Market Overview

At Federal Reserve Chairman Ben Bernanke’s first FOMC meeting he picked up right where Alan Greenspan left off, leaving little doubt about future interest rate increases. The considerable momentum exhibited in aggregate demand coupled with higher energy prices and levels of resource utilization are seen as possible inflationary culprits.  Future rate hike decisions will likely focus heavily on economic data from both the housing and labor markets. 

The Fed is keeping a close eye on the housing market as price appreciation cools and refinancing activity drops, since both could significantly affect consumer spending, which accounts for two thirds of the nation’s economic activity.  However, January saw a surge in housing construction, with activity increasing by 14.5% over December, the fastest rate since March 1973.  This number is largely viewed as a blip caused by builders taking advantage of mild January weather to start new projects, with housing construction expected to slow this year along with overall housing market.

As weekly jobless claims hit a new low, with the four week moving average for jobless claims dropping to its lowest level since April 2000, consumers’ confidence has climbed to a 16 month high.  The positive news on the employment front along with wage gains and a mild winter that kept home heating bills in check has improved consumers’ outlook on economic activity and increased their willingness to spend, despite the cooling of the housing market.

M&A

Regulatory issues that have prevented the mergers and acquisitions of many utility companies have recently disappeared, thanks to the repeal of the Public Utility Holding Company Act of 1935.  Without the regulatory hurdles that used to exist in the industry, activity in the space is expected to increase.  Warren Buffet, who has promised to sink $10 billion to $15 billion into the industry, has already gotten started, with MidAmerican Energy Holdings, controlled by Berkshire Hathaway, finalizing a $9.4 billion takeover of PacifiCorp in Oregon.  Analysts expect many of the small and mid-cap utility companies in the market to become targets as consolidation heats up in the industry.

In an indication that the recent M&A activity levels have increased target’s value expectations, several high profile deals have recently been shelved due to pricing issues.  Huntsman Corporation recently took itself off the market after a series of conversations with potential buyers, stating that the offers it received were not adequate.  Albertsons, although recently agreeing to be sold for $9.7 billion to a investment group including Supervalu, CVS Corporation and Cerberus Capital Management, temporarily took itself off the market over price as well.