Market overview
The slowing growth of the US economy, which is still feeling the drag of the housing market, has yet to affect inflation or the financial markets. After the Fed kept interest rates unchanged at its most recent meeting, it stated that although economic growth slowed in the first quarter, core inflation remained somewhat elevated. Most Fed observers believe the Fed will wait until inflation has peaked and unemployment begins to creep up before moving to cut rates.
The April CPI showed prices rose at 0.4 percent, less than 0.5 percent increase in March and below the expected 0.6 percent increase. Core CPI rose 0.2 percent, in line with forecasts, and was up over March’s 0.1 percent increase. However, with the 12 month change in core CPI at 2.3 percent, inflation is now at the lowest level since April 2006 and edging closer to the Fed’s stated 1-2 percent “comfort zone.”
Despite slowing economic growth, the financial markets continue their march to record highs. Although the economy grew at just 1.3 percent in the first quarter and forecasts for second quarter growth are decreasing (according to survey from Philadelphia Federal Reserve Bank, forecasters have cut estimates for second quarter growth from 2.7 to 2.4 percent), the bull market has continued unabated. This has caused some analysts to begin voicing fears of stagflation, as the slowing economic growth has not been reflected in inflationary gauges or stock market performance.
Part of the increase in the broad stock market indexes has been a “flight to quality” in the current inflationary environment. The size and multi-national operations of large cap stocks hold appeal to investors, and have helped companies in the S&P 500 index post 8.3 percent profit growth in the first quarter, a 3.0 percent increase over expected growth.
Housing, which has contributed to the slowing growth of the US economy, continues to see a soft market. Applications for new projects are at the lowest rate since 1997, with housing starts outpacing building permits by the widest margin since 2003. Traditionally permits outpace housing starts, as they require less upfront capital investment. Amidst home builders’ lowered earnings guidance and reports of losses, the National Association of Home Builders has said it expects a sluggish recovery to start in 2008.
Deal overview
As Tesoro was recently closing the acquisition of a Los Angeles-area refinery and 278 retail sites previously owned by Royal Dutch Shell PLC for $1.76 billion, M&A activity in the oil and gasoline industry was a topic of debate in Congress. According to expert witness testimony, US drivers can expect to see years of high gasoline prices, due in large part to continued consolidation in the industry and a lack of investment in refinery capacity. Gasoline prices have increased in the past several weeks, reaching levels last seen when Katrina shut down several refineries and caused severe shortages.
Large scale private equity buyouts continue to occur at a frantic pace across all industries. The most high-profile recent deal, but hardly the only multi-billion dollar buyout, was the announcement that Cerberus Capital agreed to acquire 80.1 percent of Chrysler for $7.4 billion, of which $6.05 billion is being invested in various Chrysler operations. Recently, Alliance Data Systems Corp., a private-label credit card services provider, agreed to a takeover offer from Blackstone Group for $7.8 billion, at a 30 percent premium to the company’s closing stock price. Also, Axciom Corp. has agreed to a buyout offer from ValueAct Capital and Silver Lake Partners for $27.10 per share, or $2.25 billion. News of the Axciom deal was followed by Bausch & Lomb’s agreement to be acquired by Warburg Pincus for almost $3.7 billion, or $65 per share and the assumption of $830 million in debt. Bausch & Lomb, still dealing with the fallout from a worldwide recall of its contact lens solution last year, had been the target of buyout rumors for several weeks.
