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No Stopping Stocks

By Igor Greenwald
December 14, 2004 4:30 PM

THE MARKET swallowed its inflation-fighting medicine with good grace Tuesday, holding on to holiday cheer after the Federal Reserve approved another quarter-point interest rate hike.

The Federal Open Market Committee raised its key rate for the fifth time in the last six months, to a still lax 2.25%. The Fed also maintained its outlook for steady economic growth in a statement virtually identical to the one it issued a month ago.

Wall Street's own rosy outlook for 2005 has been buoyed by the recent wave of corporate mergers, dividend hikes and share buybacks, as well as anticipation of seasonal fund inflows.

The Dow gained 38 points to 10676, finishing 920 points above its Oct. 22 low. The Nasdaq climbed to its highest level since June 2001, adding 11 points to reach 2160. The S&P; 500 improved nearly 5 to 1203.

Chip makers and oil drillers led the way as the price of crude rose to $41.75 a barrel. Steel producers and telecom equipment makers lagged.

Dow dog Intel (INTC) rose 2% on hopes that it might catch up in 2005. Alcoa (AA) sported a 2% dent after an analyst at J.P. Morgan warned that the aluminum giant might disappoint earnings expectations as a result of rising input costs.

Complacent traders looked past a record U.S. trade deficit, which widened to $55.5 billion in October. Some of that was due to a spike in oil prices that has since reversed. But much of the rest stemmed from a hunger for imported consumer goods that doesn't appear to be moderating.

Despite the news, the ailing dollar held its own. Bonds gained, depressing the 10-year Treasury yield to 4.12%.

Long-term U.S. bond yields have stayed low partly because Asian central banks have invested their countries' export earnings in Uncle Sam's IOUs, effectively subsidizing American consumption. The national savings rate has dropped below 1%, requiring inflows of some $2 billion in foreign savings every day, weekends and holidays included.

But Wall Street has been perturbed by this trend only on those days when the greenback drops like a stone. Lately, traders have had more pressing matters on their minds, such as handicapping all the pending and rumored mergers.

Sprint (FON) shares rose 3% as the wireless operator prepared to formally announce its merger with rival Nextel (NXTL).

Oracle (ORCL) slipped 3% in the wake of Monday's 10% surge cheering its $10.3 billion purchase of rival software maker PeopleSoft (PSFT).

Veritas Software (VRTS) leapt 9% after the New York Times reported that the company is negotiating a merger with Symantec (SYMC). The latter company's shareholders recoiled from the prospect, discounting the supplier of antiviral software 16%.

Videogame maker Electronic Arts (ERTS) muscled to a 5% gain from an all-time high by negotiating an exclusive five-year license with the National Football League and its players. The news sacked rival Take-Two (TTWO) for a 6% loss: it will lose the right to use real team insignia and player names in its own football title.

Blockbuster (BBI) added 5% after swearing off late fees. The video chain will give customers a one-week grace period before assuming they'd like to buy the rental.

There have never been any late fees with Google (GOOG), which gained 5% after unveiling plans to bring online the contents of several world-class university libraries. Keyword searches would bring up the full text of works in the public domain but only brief snippets of copyrighted material. Scanning all the tomes will take years.

The clarion call of the day comes courtesy of the Merrill Lynch bond team, which argued in its annual outlook that stocks haven't been this cheap relative to corporate bonds in 20 years. "We expect companies to increasingly use both balance sheet cash and future free cash flow to boost shareholder value," the report notes. The analysts predict many more mergers and share buybacks, as well as a pickup in capital spending.

They deem the small-cap space especially ripe for consolidation. "While capacity utilization levels might suggest a dearth of investment growth prospects, excess levels of cash hint at a corporate landscape that is coiled to chase after growth the instant it appears."

ALPS Distributors, Inc., a registered broker-dealer, is distributor for the Select Sector SPDR Trust.

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