Business Blog Posts

Stocks have shown remarkable resilience as investors snap up any drop in prices, even in the face of what seem like considerable risks -- an overbought market and a still potentially explosive situation in the Middle East.

Confidence in the economy, strong earnings, and inflows into equities from bond funds have been enough to push indexes to new highs on an almost daily basis even if light volume and slight gains show investors are not making aggressive moves.

Robert Auer, a fund manager at SBAuer Funds in Indianapolis said that after eight months of outflows his Auer Growth Fund had started to see inflows.

"I'm wondering if this is happening at American Funds and Fidelity and everyone else," he said. "I'm having to put it to work because we typically don't hold any cash, so it is causing me to do buying."

Bond funds have seen three months of outflows, the longest streak in more than 2 years.

Over that period $23 billion has moved out of bond funds while $16 billion has flowed into equity funds, according to data from the Investment Company Institute.

A rise in market interest rates has hit bond prices recently and is helping to spur those outflows. During the week the yield on the 10-year Treasury note rose to its highest level since April.

Rising yields have accompanied increasing optimism over the economy that will again be tested with retail sales and industrial output data during the week.

"Investors right now think the pullback is already here and they're not buying stocks - and not selling but not buying at a time of inflows is forcing the market to drift higher," said Thomas Lee, U.S. equity strategist at JPMorgan in New York.

Volume hit its lowest levels so far this year on Tuesday with just over 7 billion shares traded on the NYSE, Amex and Nasdaq compared to last year's average of around 8.5 billion.

Lee is expecting a pullback in the March and April time frame, with the S&P 500 rising to 1,333 before falling to around 1,250, taking the market back to where it was in late December.

"You really need to start buying at the 1,270 level," he said. "You need to be selective and getting ready to buy that dip."

The 1,333 level is the double-your-money mark from the bear market intraday low of 666.79 in March 2009 and is seen as a significant level by some investors.

OPTIONS MARKET SHOWS GROWING CONCERN

The new regulation, which will come into effect in March, is set to install a new red-tape barrier for doing business in China, the world's second largest economy where double-digit growth has attracted more than $105 billion in foreign direct investment last year.

Foreign investments in military, agriculture, energy and resources, key infrastructure, transport systems, key technology sectors and "important equipment manufacturers" may be subject to reviews, according to a statement published on the central government Internet portal, www.gov.cn.

The review will be conducted by a "foreign investment security review board" under the cabinet. Members of the board will come from the National Development and Reform Commission, the Ministry of Commerce and other agencies on ad hoc basis.

The new body could enable China to turn the tables on some countries that have previously blocked its investments on national security grounds.

China suffered the biggest knock to its deal-making confidence in 2005, when state-controlled oil firm CNOOC Ltd withdrew an $18.5 billion bid for U.S. oil firm Unocal after the Senate moved to block it on national interest grounds.

But Beijing, which introduced an anti-trust law in 2008, has also blocked deals that do not conform with its national plans in the past.

China rejected Coca-Cola's $2.4 billion bid for China's top juice maker Huiyuan, in 2009 and buyout giant Carlyle's $375 million bid for Xugong, China's biggest construction equipment maker, in 2008.

The government wants to consolidate many heavy industries such as steel into the hands of a few big players, and it has blocked several foreign attempts to buy into its huge steel sector, by far the world's biggest.

In 2007, it blocked ArcelorMittal from gaining a majority stake in China Oriental Group and in 2009 it forced Russia's Evraz Group to abandon an option to take control of Delong Holdings Ltd, a Chinese steelmaker listed in Singapore, in a $1.5 billion deal.

INVESTOR-UNFRIENDLY?

China attracted $105.7 billion in foreign direct investments in 2010, 17.4 percent more than in 2009, but some foreign businesses have complained that the Chinese government is becoming more unfriendly toward investors.

According to the new regulation, Chinese government agencies, trade associations, competitors, suppliers and other related parties are allowed to apply for the start of a review of a foreign-related M&A deal.

The process will include two parts as "general review" and "special review." For those deals failed to pass the "general review," a "special review" will be started that may last up to 60 days.

If Beijing finds a deal that could potentially threaten national security, it can terminate the deal.

"Related departments and units must enhance the sense of responsibility to guard state and commercial secrets... to effectively safeguard national security," the cabinet said in the notice.

A formal merger document that can be presented to the companies' boards is not yet prepared, a separate source familiar with the situation said. Other sources said the NYSE Euronext board is also expected to meet on Sunday, but the details of what it might discuss were unclear.

The two companies declined to comment.

Deutsche Boerse and NYSE Euronext said on Wednesday they were in advanced talks to merge, just hours after London Stock Exchange unveiled a bid for Canadian market operator TMX Group Inc.

Most of the tough decisions, including the composition of a combined Deutsche Boerse-NYSE Euronext board, have been made, but a deal is not done yet, the first source said, adding that the exchanges are working toward an announcement on Tuesday.

Important issues such as the exact exchange ratio and premium for the deal are yet to be decided, the source said.

All the existing brand names will stay in place in a combined company, the source said. The only question on that front is around the name of a new Dutch holding company being contemplated in a merger, and that has not been decided, the source said.

Other exchanges said they were considering striking their own deals or looking to take advantage of the distraction, in early signs of ripples through the world's capital markets.

CBOE Holdings Inc, IntercontinentalExchange Inc, BATS Global Markets and Chi-X Europe all weighed in on Friday on the deals that would see Europeans acquire the New York Stock Exchange and the Toronto Stock Exchange.

"Every exchange that wasn't involved in the two mergers -- the four that were not involved -- had to at lunch on Wednesday be asking themselves, 'Should I be involved in some way?' and calling their bankers and thinking strategically," said Alan Dean, CBOE's chief financial officer.

"It has to be a jolt, I think, for all market participants in this industry," he said at a conference hosted by Credit Suisse.

CBOE, the largest of the U.S. options venues, is seen as a likely takeover target. The other public U.S. operators -- ICE, Nasdaq OMX Group Inc and CME Group Inc -- are mostly larger players with histories of being buyers.

The Deutsche Boerse-NYSE Euronext deal would create the world's largest exchange company and could put pressure on others to keep pace as the companies shift into more profitable derivatives businesses to stave off competition from upstart stock-trading venues.

Jeffrey Sprecher, chief executive of the futures-oriented ICE, said his rivals are attempting to "muscle their way in or acquire their way into the derivatives space," reinforcing the value of that business.

"It bodes very very well for my company to have a lot of these people distracted by with these complicated mergers, these cross-border mergers that are going to involve a lot of regulation and regulatory intervention to get these deals completed," Sprecher told the conference.

The shares closed 3.5 percent higher than the IPO price of $30 at $31.05 on the New York Stock Exchange after the company conducted the largest U.S. energy-related IPO since 1998.

The IPO was seen as a means for Kinder's private equity partners to monetize their investment and an opportunity for investors to gain access to the company's track record of steady cash flows and its vast network of pipelines spanning the United States and stretching for 2,500 miles in Canada.

"It's a yield play," Nick Einhorn, research analyst at Renaissance Capital, said of investor appetite. "It's a high-quality company that still has pretty decent growth."

Backed by private equity investors including Carlyle Group CYL.UL and Goldman Sachs Group Inc's (GS.N) buyout fund, Kinder Morgan upsized its IPO as shareholders sold a 13.5 percent stake in the company.

Houston-based Kinder Morgan raised $2.86 billion on Thursday in an IPO valuing the firm at more than $21 billion.

INSTITUTIONAL INVESTOR APPEAL

Kinder Morgan's offering represented interest in its master limited partnership (MLP), Kinder Morgan Energy Partners LP (KMP.N), which holds most of the company's assets.

Historically, institutional investors have shunned buying into partnerships because of tax complications. But this offering was a way for them to add pipeline and storage assets to their portfolios as MLPs have low tax liability, which also provides them with a lower cost of capital.

"It's a blue-chip from day one," said Francis Gaskins, president of IPODesktop.com. "It's a blue chip that institutions have no problem owning."

The underlying MLP has forecast an increase of about 4.5 percent in its dividend yield this year, which would mean an even bigger yield growth for Kinder Morgan Inc investors, Einhorn said.

The IPO price of $30 per share implied a yield of 3.9 percent based on $1.16 per share in dividends Kinder Morgan said in the filing it would pay annually if it was public for all of 2011, analysts said.

Kinder Morgan's private equity investors and management will retain control of nearly 90 percent of the company.

Chief Executive Officer Rich Kinder, who led the 2007 buyout of the company, is keeping his entire 30.6 percent stake, which leaves him heavily invested in the company's future in contrast with typical private-equity investors' exits from a bought-out company through an IPO.

The CEO previously was president of energy company Enron Corp but left in 1996 -- years before it was enmeshed in an accounting scandal and went bankrupt.

Details of what the NYSE Euronext board might discuss or what it might vote on were unclear. The two companies declined to comment.

Deutsche Boerse and NYSE Euronext said on Wednesday they were in advanced talks to merge, just hours after London Stock Exchange unveiled a bid for Canadian market operator TMX Group Inc.

Other exchanges said they were considering striking their own deals or looking to take advantage of the distraction, in early signs of ripples through the world's capital markets.

CBOE Holdings Inc, IntercontinentalExchange Inc, BATS Global Markets and Chi-X Europe all weighed in on Friday on the deals that would see Europeans acquire the New York Stock Exchange and the Toronto Stock Exchange.

"Every exchange that wasn't involved in the two mergers -- the four that were not involved -- had to at lunch on Wednesday be asking themselves, 'Should I be involved in some way?' and calling their bankers and thinking strategically," said Alan Dean, CBOE's chief financial officer.

"It has to be a jolt I think for all market participants in this industry," he said at a conference hosted by Credit Suisse.

CBOE, the largest of the U.S. options venues, is seen as a likely takeover target. The other public U.S. operators, ICE, Nasdaq OMX Group Inc, and CME Group Inc, are larger players with histories of being buyers.

One of the mergers would create the world's largest exchange company in Deutsche Boerse-NYSE Euronext, and could put pressure others to keep pace as the companies shift into more profitable derivatives businesses to stave off competition from upstart stock-trading venues.

Jeffrey Sprecher, ICE's chief executive, said his rivals are attempting to "muscle their way in or acquire their way into the derivatives space," reinforcing the value of that business.

"I bodes very very well for my company to have a lot of these people distracted by with these complicated mergers, these cross-border mergers that are going to involve a lot of regulation and regulatory intervention to get these deals completed," Sprecher told the conference.

"We feel very opportunistic right now that we're in an excellent position to take advantage of their downturn."

Shares of U.S. exchange operators were little changed Friday afternoon after a roller-coaster week in which NYSE Euronext and Nasdaq OMX soared to multi-year highs. NYSE Euronext shares were off 0.2 percent at $37.74. Deutsche Boerse closed 0.8 percent higher at 61.62 euros.

LAYERS OF COMPETITION

In Europe, trading venues BATS and Chi-X said they extended their merger talks to secure a deal, which has taken on added importance by the Deutsche Boerse-NYSE Euronext talks.