Stocks: Merrill Brings Some Holiday Cheer

News that the Wall Street firm will receive billions to bolster its balance sheet led U.S. equity indexes higher Monday

Not many traders or other creatures were stirring on Wall Street the day before Christmas. But light trading activity in an abbreviated session Monday didn't stop market participants from extending the Santa Claus rally seen on Friday.

Major U.S. stock indexes finished higher on Monday, buoyed by financials getting a boost from reports that Merrill Lynch & Co. (MER) has signed some deals designed to pump nearly $6 billion in much-needed cash into its coffers.

On Monday, the Dow Jones industrial average closed 98.68 points, or 0.73%, higher at 13,549.33. The broader S&P 500 index rose 11.99 points, or 0.81%, to 1,496.45. The tech-heavy Nasdaq composite index gained 21.51 points, or 0.80%, to trade at 2,713.50.

U.S. financial markets will be closed Tuesday in observance of Christmas.

On Monday, Merrill Lynch said it's getting a combined cash injection of $6.2 billion from a sovereign wealth fund and a domestic source, and is also selling its wholly-owned middle-market commercial finance business, including its corporate finance, equipment finance, franchise, energy and health-care finance units, to GE Capital, a unit of General Electric (GE). The financial terms weren't disclosed, but the acquisition is slated to close in the first quarter of 2008 and will add more than $10 billion in assets and $5 billion in commitments to GE Capital Commercial Finance's base of $260 billion.

The most important aspect of the deal, however, is that it will allow Merrill to raise about $1.3 billion in capital for other parts of its business, including its portfolio of asset-backed securities. The investment bank is trying to bolster its balance sheet with cash before taking some more hefty write-downs of portfolios exposed to the subprime mess.

"The market is reacting not just to this infusion, but news of any infusions from sovereign wealth funds," said Brian Gendreau, an investment strategist at ING Investment Management in New York. "Any sign that the financial sector is being recapitalized has to be a positive sign in the long run."

An even more important indication of some relief in the financial sector is the fact that the the spread in the London interbank overnight rate, or Libor, is narrowing after widening to 220 basis points recently.

"That means banks are starting to be willing to lend to one another again," Gendreau said. "I attribute some of that to this recapitalization on the part of sovereign wealth funds."

The credit crisis has certainly taken a toll on mergers and acquisitions activity. The latest example of that is United Rentals Inc.'s (URI) termination of its merger agreement with Cerberus Capital Management after a court ruling on Friday that the private-equity firm wasn't obligated to complete its proposed $4 billion buyout of the construction-equipment rental company.

But that may not be as worrisome to the markets as it could have been, since investments by sovereign wealth funds are in a sense replacing the funds large banks aren't getting from corporate mergers, Gendreau said. "That's one reason the market has held up as well as it has," he said.

The Christmas holiday makes this a quiet week for new economic data, but those who return to work before the new year will be watching the November durable goods and December consumer confidence reports due out on Thursday, as well as December's new home sales figures and the Chicago Purchasing Managers survey to be released on Friday.

Action Economics said it expects durable goods orders to rebound 2.0%, a positive sign for the 2008 economy. Consumer confidence should edge up to 88.0 --the average forecast is for 86.5 -- if the improvement in the consumer sentiment report is any indication. New home sales are expected to slow to a 0.725 million pace amid the ongoing contraction in that sector, though there have been some signs of bottoming. The Chicago PMI is likely to pick up to be little changed at 52.0, vs. 52.

9 in November, consistent with the slowing seen in other regional surveys.

The data will be of interest, but won't settle the question as to whether the Fed's policy committee will cut rates again in late January, said Kim Rupert at Action Economics. Fed funds futures show about an 85% chance for a quarter-point easing to 4.0%, down from nearly 100% probability earlier last week. Signs of rising inflation, including the run-up in the Fed's closely watched core PCE deflator to a 2.2% year-over-year pace, and real sector numbers suggest the economy may not be headed for recession, contrary to the predictions of several economists.

January NYMEX crude oil bounced back from earlier selling to trade 35 cents higher at $93.66 per barrel despite the attention being paid to a warmer-than-usual outlook for the next two weeks. That prompted the U.S. government's weather forecaster to predict U.S. heating demand would be about 17% below normal this week, according to Reuters. But some traders said that oil price moves are being exaggerated by the low volume with many traders out on vacation.

Among the stocks in the news Monday, in addition to its deal with GE Capital, Merrill Lynch is close to finalizing a deal to sell a $4.4 billion equity stake to Temasek Holdings Pte. Ltd., the Singaporean state-owned investment company, which will also have the option to buy an additional $600 million in stock by March 28, 2008. The deal would give Temasek a nearly 10% interest in the embattled brokerage and follows similar transactions with sovereign wealth funds undertaken by peers such as Citigroup, Morgan Stanley and UBS in recent weeks. Merrill said it's selling another $1.2 billion in common equity to Davis Selected Advisors.

Merrill shares gave up earlier gains and were down 2.7% Monday after investors heard that Temasek is getting its equity investment at a price of around $48 per share, a large discount to its current price.

Alcoa Inc. (AA) agreed to sell its packaging and consumer businesses to New Zealand's Rank Group Limited for $2.7 billion in cash. The deal is expected to be completed by the end of the first quarter 2008. Shares rose 1.9%.

Consolidated Water Co. Ltd. (CWCO) fell 23.7% and could take as much as a 50% hit if the company can't reach a viable agreement the British Virgin Islands, its only customer for a desalination plant that could account for up to a quarter of the company's current earnings, according to Barron's.

Vonage Holdings (VG) shares rose 3.0% on news that it and AT&T (T) have entered into a definitive agreement to settle their patent dispute. The companies had agreed in principle to a settlement on Nov. 7.

European stocks were trading higher Monday. In London, the FTSE 100 index gained 0.70% to trade at 6,479.30. In Paris, the CAC 40 index climbed 0.21% to 5,614.28. Germany's DAX index is closed until Dec. 27.

Major Asian markets finished higher. In Hong Kong, the Hang Seng index rose 1.82% to 28,128.80. The Shanghai composite index bounced 2.60% to trade at 5,234.26. Japanese markets were closed in observance of a national holiday.

Treasury market

Treasury yields bounced in concert with equities. The 10-year note was lower in price at 100-14/32 for a yield of 4.205%, while the 30-year bond was lower at 106-11/32 for a yield of 4.607%.

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