Jim Cramer Blog

Takeover talk spurred a rally among Blue Chip stocks today that pushed the Dow Jones Industrial Average and the S&P 500 to solid gains. Technology stocks as measured by the Nasdaq composite also traded positively, but the advance was less robust. Today's rally appeared to be driven by M&A news, and not necessarily by a change in the cautious sentiment that has characterized recent trading. The day's economic picture was painted by government figures that revealed a record U.S. trade deficit in 2006. While the amount of U.S. exports increased, America's appetite for high-priced oil and foreign goods was even greater. Crude oil prices added over $1 a barrel in today's trading, while the 10-year Treasury note fell.

Fueling the Blue Chip rally was a report in The Times of London that two Australian-based mining concerns, Rio Tinto (NYSE: RTP - News) and BHP Billiton (NYSE: BHP - News), were each considering bids for U.S. aluminum giant Alcoa (NYSE: AA - News) valued at approximately $40 billion. None of the companies involved would comment on the report, but Alcoa added 6% on the day, down from an intraday gain of 10%. Many analysts doubted that Alcoa was a target of either mining company, suggesting Alcoa's packaging and consumer products business was of little interest to these pure mining operations.
In other M&A news, drug-store operator CVS (NYSE: CVS - News) raised the post-merger dividend it offered to pay shareholders for approving its bid for the pharmacy benefits company Caremark RX (NYSE: CMX - News). Caremark rose 3% on the news that CVS would triple the special dividend payable to shareholders after the merger from $2 per share to $6. The added dollars raised the CVS bid to $25.7 billion, but it is still below Caremark's market cap and shy of a competing offer from Express Scripts (Nasdaq: ESRX - News). Caremark's board has consistently supported the CVS bid, but several institutions have voiced opposition. Another roadblock appeared later in the day when a Delaware judge ordered Caremark to delay the vote to give shareholders more time to study the offers.
Casual dining restaurant operator Applebee's International (Nasdaq: APPB - News) jumped 9% after the company announced it was exploring strategic opportunities, including the possible sale of the company. Management was under pressure from a major stakeholder to improve operations. The company has been hurt by reduced consumer spending at casual dining chains and by increased competition.
In earnings news, homebuilder KB Home (NYSE: KBH - News) reported a loss of -$50 million, or -64 cents per share, in the fiscal Q4 ended November 30th. That compares to a profit of $304 million, or $3.44 per share, during the same period last year. The stock nonetheless gained 3% as investors looked toward a possible rebound later in the year. The company said it expects continued pressure in the current and following quarter until it clears out more of its backlog of unsold homes, which is one of the largest in the industry. KB Homes has cut prices sharply and is using other incentives to stimulate buyers.
Marsh & Mclennan (NYSE: MMC - News), the world's largest insurance broker, declined -2% on profit taking after the company reported a substantial profit increase for Q4. It earned $226 million, or 40 cents a share, against $35 million, or 6 cents a share, a year before. Growth came from the company's consulting and risk-management units. The company acknowledged that its core insurance-brokerage business remained under pressure from declining prices in the commercial insurance market.

By Bullmarket.com Staff