Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
In the world of exchanges, futures are the future, options the preferred option and global scale a big necessity.
And so we witness another round of cross-border proposed exchange mergers, most prominently last week's disclosure that NYSE Euronext (ticker: NYX) and Deutsche Börse (DB1.Germany) are discussing a merger that would create the world's largest exchange, most of which would be owned by the German company's shareholders.
Deutsche Börse dominates European futures trading, and NYSE Euronext is more reliant now on options in the States and futures in Europe than on traditional cash equity trading, which represents a declining profit pool everywhere, thanks to rampant competition among traditional players and upstart electronic venues. The new company would have the top market share in European stocks and futures, and U.S. stock options.
There's apparently been only a slight ruffling of patriotic feathers, though former Goldman Sachs Chairman John Whitehead was quoted as calling such a deal a "terrible idea" and "an insult" to America. Politicians might make similar noises if they crave a good, shrill congressional hearing to get attention, maybe in the slow summer months.
That would be a bit ironic, given that America's uniquely bifurcated regulation of securities and futures exchanges is believed to have discouraged the idea of a domestic-only version of such a deal, though even this could change as the pressures to find suitable merger partners grow more intense. Another irony would be an uproar over "the Germans" owning the storied NYSE trading floor, when the physical and even electronic stock-trading operations there aren't remotely behind the deal's intent.
Yet, most likely, if a final agreement is struck, it is thought to stand a good chance of approval, perhaps after some antitrust concessions. If so, it would be a nice win for NYX shareholders, who would own 40% of the resulting $25 billion company by market value. Sandler O'Neill analyst Richard Repetto figures that the market has gone most of the way toward pricing in the deal's potential upside, but not completely, and only if one makes conservative assumptions about cost savings, revenue "synergies" and the eventual stock valuation. Assuming only the minimal operating benefits, NYX would be worth $40.76 a share today, he says, or 6.4% above Friday's close of 38.31. Penciling in slightly higher savings and some revenue pickup gets the price to the high $40s.
But will the rest of the global exchanges sit idly while the marriage plans move ahead? Maybe not, as my colleague Steve Sears notes in Striking Price.
IN THE LAST YEARS OF HIS LIFE, the punk rocker Joey Ramone became known as something of a stock-market and financial-TV junkie. Today, it's as if investors got The Ramones' wish, expressed in their song I Wanna Be Sedated.
The S&P 500 continues its sedate crawl north. Up 5.7% this year, it has risen in about two-thirds of 2011's 29 trading sessions, for an average 0.2% daily gain. The Dow has risen on all but one trading day in February, though by inches a day. Volatility continues to drip lower. Usually, a doctor asks you to count backward from 100 to get this pleasantly calm.
This market climate explains some of the signs of excessive comfort out there—the kinds that often don't matter, until they do. The Barron's Confidence Index last week rose to a level not seen since right near the October 2007 market high. This is a measure of bond investors' demands for safety, with a high reading implying that they're happy to accept a rather small premium to take more credit risk. It's a coincident indicator, mostly, and was even higher in the middle of the past decade, but nonetheless worth monitoring.
Brokerage-firm analysts continue to extrapolate the positive earnings trends by revising forecasts higher. Yet this quarter, unlike in recent ones, this goes against the pattern of more downward guidance moves by companies, say the quantitative strategists at Merrill Lynch. That the big-cap indexes have been able to buck the underperformance by emerging-market stocks, small-caps and the Dow transports—with the help of a recent reallocation of mutual-fund money to domestic stocks—is both impressive and a hint of a maturing rally.
Nothing much here to win a sure indictment. With so many traders eager to buy on a dip that hasn't materialized, this could go on a while. That would fit with the 2005 sort of sleepwalk market, which tilted modestly higher but then flattened out for months on end.
E-mail: michael.santoli@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
With the stock riding high, seven insiders, including the CEO, recently sold about $18 million in shares.
Even as the food giant hikes prices, high commodity prices should continue eating away at margins.
Nokia chooses a higher-risk/higher-reward path versus adopting Android.
The restaurant chain has only limited upside from here.
With a bullish outlook for agriculture, Agrium looks like a top pick.
The firm's momentum will be helped with a China Mobile pact.
Shares of AGCO are a play on Brazil, India and other fast-growing agricultural markets.
The natural foods grocer's stock surged to a two-year high but we simply can't stomach the rich valuation.
Poor use of capital more than offsets operational excellence for tech giant's shareholders.
The reported talks to acquire NYSE are a sign of a market topping out.
Pressure on commodity costs will continue, but worst may bever. (At SmartMoney.com.)
What Germans at Broad and Wall will mean for investors. Plus, only the Sphinx knows what's ahead for Egypt, and a bearish take on Amazon.
With drug stocks ailing, companies like Abbott and Medtronic should start shedding non-core businesses. For investors, it would be just the right medicine.
So far this year, investors have been returning to U.S. markets and eschewing more exotic locales.
Devon Energy's focus on oil and gas assets in the U.S. and Canada could lead to more reserves, bigger profits and higher shares.
A strong capital-adequacy ratio doesn't protect big depositors and senior debt holders from possibility of losing 41% of their assets at Amagerbanken.
Regardless of what path Egypt now follows, a leading analyst says the price of oil is headed toward $300 a barrel based on basic supply-and-demand forces.
Some Fed officials question the need to keep buying bonds, but the program is likely to continue.
Stocks could surge when trading in Cairo resumes after a two-week shutdown. Here are five promising names and an intriguing ETF. How to play a revolution.
Always willing to experiment, the sports network's latest move is into 3-D. Can you imagine a TV football telecast without that yellow first-down line?
The chief investment officer of Rosenau/Paul thinks the time is finally here for large-cap stocks with growing dividends. Here's what she's been buying.
Two Websites offer differing perspectives on online brokerages—with an assist from Barron's annual survey. Is thinkorswim better than TradeKing?
Business ethicists and advocates for corporate social responsibility are playing a dangerous game.
With the revamping of its Holiday Inn chain almost complete and travel picking up, the hotel giant looks ready to chalk up big gains in profit and revenue.
Read Full Article »