US stocks: Mergers, Greenspan to Set Tone

NEW YORK - US markets will need a fresh dose of merger activity and a clear signal from Federal Reserve Chairman Alan Greenspan about the strength of the economy and the pace of future interest rate increases to clock gains this week.

Oil company stocks that have touched lifetime highs recently amid stubbornly high oil prices could come under a wave of profit taking, strategists said. Investors will also eye monthly housing data for its impact on homebuilding stocks, which were down sharply on Friday after a brokerage downgrade.

Meanwhile, the expiration of February options this Friday could increase the volatility in the market.

Still, merger fever will reign, strategists said.

"The real focus for more investors will be the mergers and acquisition boom. They will be wondering who will strike next and whether any of them will be derailed at all," said Michael Metz, chief investment strategist at Oppenheimer & Co.

One big deal has been simmering for much of the past week, with Verizon Communications in talks to buy MCI Inc in an acquisition that could extend the recent wave of telecommunications mergers.

"The good part of this trend is that it shows that corporations have very strong balance sheets and secondly, they find the targets to be reasonably priced," Metz added. "The dark side is that these mergers are accompanied by layoffs and signals less vigorous capital spending because companies are willing to buy rather than build."

The M&A activity spurs stock market trading, Metz said, adding that "traders or investors looking to make money are finding this the most fertile area of the market."

For the week, the blue-chip Dow Jones industrial average ended up 0.75 per cent. The Standard & Poor's 500 index finished up 0.20 per cent for the week and the Nasdaq ended down 0.48 per cent.

GREENSPAN IN THE SPOTLIGHT

Greenspan's comments on the economy and the pace of interest rate increases going forward will also be a focus for the markets.

Greenspan will testify on the economy on Feb 16-17 to the Senate and US House of Representatives panels, respectively.

"The key thing would be to see if the concept of 'measured' is removed from the Fed's psyche," said Bryan Piskorowski, a market analyst at Wachovia Securities LLC. "Moreover, Greenspan's comments would shed light on what does the picture of economic growth look like this year."

Earnings season winds down this week with Dow components Wal-Mart Stores Inc. and Coca-Cola Co. reporting earnings.

Hewlett-Packard Co. which last Wednesday ousted Chairman and Chief Executive Carly Fiorina, will also post quarterly results this week. Fiorina was the architect of a controversial US$19 billion merger with Compaq Computer that never produced the results she promised.

"Some of the analysts are going to come out with deeper insights on what's going to become of Hewlett Packard," said Ted Parrish, a portfolio manager at the Henssler Equity Fund.

This week could also seem some volatility as Friday marks the expiration of February options. Typically, options expiration is orderly, but some volatility may occur as players unwind those positions at the last minute against other derivative products.

On the economic front, January retail sales figures will be reported on Tuesday, while housing starts numbers and industrial production data will be released on Wednesday.

The University of Michigan consumer sentiment survey and US Producer Price Index -- a key measure of wholesale inflation -- will command attention on Friday.

"Housing starts are coming up (this) week. You have a major downgrade on housing stocks by a Smith Barney analyst and if you continue to see a decline in new home starts, it could be another negative for that group," said Elliot Spar, a market strategist with Ryan Beck & Co.

US home builders including Beazer Homes USA Inc. and KB Home fell on Friday after Smith Barney analyst Steve Kim cut his rating on six stocks to "hold" from "buy."

Spar added that oil company shares such as Exxon Mobil Corp. and ChevronTexaco Corp which hit their lifetime highs last week as oil hovered around US$47 a barrel, could come under pressure next week as investors take profits.

- REUTERS