Despite a Relatively Flat Week, M&A Activity is on the Rise

On Thursday, April 7th, Japan suffered another earthquake close to the epicenter of last month’s magnitude-9 quake, which initially sent the markets tumbling. We feel it is debatable if this was a reaction to the earthquake or Congress’ indecision on a budget and the threat of a government shutdown. However, the markets had been on a flat to downward trend most of the week. Materials and commodities contributed most to the gains for the week.

Federal Reserve Chairman, Ben Bernanke, continues to downplay the threat of inflation.

  • In a conference held by the Federal Reserve Bank of Atlanta, Bernanke said that the recent rise in oil, and grain prices, along with other commodities, is likely temporary and will not become a broader problem
    • If the prediction is incorrect, the central bank will be quick to respond if inflation picks up.
  • Interest rates rose across the board this week
    • The two-year Treasury yields about 0.81%, about 0.5% higher than its all-time low set last November.
    • The five-year Treasury rose to 2.29%.
    • The 10-year Treasury jumped to 3.55%, more than a full percent higher than levels seen in fall 2010.
    • The 30-year Treasury increased to 4.60%.
  • The minutes from the March 15th Federal Open Market Committee meeting indicated participants expect the economic recovery to strengthen in the near term..
    • Monetary policy was left unchanged.
    • The Fed will continue its quantitative easing program through June.
  • On Tuesday, the Institute for Supply Management’s Services Index fell for the first time in seven months for March.
    • This suggests that the high price of oil has taken some wind from the economy’s sails.
    • At 57.3, the composite index is below the first-quarter average of 59, but still above the 55.9 average in fourth quarter 2010

A government shutdown was narrowly averted on Friday: Congress came to a last-minute resolution on the U.S. federal budget, hopefully staving off any halt to the economic recovery.

  • We feel both sides realize there needs to be a change and a reduction in spending.
    • We cannot continue to spend at the levels we are before the market makes you stop.
      • When you cannot borrow any more, you have to do something.
      • While our country is not near the condition Greece was in, we certainly do not need to let it get to that point.
    • We believe the best cure is a strong economy.
      • The best way to encourage a strong economy is to provide opportunities for small businesses and private industry to grow as much as possible.
      • Cost of capital should remain low.
    • Both sides of Congress agree on lowering the corporate tax rate.
  • The next issue: Debt limit debate
    • Republicans are likely to expect more spending cuts.
      • Treasury Secretary Timothy Geithner says cutting spending now could tip economy into recession.
      • Prefers taxes raised to limit debt.
    • Raising the debt ceiling is critical because without a higher limit, the government would not be able to borrow money to cover its expenses—including money needed to pay off earlier debt that has come due.

In Company News: Strong reports in the Consumer Discretionary sector, while mergers and acquisitions activity picks up.

  • Bed Bath & Beyond (NASDAQ: BBBY) fourth-quarter net income rose 25% on strong sales and topped expectations.
    • BBBY earned $283.5 million, or $1.12 a share, up from $0.86 a share last year.
    • For the year BBBY sees earnings rising 10 to 15%, which would imply a profit of $3.38 to $3.53.
  • Pier 1 Imports’ (NYSE: PIR) net income surged 65% buoyed by improving sales, cost control efforts and strong merchandise margins.
    • PIR earned $57.1 million, or $0.48 a share up from $0.30 a share last year.
  • Texas Instruments Incorporated (NYSE: TXN) announced it would buy National Semiconductor Corp. (NYSE: NSM) for $6.5 billion in cash.
    • NASDAQ announced it would rebalance the NASDAQ 100 stock index, which will reduce Apple’s weighting from more than 20% to 12%.
    • The move matters since more than $330 billion of assets track the index through ETFs, mutual funds, options and futures.
    • The rebalance may mean significant selling pressure on Apple shares by funds tracking the index.
  • The Procter & Gamble Company (NYSE: PG) has agreed to sell its Pringles snack line for $1.5 billion to Diamond Foods.
    • In the last 10 years, PG has shed its various food brands.
    • Diamond will be the second largest global snack company behind PepsiCo’s Frito-Lay brand.
  • Cisco Systems Inc.’s (NASDAQ: CSCO) CEO, John Chambers, admitted the company had lost its focus and needs to overhaul its operations.
    • Chambers said the company would make moves to fix its portfolio, revamp operations and possibly cut costs.
    • The company has recently been under competitive pressure in its core network-switching business from rivals Hewlett Packard and Juniper Networks.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.

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