MarketView for December 21

Summary

A combination of another round of merger and acquisition activity, upgrades on some major companies, combined with the health care win in the Senate, sent share prices higher on Monday, the first day of a shortened trading week, and sent all three major equity indexes into positive territory. Analyst upgrades of Alcoa also helped drive a broad advance on the stock market.

Morgan Stanley raised its recommendation on Alcoa's stock to "buy," expecting the company to report increased profitability in its alumina and downstream divisions. Alcoa jumped 7.9 percent to $15.73 and helped lift the materials sector 1.2 percent. Alcoa Inc gave the Dow its biggest boost after it announced a joint venture to build a $10.8 billion aluminum complex in Saudi Arabia.

Aetna added 4.7 percent to $34.04 and Cigna Corp rose 3.9 percent to $37.19. One result was that the Dow Jones industrial average is now in the black for the month. The S&P 500 closed within a hair of a new 14-month high, while the Nasdaq ended at a 15-month high. In contrast, the Dow ended considerably below its 2009 closing high at 10,501.05, which it reached on December 14.

Bond prices fell as stocks rose, pushing the yield on the benchmark 10-year Treasury note up to its highest level since August. The dollar strengthened, hurting commodities prices.

French drug maker Sanofi-Aventis SA announced plans to buy Chattem for $1.9 billion, while mining equipment maker Bucyrus International Inc. said it planned to buy Terex Corp.'s mining equipment division for $1.3 billion. Dutch automaker Spyker Cars submitted a new offer to buy Saab from General Motors.

Healthcare stocks rose after a bill to overhaul the health care system, which is perceived as less damaging to industry profits than expected, passed a crucial test in the Senate early Monday.

Retail stocks also gained as Wall Street expressed confidence over retail sales, even after a heavy snowstorm hit the East Coast over the weekend, which may have cut into retail profits.

Shares of Take Two Interactive Software lost 5.1 percent to $8.95 in extended trade after the company revised its outlook lower, citing the impact of the sale of its distribution business Jack of All Games.

Healthcare Bill A Positive for Stocks

Health care shares were higher on Monday as a bill to reform healthcare passed the first critical test in the Senate, without many of the provisions, such as a government-run health insurance option, that Wall Street feared would hurt profits.

The original Senate bill taxed the health insurance industry a fixed $6.7 billion a year. Under the new proposal, the industry would face a $2 billion tax in 2011, with increases over time to $10 billion in 2017.

The bill would require most Americans to have insurance, expanding the membership rolls for health insurers. At the same time, it replaces a proposed government-run public insurance option with less onerous exchanges to cover those who are not covered through their employment.

The shares of many health insurance companies moved higher, including Cigna, up 5.3 percent at $37.69. Aetna rose 5.84 percent to close at $34.41 while Humana was up 3.79 percent to $45.17 and United Health Group rose 5 percent to $33.14. Shares of Wellpoint closed up 3.8 percent at $60.51.

Shares of pharmacy benefit managers Medco Health Solutions were up 3.84 percent to close at $65.51 and Express Scripts rose 5.2 percent to $88.77 as concern eased that an industry tax could be added to the bill in the final days leading up to the vote.

Shares of Allergan, which manufacturers the anti-wrinkle treatment Botox, rose 1.7 percent to $61.68 after it dodged a bullet that would have placed a 5 percent tax on cosmetic surgery, wrinkle-filling injections and similar procedures. Instead, a 10 percent tax would be placed on indoor tanning salons.

The bill's revisions delayed a tax on medical device manufacturers until 2011. The total tax on the industry would be unchanged at nearly $20 billion.

Shares of St. Jude Medical Inc rose 1 percent to $37.18; shares of Stryker Corp rose 0.6 percent to $50.78, while shares of Zimmer Holdings rose 0.9 percent to $58.97. Shares of Medtronic fell 3 cents to $43.19.

Low Inflation Helps Monetary Policy

Charles Evans, president of the Chicago Federal Reserve Bank, said on Monday he expects the economy to grow 3.0 to 3.5 percent over the next 18 months, but that low inflation will give the central bank room to keep monetary policy easy for an extended period.

Next year "will definitely be a better year" than 2009, Evans told business television channel CNBC in an interview, but added he expects the jobless rate to creep up further. Evans said he expects the U.S. jobless rate -- currently at 10 percent -- will edge up "a few tenths" before coming down. He said he sees the jobless rate peaking in the spring or summer of 2010.

The Federal Reserve, after its December policy-setting meeting last week, voiced growing optimism about the U.S. economy, but repeated its pledge to keep interest rates unusually low for "an extended period."

Evans, a voting member of the policy-setting Federal Open Market Committee this year, said to him "extended period" means about three to four meetings. "I've said before, that to me that seems like its about three to four meetings and next meeting we'll recalibrate that again. I don't see an urgent need to recalibrate," Evans said.

He said inflation expectations seem anchored and that substantial resource slack is "diminishing the trajectory of inflation, I would say over the next couple of years." This gives the Fed breathing room on policy, he said.

"At the moment, core inflation is about 1.4 percent and my own guideline is 2.0 percent. We do have some room. If things change quickly, we'll recalibrate policy quickly, but I think inflation is relatively slow moving and we have time," Evans said.