MarketView for February 14

Summary

The S&P 500 chalked up a small gain for the third consecutive session on Thursday, helped by a flurry of merger activity, though investors see no catalysts to lift the market further with major averages near multi-year highs. Nonetheless, the market's slowed advance took the S&P 500 to its highest intraday level since November 2007 on Wednesday. While the index notched its third straight day of gains, none was more than 0.2 percent.

Shares of H.J. Heinz rose 20 percent to $72.50 on the announcement that Warren Buffett's Berkshire Hathaway and 3G Capital will buy Heinz for $72.50 a share, or $28 billion including debt. Berkshire's class B shares rose 1.3 percent to $99.21.

Also supporting the market was data showing the number of Americans filing new claims for unemployment benefits fell more than expected in the latest week. The CBOE Volatility index fell 2.4 percent to 12.67.

The markets were down early in the trading day after a report indicating that the euro zone's gross domestic product contracted by the steepest amount since the first quarter of 2009. In addition, Japan's GDP shrank 0.1 percent in the fourth quarter, crushing expectations of a modest return to growth.

Constellation Brands ended the day up 37 percent to close at $43.75 after AB InBev's deal to take over Mexican brewer Grupo Modelo was revised to grant Constellation perpetual rights to distribute Corona and other Modelo brands in the United States. U.S. shares of AB InBev gained 5.1 percent to end the day at $92.77.

American Airlines and US Airways said they plan to merge in a deal that will form the world's biggest air carrier, with an equity valuation of about $11 billion. US Airways shares fell 4.6 percent to close at $13.99.

Weakness in Europe contributed to a 5 percent drop in revenue from the region for Cisco Systems, which nonetheless exceeded Street estimates as it reported its results late Wednesday. The company's shares fell 0.7 percent, closing at $20.99.

General Motors reported weaker-than-expected fourth-quarter earnings, citing larger losses in Europe alongside lower prices in its core North American market. The shares were down 3.3 percent to close at $27.73.

Volume was light, with about 6.36 billion shares changing hands on the three major exchanges, well below the daily average so far this year of about 6.48 billion shares.

Jobless Claims Fall Sharply

The number of Americans filing new claims for unemployment benefits fell more than expected last week, offering up a strong indication once again that the labor market recovery may be moving up to a higher gear. Initial claims for state unemployment benefits fell by 27,000 to a seasonally adjusted 341,000 claims, the Labor Department reported on Thursday. The prior week's claims figure was revised to show 2,000 more applications received than previously reported.

A Labor Department analyst said claims for Illinois and snowstorm-hit Connecticut had been estimated. Nevertheless, because most claims are filed online, the blizzard that slammed the East Coast appeared to have little effect on the broader claims data, he said.

While companies are no longer aggressively laying off workers, they still appear to be in no hurry to step-up hiring against the backdrop of still lackluster demand. The economy has struggled to grow much more than 2 percent since the 2007-09 recession ended.

Job gains averaged 181,000 per month in 2012, far less than the at least 250,000 that economists say is needed to significantly reduce the ranks of unemployed. The four-week moving average for new claims, a better measure of labor market trends, rose 1,500 to 352,500. The average hit a near five-year low in the prior week, but economists said a drop in first-time claims early this year likely was exaggerated by difficulties smoothing out the data for seasonal fluctuations.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 130,000 to 3.11 million in the week ended February 2. That was the lowest level since July 2008 and could reflect people exhausting their benefits.

It Is Official

US Airways and American Airlines have announced they are merging forces to become the world’s largest airline operator. The new entity will retain the American name; be based in Dallas-Fort Worth, Texas; boast a workforce of nearly 100,000 and have a repertoire of 1,000 jets in its fleet. The deal, which has been in the works for at least a year, values the new airline at $11 billion.

US Airways CEO Doug Parker will run the combined company as chief executive and AMR CEO Tom Horton will become nonexecutive board chairman until 2014. If the Justice Department and American’s bankruptcy judge in New York sign off on the merger, the new carrier would be 2 percent larger in terms of air traffic than the current leader, United Continental Holdings. The merger is expected to be completed in the third-quarter of this year.

Consolidation in the airline industry over the last decade has shrunk the pool of major U.S. carriers to just four – Delta, United Continental, Southwest Airlines, and now the new American entity.

According to Barbara Peterson, senior correspondent for aviation at Conde Nast Traveler, previous airline mergers have resulted in outsourced customer service, capacity cuts and more crowded planes as well as sharp service cuts in some airports and smaller communities. Even though mergers are usually regarded as bad news for fliers, Peterson doubts that the US Airways/American deal will be blocked by federal regulators.

“Ten years ago, eight or nine major airlines, plus a host of smaller regional and upstart lines, offered consumers a serious choice," Peterson writes on the Conde Nast Traveler site. “Now, four huge airlines would control roughly 85% of the domestic airline traffic in the U.S., giving them a huge say in where we fly and what we pay. While U.S. antitrust regulators should look at this closely, no one expects it’ll get turned down outright after so many other airline deals have gone through.”

Whether or not airline mergers ultimately increase the price of plane tickets and fees is a hotly debated topic. According to TravelNerd, worldwide airline fee revenue in 2012 totaled $36.1 billion, an 11 percentg increase over 2011. The major U.S. airline carriers have attempted to increase domestic airfare 15 times in 2012.

US Airways CEO Doug Parker said on a conference call with analysts that the combined carrier will service more U.S. cities and will offer 6,700 daily flights to 336 destinations in 56 countries. Existing American and US Airways hubs will remain open and both airlines will continue to operate independently until the deal is completed.

Current loyalty programs for each carrier will be maintained and existing miles will be honored. The new entity will have the world’s largest loyalty program and the youngest and most fuel-efficient fleet among its U.S. airline peers within five years, according to the US Airways Web site.