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Bank of America may have paid too much

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In what is said to be the 13th largest acquisition in corporate America history, and create the nations largest consumer bank, Bank of America (NYSE:BAC) $73.57 -10.12% said it was willing to pay $47 billion, a 42% premium over Friday's close for FleetBoston (NYSE:FBF) $39.20 +23.2% in a stock-for-stock deal.

While the news had many regional banks share prices moving higher on speculation that they too might be rewarded with premiums attached to FBF by BAC, market participants questioned the premium being paid by Bank of America (BAC) as it lost just over $12 billion in market capitalization. Meanwhile, FBF, which has a large footprint in the Northeaster part of the U.S. increased its shareholder's value by just over $7.7 billion.

All told, the market seemed to think BAC may have paid roughly $4.3 billion too much by day's end.

Today's 10% decline in Bank of America (BAC) single-handedly wiped out gains in the more regional S&P Banks Index (BIX.X) 325.29 -0.17%, while the larger money center banks as depicted by the KBW Bank Index (BKX.X) 923.64 -0.4% edged lower as investors pondered what premiums might be paid by other money center banks looking to grow the size of their footprint.

S&P Bank Index (BIX.X) Components - Sorted by Market Cap

A quick look inside the BIX.X shows some of the money center components weighing on the BIX.X in today's session, while the "smaller" regional banks all posted gains.

The AMEX-listed Regional Bank HOLDRs (AMEX:RKH) $123.85 +2.3% benefited from today's gains in FBF. According to the American Stock Exchange and data provided by Merrill Lynch, the top 5 weighted components in the RKH as of 10/17/03 were USB (56.8%), WB (41.0%), ONE (33.0%), FBF (25.0%) and WFC (24.0%).

The RKX is comprised of (ASO, ONE, BBT, CMA, FITB, FBF, KEY, MI, MEL, NCC, NTRS, PNC, STT, STI, SNV, USB, WB and WFC).

An analysts note I'll make tonight is that on July 17, 2003, Friedman Billings Ramsey upgraded FleetBoston (FBF) to "outperform" from "market perform" at approximately $30 citing the progress the company was making in repairing its retail and wealth management operations, as well as their belief that the company's exposure in Latin America and loans to troubled corporations had been adequately addressed and no longer posed a threat to future earnings. Just last week, 10/24/03, Friedman Billings Ramsey upgraded Mellon Financial (MEL) to "outperform" from "market perform" saying they feel there has been a disconnect between the extent of the "bad" Q4 news contained in MEL's Q3 earnings release and the then seen 13% decline in MEL's stock price. FBR says MEL still boasts a diverse mix of asset mgmt, wealth mgmt, and securities processing business units, each of which possesses double-digit annual growth potential and warrants a premium valuation. FBR placed a $33 target price on MEL's shares, which has MEL's stock trading at a 10.7% discount to FBR's price target.

While today's banking merger news had little net effect on the banking sectors, the HMO Index (HMO.X) 785.89 +2.46% grabbed today's top spot among sector winners with two of its components making merger-related headlines. Anthem Inc. (NYSE:ATH) $71.05 -8.03% saying it would buy HMO Index component WellPoint Health (NYSE:WLP) $91.09 +8.53% for $16.4 billion in a stock and cash deal. If fully consummated, the deal will create the nations largest health benefits company.

Also seeing gains were HMO Index component Mid Atlantic Medical (NYSE:MME) $59.62 +10.65% being acquired by UnitedHealth (NYSE:UNH) $52.40 -3.41%. Under the terms of the agreement, MME shareholders will receive UNH stock at a fixed ratio of 0.82 shares for each MME share, plus $18.00 per share in cash, which value the deal at approximately $62.49 per MME share.

The news helped lift Oxford Health (NYSE:OHP) $45.99 +3.46% to an intra-day high of $46.60 and challenge a 52-week high set on July 29, 2003 of $46.67. I think tomorrow morning's before the bell earnings and comments from OHP should be closely monitored by SPX and OEX traders when analysts expect the company to report quarterly earnings of $1.15 per share. The reason I say this is that on August 5, 2003, OHP reported EPS of $0.85 per share, which was 5 cents better than analysts' estimates, but the stock fell from $42.32 to $35.38 in following sessions on concerns that a weaker jobs market had enrollments falling by 23,500 during that quarter and the sell-off in OHP may have been a near-term negative reaction to a weak jobs market and future enrollments not only for OHP, but other HMO's. Tomorrow we might monitor OHP for any divergence or similarity to August 5, as a pulse from the market on future prospects for jobs growth.

Other HMO Index (HMO.X) components (SIE +5.3%, PHS +3.7%, CVH +1.96%, HNT +1.06%, CI +0.72%, FHCC -0.32%, HUM -0.6%, AET -2.76%) finished mixed to higher in today's trade.

The Dow Jones Home Construction Index (DJUSHB) 548.86 +2.13% finished a close 2nd to the HMO.X for today's sector winner to close at an all-time high. While September new home sales edged back from August's 1.147 million unit pace at 1,145 million units, September's pace was well ahead of economists' forecasts for a 1.125 million unit annual rate.

Small to mid caps as depicted by the Russell-2000 Index (RUT.X) 515.35 +1.76% clearly outperformed the major indices in today's trade. Some trading desks mentioned that small caps were benefiting from some mutual fund end of quarter window dressing. In Sunday's Market Wrap: Click Here we took a look at the Russell-2000 Index (RUT.X) where today's gains come at an upward trend and rising 50-day SMA.

Pivot Matrix

A late session rally on Friday did have the major indices reclaiming last week's WEEKLY S2s by the close, and this week started out with the major indices below their WEEKLY Pivots, where intra-day trade did find moves higher seeing trade at the WEEKLY Pivots, but traders seemed tentative to push the major market averages higher ahead of tomorrow's FOMC meeting.

My only negative thoughts at this point would be related to a Fed rate hike, where I do think WEEKLY S2s could be traded again this week, should the Fed decide to raise its Fed funds rate by 0.25 points or more.

One observation I make tonight as it relates to an August 31, 2003 Ask the Analyst column: Click Here is that the Continuous Gold Contract ($GOLD) $388.10 fell $1.10 today and trades under the $400 level and based on that article and comments/observations made by Steve Forbes, has the gold market telling the Fed they are correctly doing their job. After tomorrow's 02:00 PM EST update, I will monitor the December Gold futures contract (gc03z) $388.40 +0.05%, where its contract high of $394.80 was found on September 25, 2003, but has yet to see trade at or above the $400.00. Still, the price of gold getting closer to $400.00 than further away does hint the Fed rate hikes may not be far off, but it may still be early in the scope of "signs of sustainable economic growth" that the Fed has said it wanted to see before it started raising rates, or moving from its current stance of an accommodative monetary policy.

Dow Industrials ($INDU) Chart - Daily Intervals

The INDU traded strong for the bulk of this morning's session, but gave back early gains after American Express (NYSE:AXP) $46.75 -1.82%, which reported earnings during today's trade gave full year 2003 guidance of between $2.26-$2.29 per share, which was at the low end of consensus estimates of $2.29 per share. International Paper (NYSE:IP) $38.00 -1.14% fell as higher energy prices hurt results and had the company reporting quarterly earnings of $0.24 per share, which was a penny below Wall Street's consensus estimates. Procter & Gamble (NYSE:PG) $96.80 +0.77%, which is the highest priced stock in the price-weighted Dow beat estimates with quarterly earnings of $1.26, compared to consensus estimates of $1.25.

In the theme of "the market giveth and market taketh away," I make note that analysts have revised 3M's (NYSE:MMM) $75.74 +0.07% next quarter EPS estimates up a penny to $0.75 from $0.74, but revised SBC Communication's (NYSE:SBC) $23.48 +2.35% EPS estimates for next quarter down a penny to $0.34 per share.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 83.33%.

S&P 500 Index (SPX.X) Chart - Daily Interval

Rules are rules and a stop placed as profiled in the S&P Depository Receipts (AMEX:SPY) $103.63 at $102.20 would have been stopped out on Friday when the SPY traded a session low of $102.18. The SPX and SPY does lend itself to a bullish test back into the 1,045-1,050 area this week, but tough new bull entry with that type of bullish target parameter, but would rather get another shot at pullback instead of looking long in today's trade. Looking for 1,015 support this week, with rally potential to WKLY R1. Need technology to firm and start showing some strength to happen.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 1 stock to a point and figure sell signal. Still "bull confirmed" at 78.4%, where a reversal lower at 76% would be "bull correction" status.

The narrower S&P 100 Bullish % ($BPOEX) saw a net loss of 1 stock to a point and figure sell signal today as the bullish % slips another 1% to 77%. Still "bull correction" status and shows the large caps seeing some supply outstripping demand.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals

The QQQ rallied late on Friday to close right at its WEEKLY S1 of $36.20, but sputtered throughout today's session. I'd look for a short-covering rally to trigger on a move above today's highs. Would wait for that break as the QQQ may still want to try and fully fill its gap from the October 2nd high of $33.43, which it didn't quite do on Friday with a session low of $33.49. Similar to this weekend's Market Wrap where it seemed like old bears may have been a bulls best friend on Friday, with WEEKLY R1 at $33.31, complacent bears that may not have taken the opportunity to cover some short positions on Friday should be doing buying on weakness at this week's WEEKLY R1, which is just below the October 2nd high of $33.43.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bear correction" status at 75.00%.

Jeff Bailey

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