The bull's strength will be tough to curb

Reports that Microsoft (MSFT, news, msgs) might be trying to get Yahoo (YHOO, news, msgs) to the altar offers some strong evidence why the momentum in the stock market is pushing prices higher.

At some point the market will pull back. The question is when and for how long. For now, the internals of the domestic market -- plus strength in markets around the world -- aren't signaling anything like a blowoff is in the offing.

Stocks rose slightly on Friday with the Dow Jones industrials setting a new closing high. The small gains came despite a 9.9% gain in Yahoo shares and a gain nearly 27% to $74.76 for news and information giant Reuters (RTRSY, news, msgs), which said it has received a buyout bid. Thomson Financial is reportedly the suitor, and the Financial Times was reporting late Friday that Reuters is open to an offer.

The market has been rallying steadily since mid-July, when the Federal Reserve stopped raising interest rates. That's despite the big market break in late February and early March, a big increase in oil prices since January and increasing evidence of a softening domestic economy.

The Dow closed up 23 points on Friday to just under 13,265. It was the 23rd gain in 26 sessions for the blue-chip index, something not seen since April and May 1944. Nineteen of the 30 stocks in the index were higher, led by a 2.2% gain $43.79 for computer giant Hewlett-Packard (HPQ, news, msgs).

The Standard & Poor's 500 Index was up 3.2 points to just under 1,506, with 270 of the 500 stocks in the index showing gains. Thursday, the index crossed 1,500 for the first time since September 2000.

The Nasdaq Composite Index closed up 6.7 points to 2,572. Gains for Yahoo were offset by a 2.9% decline for Starbucks (SBUX, news, msgs) and a 4.6% decline for Sears Holdings (SHLD, news, msgs). Both reported earnings that disappointed Wall Street.

For the week, the Dow added 1.1% and is now up 6.4% for the year. The S&P 500 rose nearly 0.8% and is up nearly 6.2% for the year. The Nasdaq was up nearly 0.6% and is up 6.5% this year.

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The Yahoo-Microsoft story commanded the most attention by far Friday with reports from the New York Post and The Wall Street Journal suggesting Microsoft is pushing the idea of a merger or some sort of tie-up.

Late Friday, however, The Journal, citing unnamed sources, said the talks are no longer active, and the newspaper added, "The two companies may still explore other ways of cooperating."

Yahoo finished up $2.80 to $30.98. The stock's gain, as much as 18% in the morning, faded as skepticism grew during the day that a deal might be struck, and the stock continued to fall in after-hours trading.

Microsoft finished down 1.3% to $30.56, the worst percentage loss among Dow stocks. (Microsoft is the publisher of MSN Money.)

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	13,264.62	13,120.94	1.10%	6.43%
S&P 500	1,505.62	1,494.07	0.77%	6.16%
Nasdaq Composite	2,572.15	2,557.21	0.58%	6.49%
Russell 2000	832.88	829.70	0.38%	5.74%
Crude oil per barrel	$61.93	$66.46	-6.82%	1.44%
10-yr. Treasury yield	4.64%	4.67%	-0.68%	-1.49%
Gold per troy ounce	$689.70	$681.80	1.16%	8.10%

Why the market has strength

The market's strength is undeniable. A look at six-month charts of the Dow, the S&P 500 and the Nasdaq Composite show all three indexes trading in strong channels. So is the Dow Jones Transportation Index ($TRAN). Strong upward channels are a sign of investor confidence. And bulls see new highs in the Dow transports and industrials signaling more gains ahead.

Along with the indexes, Dow stocks such as IBM Corp. (IBM, news, msgs), ExxonMobil (XOM, news, msgs), United Technologies (UTX, news, msgs) and even Microsoft had shown strong gains since the sell-off at the end of February and early March.

• Video: S&P crosses 1,500

The reasons for this strength include:

• Low interest rates. The 10-year Treasury yield was at 4.6% Friday, down slightly from Thursday but about half the levels seen in the summer of 1990.

• Deal rumors move stocks. This is true even if the information may be sketchy. The Microsoft-Yahoo story is a case in point.

• Fantastic amounts of private-equity capital ready to be employed. This can be mobilized quickly to buy companies. That provides a base for stock prices and has the effect of taking stock of the market, thus concentrating buying on fewer shares. One reason the cash is there: Bond yields can't compete.

  Stock Charts (Year)

  Dow Jones Industrial Average

  

  Standard & Poor's 500 Index

  

• A strong global economy. India, China and other countries are fueling growth for big-cap U.S. stocks like Caterpillar (CAT, news, msgs) and IBM and basic materials stocks like Freeport-McMoRan Copper and Gold (FCX, news, msgs) and BHP Billiton (BHP, news, msgs), the big iron ore producer.

• A lower dollar. At least against the euro and the British pound. Sure it means vacations in Europe will cost you, but it also means U.S. exports into Europe especially are cheaper. That flows immediate to the corporate bottom line.

• An unfolding explosion in wireless communications. This will help companies like Juniper Networks (JNPR, news, msgs) and Cisco Systems (CSCO, news, msgs).

• A benign Federal Reserve. The Fed stopped raising rates last summer (its key federal funds rate is 5.25%). The central bank's Federal Open Market Committee meets on Wednesday, and economists and the financial markets are betting it won't change interest rates.

This may sound wildly bullish. There are, in fact, risks to the markets, including:

• The markets are getting just plain frothy. The S&P 500 Index is trading more than 8.7% above its 200-day moving average, nearly the level in late February when the market sold off. Energy, materials, telecom and utilities stocks are all selling at 12% or more above their 200-day moving averages. A wrong bet on a deal rumor could prove costly.

• Oil prices are high. Even if crude is down under $62 Friday, it is still up 24% or so from January, and gasoline prices appear headed to $4 a gallon this summer. The average national retail price of gasoline was $3.012 a gallon, according to AAA's daily survey Friday.

• Geopolitics. Any deterioration of the situation in the Middle East could generate some selling.

• Inflation is rising. Ask anyone going to the grocery store lately. Food and grain prices have been soaring along with oil and everything from concrete to steel. That could force the Fed to, dare we say it, raise rates.

• A nervous consumer. While the major averages are tracking nicely higher, Market Dispatches notes that retailers aren't. The S&P Retail Index ($RLX.X) has recovered some from February's tumble, but it has been slipping in the last two weeks. Since Feb. 20, Target (TGT, news, msgs) has lost 8.6%; Wal-Mart Stores (WMT, news, msgs) has been stagnant.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$61.93	$63.19	-$1.26	-5.75%	1.44%
Heating oil (per gallon)	$1.8309	$1.8453	-$0.0144	-4.32%	14.58%
Natural gas (per million BTU)	$7.9380	$7.9470	-$0.0090	0.95%	26.02%
Unleaded gasoline (per gallon)	$2.2164	$2.2476	-$0.0312	-9.18%	38.34%

The battle over ABN Amro: A jilted suitor sues

Bank of America isn't pleased by the latest turn of events in the battle for Dutch bank ABN Amro.

That unhappiness prompted a lawsuit against ABN Amro (ABN, news, msgs), which was to sell its LaSalle Bank division to Bank of America (BAC, news, msgs), and BofA has asked a U.S. court to prevent ABN from selling LaSalle to anyone else.

The move follows a decision by a Dutch court Thursday that halted LaSalle's sale to Bank of America. ABN had agreed to sell LaSalle for $21 billion as part of a $91 billion merger with Barclays (BCS, news, msgs), but rival suitors are trying to block that deal.

Shares of ABN Amro were flat at $49.93 by midday, while shares of Bank of America added 12 cents to $51.35.

Bank of America says it has suffered "substantial harm" from the decision to halt the sale of LaSalle. LaSalle is considered particularly valuable to BofA because it has a strong retail presence in Chicago, one of the few big U.S. cities where BofA doesn't have a dominant share of consumer-banking business.

The Dutch bank has been the subject of a bidding war between Barclays and a consortium including the Royal Bank of Scotland, which offered $98 billion for ABN.

Payrolls rise less than expected

The merger buzz Friday overshadowed Friday's economic news on the job front.

U.S. nonfarm payrolls rose 88,000 in April, below economists' prediction of a 100,000 gain. The number was the smallest gain since November 2004.

Excluding gains in government jobs, the number of jobs that were added last month came in at 63,000 -- almost the exact prediction made by Automated Data Processing (ADP, news, msgs) earlier in the week.

"It's not a bad number -- we're still adding jobs," Tobias Levkovich, the chief U.S. strategist at Citigroup, told CNBC Friday.

Although jobs were still being added in April, another study, by Challenger Gray & Christmas, said this week that 70,000 layoff notices had been announced in April.

The jobless rate grew to 4.5% in April from 4.4% in March, as retailers cut 26,000 jobs and 11,000 jobs were cut in the building sector.

In March, the private sector added a revised 177,000 jobs, down from an original reading of 180,000.

Short hits from the markets -- 4 p.m.

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	4.750%	4.750%	0.000	0.53%	-2.76%
5-year Treasury note yield	4.549%	4.588%	-0.039	0.73%	-3.23%
10-year Treasury note yield	4.640%	4.674%	-0.034	0.22%	-1.49%
30-year Treasury bond yield	4.804%	4.837%	-0.033	-0.27%	-0.29%
Currencies
U.S. Dollar Index	81.62	81.82	-0.20	0.33%	-2.17%
British pound in dollars	$1.993	$1.988	0.006	-0.36%	1.71%
Dollar in British pounds	£0.502	£0.503	-0.001	0.36%	-1.69%
Euro in dollars	1.360	1.355	0.005	-0.34%	3.03%
Dollar in euros	€ 0.7353	€ 0.7378	-0.003	0.34%	-2.94%
Dollar in yen	¥120.13	¥120.39	-0.26	0.60%	0.93%
Commodities
Gold	$689.70	$675.10	$14.60	0.91%	8.10%
Copper	$3.7585	$3.6445	$0.11	5.68%	30.91%
Silver	$13.5300	$13.3300	$0.20	-0.33%	4.60%
Crude oil (NYMEX) (per barrel)	$61.93	$63.19	-$1.26	-5.75%	1.44%

Investment banker charged with insider trading

The Securities and Exchange Commission has charged Credit Suisse (CS, news, msgs) investment banker Hafiz Naseem with conspiracy and securities fraud.

The 37-year-old allegedly leaked information about merger deals, including the recent $31.8 billion private-equity buyout of TXU Corp. (TXU, news, msgs) in February.

• Video: Insider-trading bust

The SEC started to investigate the deal after 18,000 call options exchanged hands on the Friday before the TXU deal was announced -- more than seven times the average daily volume for the normal options trading in February.

In a statement, Credit Suisse said that it is "shocked and extremely disappointed that an employee would violate not only our trust, but the trust of our clients."

Naseem was arrested late Thursday.

Starbucks' frothy profit doesn't impress

Coffee company Starbucks (SBUX, news, msgs) reported fiscal-second-quarter net income of $150.8 million, or 19 cents per share, up from $127.3 million, or 16 cents per share, in the year-ago quarter. The report met analysts' expectations.But the stock was down nearly 3% Friday to $30.71. The shares are down more than 13% this year. CIBC analyst John Glass noted that U.S. customer counts appear to have stalled for the first time in Starbucks' history. "We see this remaining a source of investor anxiety," he wrote in a note to clients.

Starbucks said the opening of 560 stores in the quarter helped boost profits. The company also said that sales at stores open at least one year rose 4%.

Being a Wal-Mart employee has its perks

More than $1.1 billion worth, to be precise.

Wal-Mart said it paid its hourly employees more than $1.1 billion in profit-sharing plans, 401(k) contributions and other benefits last year. That total included $667 million in profit-sharing and retirement-account contributions and $529.8 million in bonuses for nearly 816,000 hourly workers -- more than half of the company's 1.4 million-member staff.

The retailer has been criticized by unions for the way it treats its hourly employees and is facing more than 70 lawsuits for allegedly not paying overtime or allowing required rest breaks.

Wal-Mart was down slightly at $48.27 on Friday.

By Charley Blaine and Elizabeth Strott