Verizon's Potential Deal Leads the Dow Higher

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Verizon (NYSE: VZ  ) is leading the Dow Jones Industrial Average (DJINDICES: ^DJI  ) up following reports that the company is in advanced talks to buy Vodafone's (NASDAQ: VOD  ) 45% share of their joint venture, Verizon Wireless. Also pushing the Dow higher is good news on the U.S. economic front, with GDP being revised higher. As of 1:25 p.m. EDT the Dow is up 50 points, or 0.34%, to 14,874. The S&P 500 (SNPINDEX: ^GSPC  ) is up 0.45% to 1,642.

There were two U.S. economic releases today.

Report

Period

Result

Previous

New unemployment claims

Aug. 17 to Aug. 24

331,000

337,000

Gross domestic product

Q2

2.5%

1.7%

Unemployment claims remain near five-year lows. New unemployment claims dropped by 6,000 to 331,000 last week, in line with analyst expectations of 330,000. The four-week moving average rose by 750, slightly off its five-year low, to 331,250.

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts.

The key report here, though, is the GDP revision. The advance estimate of GDP was 1.7% growth for the second quarter. Earlier this month, the trade deficit for June was reported, coming in far below expectations -- a positive for the economy. Analysts began revising their GDP estimates upward, and the consensus forecast rose to 2.3% growth. Today the Department of Commerce reported a revised figure of 2.5% growth. The better-than-expected GDP report gives credence to Federal Reserve Chairman Ben Bernanke's view that the U.S. economy is doing better and raises the likelihood that the Fed will begin winding down its long-term asset purchases this year. U.S. Treasury notes sold off slightly on the news.

Today's Dow leader
Today's Dow leader is Verizon, up 3.2%. Today The Wall Street Journal reported that Verizon and Vodafone have rekindled discussions of Verizon buying out Vodafone's 45% stake in Verizon Wireless for somewhere between $100 billion and $130 billion. Vodafone shares have responded well to the news, rising 7.6%. Given Verizon Wireless' high price tag, Verizon would likely have to raise debt on top of employing some combination of stock and cash.

Verizon has been trying to buy out Vodafone's stake for a few years now, but the sticking points have always been the price and Vodafone's reluctance to pay a likely $10 billion tax on the sale. According to the article in the Journal, Verizon is hoping to take advantage of low interest rates before they go any higher. Shareholders should carefully analyze any deal that goes through, as Verizon will likely have a much greater debt load than it does already.

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