Bid & Ask: The Deals of the Week

1. Walgreen (WAG) will buy a 45 percent stake in Switzerland-based drugstore operator Alliance Boots for $6.7 billion, with the option of gaining full control in three years. Between them the companies have 11,000 stores in 12 countries.

2. Increasing its original offer by $125 million, Fortress Investment Group (FIG) offered $2.5 billion for the mortgage business of bankrupt Residential Capital, topping a bid by Berkshire Hathaway (BRK.A).

3. Rupert Murdoch’s News Corp. (NWSA) offered $2 billion to double its stake in Australia’s biggest pay-television network, Consolidated Media Holdings (CMJ).

4. Microsoft (MSFT) will purchase Yammer, operator of a social network for businesses, for $1.2 billion, says a person familiar with the matter.

5. In the wake of the consolidation of Europe’s carriers, Dublin-based Ryanair Holdings (RYAAY) will renew attempts to purchase Aer Lingus with a bid valuing its Irish rival at $883 million.

6. Brookfield Office Properties (BPO), owner of New York’s World Financial Center, will buy a portfolio of properties and a development site in the City of London financial district for $812 million.

7. The world’s No. 1 hydrogen producer, Air Products & Chemicals (APD), will buy a 67 percent stake in Chile’s Indura for $707 million to expand in Latin America.

8. CVC Capital Partners, a part-owner of Formula One, sold $500 million of shares in the auto-racing series to Waddell & Reed Financial (WDR). The deal values Formula One at $9.1 billion.

9. InterDigital (IDCC), a wireless-technology developer, agreed to sell about 1,700 patents and patent applications to Intel (INTC) for $375 million.

10. Joan Miro’s 1927 canvas Peinture (Etoile Bleue) fetched $37 million at Sotheby’s (BID) in London. That’s an auction record for the Spanish Catalan artist and the highest price paid for a work of art in London so far this year.

Boots: Jason Alden/Bloomberg Aer Lingus: Aidan Crawley/Bloomberg; Formula One: Don Emmert/AFP/Getty Images; Miro: Sotheby's/Bloomberg

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Oil Prices Keep Falling, But a Strange Gap Persists

Oil prices are down more than 20 percent since mid-March. Yet that hasn’t erased a strange anomaly in the market: the gap between two essentially identical types of oil. North American light, sweet crude, also known as West Texas Intermediate, trades just below $84 while its international equivalent, known as Brent, is priced at $97.

Why would two similar products sell for such different prices? The problem is getting hold of WTI and connecting supply with demand. The gusher of new domestic oil production coming out of shale deposits in North Dakota, Texas, and Oklahoma has outstripped the country’s pipeline capacity to move it around. The result is a supply glut that has built up in the middle of the country, lowering the price of WTI. Refineries along the Gulf Coast would love to get their hands on more cheap domestic crude, but they can’t simply call an oil supplier and have a load of cheaper WTI delivered whenever they want. While pipeline projects to solve the problem are just getting underway, there’s still no easy way to get large quantities of WTI down to the country’s refining hub along the Gulf Coast. So refiners remain trapped, forced to keep taking more expensive imported oil.

The discrepancy has lasted a lot longer than most people thought. Although they’ve traded within a dollar of each other for the bulk of the past 20 years, starting in August 2010, WTI began trading below Brent by about two to three dollars. By February 2011, the spread widened to $20 as domestic production ramped up and turmoil hit the Middle East with the Arab Spring, spooking markets with concerns over threats to supply. The gap peaked at $27 last October, when Brent was trading at $114 and WTI was close to $87. The gap is currently about $13.

One of the big debates in the oil market right now is how tight that spread will get over the next half a year. Opinions vary considerably. The energy guys at Goldman Sachs, led by analyst David Greely, think that by the end of 2012 the price of WTI will be just $5 below Brent, largely because new pipeline projects, such as the recently reversed Seaway, will allow more domestic crude to reach refineries along the Gulf Coast, making WTI more valuable. In essence, the more domestic crude that reaches the Gulf Coast, the stronger the floor beneath the price of WTI becomes.

At the same time, though, domestic production shows no sign of abating. The number of oil rigs drilling in the U.S. has risen to 1,400 from 984 last June, a 43 percent increase. That extra supply should provide an equally strong (if not stronger) ceiling on the price of WTI. As a result, many analysts think the WTI-Brent spread will persist in double-digits for the foreseeable future. “Five dollars is not likely,” says Fadel Gheit, an analyst at Oppenheimer. “And even if it does go to $5, it’s not going to stay there.” Gheit points out that as long as WTI stays above $70, drilling companies can still make money producing new wells, which in turn, he says, will keep WTI anywhere from $8 to $12 below the price of Brent.

This price gap has created an arbitrage opportunity for some enterprising oil traders. For those who can buy domestic oil cheaply and have the means—either by leasing barges or rail cars—to move it down to the Gulf Coast, they can make money by selling it to refineries at a higher price. The tighter that spread, the trickier that trade becomes. Yet $13 is still a big enough window to make it work.

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What If Speed Traders Competed on Price?

In high-frequency trading, speed means everything. With most firms using sophisticated trading algorithms to scour the stock market for tiny price differentials, the trick isn’t so much spotting the profit opportunity, but getting there first. Which is why HFT firms put so much effort (and money) to upgrading their computers while paying steep fees to locate their servers next to those of the exchanges. There’s even a rush to spend millions improving the world’s fiber-optic cables so HFTs can shave a few milliseconds off execution times—reducing “latency,” in industry parlance.

Some see this arms race in speed as a waste of time, money, and talent. If everyone’s continually getting faster, the relative speeds stay the same, but costs continue to rise. One former high-frequency trader has a proposal to slow things down. Chris Stucchio, a math PhD who spent a few years working at a New Jersey high-frequency trading firm, argues that if stocks were allowed to be priced in increments below one penny, HFT firms would have to compete not just on speed, but on price as well.

The Securities and Exchange Commission requires stocks to be priced in 1? increments, a rule that reduces the ability of trading firms to compete on price. As Stucchio sees it, if stocks could be priced in sub-penny increments—say, half a cent—then HFT firms would be forced to compete on two fronts, not just one. In theory, firms that offer better prices would be rewarded, not just the ones claiming the trade a micro-second faster than everyone else.

According to Stucchio, the benefits would be two-fold: “Trading for retail investors would be cheaper and the profits of high-frequency trading firms would be reduced,” he says. Making high-frequency trading less profitable would be a good thing, Stucchio believes, because it would encourage a bunch of smart people to leave the industry and do something of greater social use. Like making the Internet itself a whole lot faster.

It’s an interesting theory. But Ben Van Vliet, a professor at Illinois Institute of Technology and an expert on high-frequency trading, believes sub-penny pricing would put an even greater premium on speed. When the SEC reduced the pricing increments—or spreads—from 12.5? to a penny in 2000, speed became more important, he says, adding, “I don’t see why it would be any different this time around.”

Whether we like it or not, speed is now part of the market. HFTs need it to make their operations profitable. And the exchanges have come to count on the constant flow of high-frequency trades to create the liquidity that allows markets to function smoothly. Reducing the role of HFTs would probably require a complete overhaul in how the markets operate. Still, Van Vliet has a suggestion for how to pull back on the speed arms race: “Go back to dollar spreads and guys in funny colored coats on the exchange floor.”

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Can You Invest $100 in Good Investments in 2011?

Falling Oil Prices Are No Mystery

Oil prices have fallen sharply in the past two months, with Brent crude sinking to $97 a barrel and West Texas Intermediate hitting $83. The explanation is simple: Since March, the world has been producing more oil than it’s consuming, according to data gathered by the Energy Intelligence Group. Global oil consumption has been declining since the end of 2011, falling to 88.5 million barrels per day at the end of April, from 90.4 million barrels per day in late December 2011. At the same time, world oil production has risen steadily for more than a year, driven by new finds and drilling techniques in North America and a 10 percent increase in production from OPEC during the past 12 months. The last time supply outstripped demand was in 2006.

The U.S. is now sitting on more oil supplies than it has since 1990. And yet our demand for it is at close to a 15-year low—a result of economic weakness and increased energy efficiency. “The amount of oil it takes to move the economy is declining,” says Fadel Gheit, an energy analyst at Oppenheimer.

The price declines have coincided with a steep selloff in oil futures contracts over the last two months. Speculators cut their net-long positions—bets that the price will rise—to the equivalent of 136 million barrels of oil, the lowest level since September 2010, according to the Commodity Futures Trading Commission. This follows a huge speculative buying binge. Oil prices spiked from October through March—a six-month bull run fueled by speculative worry over an Iranian supply disruption.

With speculative money pouring out of the oil market, the price is closer to reflecting supply-demand fundamentals. And that means the world’s two most traded oil contracts should continue to fall in price through the summer, analysts say. Religare Capital Markets forecasts that Brent crude, the benchmark for more than half the world’s oil, will fall to $90 a barrel by September, and that West Texas Intermediate should fall to $80.

Since two-thirds of the price of gasoline is determined by the price of oil, that should continue to lower prices at the pump. At the end of May, the average price of a gallon of gasoline in the U.S. was $3.66, 12? lower than it was a year ago. That will provide some relief at the pump in time for the summer driving season. Whether that amounts to enough of an economic stimulus for consumers to help lift the economy is much less clear.

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Investment Tips Based on Moon Sign for Diwali 2010

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