Daily State of the Markets |
Just about the time the bears looked as if they were ready to get something more than a run-of-the-mill pullback going, a new phase of the bull market may have turned the tables. I’m not sure if we can really call a handful of strategic M&A deals a return of “merger mania,” but it was nice to be greeted with a couple of decent-sized deals on a Monday morning.
It is a fairly safe bet that most traders may have been looking for some follow-through on Monday morning. After all, we had an important Fed Governor writing about the Fed changing course and talking about “aggressive” rate hikes. Next, we had Obama, alongside the British and the French, calling out Iran on their secret nuclear site on Friday. And then, Iran responded by firing off a bunch of missiles as a show of strength. Thus, some additional selling on Monday wouldn’t have been much of a surprise.
But as we’ve opined recently, the stock market doesn’t always focus on the obvious and in short, the market doesn’t care about things – until it does. And with a couple of big M&A deals to distract traders from the geopolitical issues, well, it is safe to say that the stock market didn’t give Iran or Kevin Marsh a second thought yesterday. No, with no less than five deals to review yesterday, the talk was more about what the strategic M&A activity meant to the market than what might happen in the Middle East.
Why should you care about Xerox (XRX) buying Affiliated Computer (ACS) or Abbott (ABT) confirming its acquisition of Solvay Pharmaceuticals or Covidien (COV) buying Aspect Medical, etc.? First, a company spending their own cash to buy up competitors (or to build strategic alliances) tells traders that there is a level of confidence building in the marketplace. Again, if a company is willing to plunk down cold, hard cash to buy a company, it must be pretty confident about the state of its business.
Next, the M&A activity represents a milestone of sorts in the recovery of the financial system. Not all deals are financed with cash and/or stock – some require some debt. So, not only are companies now willing to part with some of their cash, they are also confident that they can get the financing to do the deal.
Then there is the valuation angle. With the bears howling about the market being overvalued after a run of nearly 60% in six months, the fact that companies are willing to buck up and pay a hefty premium to “do the deal” means that the companies doing the buying think that the current values in the market place are, at the very least, fair. Remember, Xerox offering price represents a 33% premium to Friday’s closing price of Affiliated Computer.
And finally, there is the game of “who’s next?” The beauty of the M&A phase of bull markets is that traders begin to bet on which company will be the next to be bought. This tends to lift all ships in a specific harbor and in general, allows for some multiple expansion.
The big question, of course, is if the game will continue. But, if you are in the bear camp right now, you should at least be cognizant of the fact that this phase – if it is indeed a phase – could continue for a while.
Turning to this morning, we don’t have any economic data to review before the bell. But we will get the September Consumer Confidence report at 10:00am eastern.
Running through the rest of the pre-game indicators, the foreign markets are mixed. Crude futures are moving lower with the latest quote showing oil trading off by $0.83 to $66.04. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.33%, while the yield on the 3-month T-Bill is currently at 0.11%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a mixed open. The Dow futures are currently ahead by about 10 points; the S&P’s are up about 2 points, while the NASDAQ looks to be about 8 points below fair value at the moment.
Upgrades/Downgrades/Brokerage Research:
Phillips-Van Heusen– Upgraded at BofA/Merrill Annaly Capital (NLY) – Upgraded at BofA/Merrill Broadcom (BRCM) – Upgraded at Barclays Rockwell Automation (ROK) – Upgraded at Barclays Eaton (ETN) – Upgraded at Barclays Lamar Advertising (LAMR) – Upgraded at Barclays Dr. Pepper Snapple (DPS) – Added to Top Picks Live list at Citi AstraZeneca (AZN) – Downgraded at Collins Stewart ConocoPhillips (COP) – Upgraded at Collins Stewart Oil States (OIS) – Estimates and target increased at Credit Suisse Huntington Bancshares (HBAN) – Upgraded at FBR Capital Zions Bancorp (ZION) – Upgraded at FBR Capital PNC Bank (PNC) – Upgraded at FBR Capital US Bancorp (USB) – Upgraded at FBR Capital RRI Energy (RRI) – Upgraded at Goldman Polo Ralph Lauren (RL) – Upgraded at Goldman Yahoo! (YHOO) – Target increased at Jefferies ProLogis (PLD) – Downgraded at Oppenheimer Citi (C) – Target increased to $6.50 at Rochdale Morgan Stanley (MS) – Estimates reduced at Rochdale MBIA (MBI) – Counterparty credit rating downgraded at S&P Under Armour (UA) – Target increased to $24 at Thomas Weisel Columbia Sportswear (COLM) – Target increased to $33 at Thomas Weisel
Long positions in stocks mentioned: GS
Try doing something nice for someone today (for no reason at all) and until next time, “may the bulls be with you!”
David D. Moenning
Founder TopStockPortfolios.com
For more “top stock” portfolios and research, visit TopStockPortfolios.com
The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
The information contained in our websites and TopStockPortfolios publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.
Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.