Daily State of the Markets 
Tuesday Morning – February 8, 2011

Stocks moved to a fresh set of new highs for the current bull market cycle on Monday, leaving little doubt in the minds of investors that after a brief scare relating to Egypt, the trend continues to be up. And while the popular press continues to beat the drum about the moves to new 2.5 year highs seen in the Dow and S&P 500, you might want to check out a monthly chart of the Midcap index as it powered to yet another all-time high yesterday. Yep, that’s right; there is no sign of a secular bear market in the ‘middies’ as this chart continues to look quite strong.

Most analysts attributed Monday’s breakout to new highs to the return of “Merger Monday” as we were treated to no less than four M&A deal announcements before the open. While merger and acquisition activity is always considered a positive due to the facts that (a) it suggests confidence on the part of the buyers and (b) that valuations remain reasonable in the market, the talk yesterday was that we have now reached a “sweet spot” in the current market cycle for M&A.

The idea here is with the economy on the mend and companies flush with record levels of cash, we could very well see an explosion in these kinds of deals. The good news for the bulls is that if this trend continues, the “who’s next” game could pick up in earnest and contribute to the rising tide in the U.S. stock market.

In addition to the M&A deals, the fact that there were no new headlines out of Egypt over the weekend also helped to stoke the bulls fire on Monday. However, perhaps the key point to recognize at this point in the game is the “The Trade” for 2011 appears to be the U.S. stock market.

Each and every year, there is one trade or macro allocation idea/theme that tends to dominate the scene. Some argue that “the trade” originates at hedge fund community gatherings and becomes the reason behind the herd mentality that tends to exist from time to time. For example, in 2010, “the trade” was the recovery/reflation/’risk on’ theme as investors moved heavily into places like China and India chasing the economic rebound. In addition, there was the “shake hands with the government” trade in government bonds. And past years’ “trades” have included commodities, a flight to safety, commodities, technology, etc.

However, this year “the trade” seems to be a move away from bonds and the emerging markets as the quantitative easing campaigns appear to be coming to a close and those fast-moving economies are now experiencing a bout of inflation. So, with the U.S. economy looking like it has finally reached terminal velocity (the growth rate needed to escape the throes of the downturn), valuations looking more attractive relative to many of the emerging markets, and just about everybody on the street looking for outsized gains in the U.S. this year, where are those macro-oriented fund managers looking to put money these days? Yep, you guessed it; the U.S. stock market.

So, if you are looking for a reason to explain the rather relentless march higher in the market – a move that has simply ignored any and all bad news for months now – one need look no further than the concept of “the trade.” And while there is no telling how long fund managers will continue to buy each and every dip in order to get money put to work here in the U.S., it is important to recognize what is happening.

Turning to this morning… Despite another rate hike in China and a successful bond auction in Greece, there appears to be little in the way of new inputs in the pre-market as overseas markets are showing little movement and the futures in the U.S. are running very close to fair value.

On the Economic front… We don’t have any economic data to reveiw before the bell this morning and little news on the calendar for the remainder of the day.

Thought for the day: Try embracing an “attitude of gratitude” today…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets:
    • Australia: +0.38%
    • Shanghai: Closed
    • Hong Kong: -0.29%
    • Japan: +0.41%
    • France: +0.05%
    • Germany: +0.18%
    • London: -0.18%

     

  • Crude Oil Futures: -$0.86 to $86.62
  • Gold: +$7.50 to $1355.70
  • Dollar: lower higher the Yen and Pound, lower vs. Euro
  • 10-Year Bond Yield: Currently trading at 3.650%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value): 
    • S&P 500: +0.15
    • Dow Jones Industrial Average: +4
    • NASDAQ Composite: -2.35

Wall Street Research Summary

Upgrades:

Boyd Gaming (BYD) – BofA/Merrill MGM Resorts (MGM) – BofA/Merrill Apple (AAPL) – Target increased to $460 at Canaccord Genuity Apogee Enterprises (APOG) – Canaccord Genuity Urban Outfitters (URBN) – Citi Pioneer Natural (PXD) – Susquehanna Shaw Group (SHAW) – UBS Wynn Resorts (WYNN) – Estimates increased at Wells Fargo Ensco PLC (ESV) – Wells Fargo Pride Intl (PDE) – Wells Fargo

Downgrades:

Genworth Financial (GNW) – BofA/Merrill Pride International (PDE) – Barclays, BMO Capital, UBS Aflac (ALF) – Citi Nalco Holdings (NLC) – Jefferies Newfield Exploration (NFX) – Jefferies First Solar (FSLR) – Morgan Stanley Chubb (CB) – Piper Jaffray The Knot (KNOT) – Susquehanna

Long positions in stocks mentioned: AAPL

 

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