The Urge to Merge

Daily State of the Markets 
Wednesday Morning – March 3, 2010  

Stocks started out with a bang again Tuesday morning as more talk of a backstop for Greek debt, some new M&A activity, and renewed discussions of Corporate America starting to spend that horde of cash that is lying around gave traders the green light to do some more buying. And before most people could stumble to their desks, the Dow found itself in breakout mode and up more than 50 points.

If you like to play the follow-the-leaders game, you will readily agree that the early fun wasn’t limited to the blue chip indices. While the Dow struggled to get past its recent highs, the Russell 2000 made a new intraday high for this cycle just after lunchtime and the Midcap 400 finished at its highest level since Lehman fell (aka a new cycle high). So, if you are looking for what’s working these days, take a gander at those small- and mid-cap names/indices.

The upbeat mood wasn’t triggered by any economic data or specific news item. No, it is the thinking that CEO’s are feeling better about the future that seems to be behind the bulls’ latest romp. While it is true that an imminent bailout for Greece helps remove some uncertainty, it appears that the willingness of corporate boards to let go of some that cold, hard cash is what’s behind the recent buying binge.

In case you haven’t noticed, there haven’t been a lot of corporate deals done since the credit crisis ended. The reason the M&A biz went into the tank is two-fold. First and foremost, the easy money used to finance billion-dollar deals simply went away. And second, with the economy in the throes of the worst economic downturn since the Great Depression, most CEO’s were more interested in surviving the crisis than buying up their closest competitors or forming a strategic alliance.

However, with 4 deals on Monday and speculation about who is next gaining momentum on Tuesday, the ‘urge to merge’ looks like it may be making a comeback. While mergers and acquisitions definitely demonstrate an increased confidence level on the part of those companies doing the buying, the return of M&A also means that things are starting to get back to normal on the corporate landscape.

But we’re not just talking about M&A here. The fact that we’re hearing of more and more companies increasing their dividends and buying back stock also is a very good sign that things are starting to improve in terms of the outlook for the future.

So, why didn’t stocks just continue to ramp up into the close? Why didn’t the Dow put up another strong gain? In short, because there are some pretty big events looming on the near-term horizon. First, the bailout for Greece, which now looks like it will take the form of German bond guarantees, needs to come together this week. And in order for that to happen, Greece must first agree to an austerity plan (which isn’t going over too well with the people of Greece). And while Greece is expected to announce its spending plans this week, traders may want to see that the deal actually gets done before going too crazy on the buy side.

In addition, traders may be bracing for what could be another really crummy jobs report. And although the weather is already being queued up as the reason for any disappointment, one can never be sure about the reaction in the market when it comes to the Big Kahuna of economic numbers. As a reminder, the February jobs report will be released Friday morning at 8:30 am eastern.

Turning to this morning, Greece has announced their austerity plan which has not been all that well received by the markets so far.

On the economic front, ADP reported that the private sector lost 20,000 jobs in February, which was in line with the consensus expectations for a decline of 20,000. However, the January report was revised significantly lower to show a total decline in jobs of 60,000, which is down from the original report of 22,000. Also on the jobs front, Challenger, Gray & Christmas reported that employers announced plans to cut 42,090 jobs last month, which was down from the 71,482 seen in January and the lowest level since July 2006.

Running through the rest of the pre-game indicators, the overseas markets are mixed with Europe having moved down fractionally after Greece’s announcement. Crude futures are up $0.44 to $80.12. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.642. Next, gold is moving up by $3.50 to $1140.90 and the dollar is higher against the Yen but lower against the Euro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a flat open. The Dow futures are currently ahead by about 11 points; the S&P’s are up about a point, while the NASDAQ looks to be about 2 points above fair value at the moment.

* Report includes items that make comparisons to the consensus estimate questionable

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