Monday, July 02, 2012

Monday Morning Musings

The market was higher after the open, with several deals getting done over the weekend bringing about a big Merger Monday.  But a weak ISM report took some of the wind out of the market's sail.  The ISM Index for June fell to 49.7 (below consensus) from 53.5 last month.  A reading below 50 signals contraction in the industry.  For comparison purposes, China's latest PMI reading fell to 48.2 while Europe held at the low level of 45.1.

It was a big morning for merger announcements, some of which were already discounted in the market.  DELL will acquire Quest Software (QSFT) for $28 per share, BMY will acquire AMLN for $31, CELL will be acquired by IM for $9, and LNCR will be acquired by the Linde Group for $41.50.  This supports the notion that corporate buyers, flush with cash on the balance sheet, still find value in the market and M&A should continue.

Asian markets were relatively flat overnight, while Europe is higher this morning.  Spanish and Italian bond yields are also lower today.  The ECB meets this week and will issue a new policy statement on Thursday.  Many are speculating about a rate cut, but I still think they will likely hold off and keep some powder dry for when they really need to pull it out.

The dollar is higher today, which is weighing on commodities.  Oil prices are lower near $83.50 despite news that Iranian lawmakers are drafting a bill to propose blocking the Straight of Hormuz for oil tankers.  Gold prices are also weaker near $1601.

The 10-year yield is back below the 1.60% support level on the weak ISM report.  Currently it has fallen all the way back to 1.56%.  As for the VIX, it is bouncing a bit from Friday's plunge to 17.75, still a relatively low overall level.

The US markets close early tomorrow and then all day Wednesday for the 4th of July holiday.  I will be on vacation for the remainder of the week so my next update will be on Monday.

Trading comment: The S&P 500 surged above its 50-day on Friday by a wide margin.  That helps as even this morning's pullback isn't in jeopardy of violating that 50-day support.  The 50-day currently sits at 1340, some 15-16 points below where the market is trading.  A couple of closes above this key average should put the market in position for more upside, as many investors have probably moved to an overly conservative posture recently.  My concern has been the upcoming earnings season and how individual stocks would react to the likelihood of conservative guidance from corporate managements.  That issue is still in front of us, so I don't want to get too aggressive ahead of it.  But big picture, if the market action stays solid I would look to lighten up on our ETF hedges.

KAM Advisors has long positions in BMY


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