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Monday Morning Musings

The market is lower in early trade after a 4-day bounce last week that resulted in solid weekly gains for the major indexes.

The big news has come on the M&A front this morning.  First, Microsoft (MSFT) said it will invested $300 million into Barnes & Noble (BKS) to form a strategic partnership aimed at accelerating the transition to e-reading.  BKS stock is up a whopping 62% on the news, aided by short-covering.

Also, Gen-Probe (GPRO) reported solid earnings but also said it will be acquired by HOLX for $82.75, which is roughly a 20% premium to Friday’s closing price.

In economic news, the Chicago PMI was disappointing at 56.2 vs. a reading of 60 that was expected.  Personal spending for March was also below expectations at +0.3% vs. +0.5% consensus.  Friday will bring the monthly jobs report, and I just saw that Goldman is estimating the economy added 125k jobs in April.

Asian markets were mostly higher overnight, while Europe is lower this morning on confirmation that Spain is officially in recession.  But is that really a surprise?

Earnings reactions have been mostly to the downside from what I’ve noticed today.  Examples of stocks falling on earnings reports this morning include: ABV, HUM, SOHU, and NYX to name a few.

The dollar is roughly flat vs. the euro, but commodities are mostly lower today.  Oil prices are lower near $104.40 and gold prices have eased back to $1657.

The 10-year yield is drifting lower to 1.91%; and the VIX is +6% higher so far near the 17.35 level.

Trading comment: I read an interesting article asking whether traders were preparing for the same summer selloff pattern that the markets experienced in 2010 and 2011.  While the fundamental backdrop seems similar (slowing economic data, unsettling news out of Europe) we don’t have the same shocks like the flash crash or the earthquake.  Also, bond yields are already lower at current levels than they were before both summer rallies the last couple of years.  Additionally, corporate profit growth has been strong so valuations are cheaper than they have been as well.  There were the arguments that were made for any pullback to be more mild in nature.  But I would argue that we simply don’t know, and that once a selloff picks up steam, its usually investor fear that drives prices lower than most investors were looking for.  So we are trimming some equity exposure ahead of time just to try to position ourselves better ahead of summer.

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