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Markets: Risk-on / Risk-off ?

Summer of 2010 is almost coming to end with labor day (un-official end of summer in US). Kids are back in school. Markets are trading water around same level as start of 2010. After peaking in Apr 2010, summer was mostly about few weeks up and then few weeks down - some professionals call it as risk-on and risk-off.

Bond markets and stock markets are diverging. Yields on 2-year and 10-year T-bills (as wells as UK Gilts and German Bunds) are reaching all time lows. Few weeks back I wrote about treasuries in bubble when yield on 10-year fell to 3%. Since then it has dropped below 2.60 and heading below 2.50 very soon - looks like my short-term timing is wrong since treasuries has gone up by 7-10% since then. However I still stand by prediction about long-term that treasuries are headed for a fall (with yield going above 3% by year-end). Basically bond markets are saying that we are heading towards double-dip.

Stock markets are pricing in very modest recovery (below 2%). Hence they are still trading nearly 50% above Mar 2009 lows. The recent pullback of nearly 10-12% is due to reduced expectations of recovery. I hope stock markets are right (if bond markets are right, DOW would go below 9000).

Last week's M&A activity suggests that companies would like to deploy their cash buying new businesses instead of expanding their work-force by hiring. Notable M&A announcements were: Intel/Mcafee, BHP/Potash and Dell/3PAR. Two of three are in technology sector. Now that McAfee is gone, most likely Symantec would be play. Just on pure buyout potential, this week's recommendation is SYMC at $13.50. There could be at least 4 companies (ORCL, HPQ, MSFT, IBM) for which SYMC could be good fit especially in terms of deploying their cash-pile. However they would have to offer price closer to $20 (which means $15B plus) which could be a potential hurdle. SYMC could return about 50% in 18-24 months

Enjoy summer while it lasts !

/Shyam

PS: Normally I do not recommend stock in technology sector to avoid conflict of interest. For a change, this week, I have considered SYMC due to changing technology landscape.

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