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Monday, July 24, 2006

M&A Sparks Market

Today’s trading session opened higher as both the S&P and NASDAQ futures indicated. Already a hectic week ahead with ten Dow components reporting earnings, today’s markets will undoubtedly be further impacted by significant M&A activity as well as the weekend’s Middle Eastern activity. Advanced Micro Devices (AMD, “AAS Recommended Sell”) will acquire ATI Technologies Inc. (ATYT, No AAS Recommendation ) for $5.4 billion. Another interesting development involves what could be the largest ever leverage buyout of HCA Inc. (HCA, “AAS Recommended Buy”) for $33 billion. Shares of HCA were up 4.4% in pre-market trading. I included HCA along with Community Health Systems, Inc. (CYH, “AAS Recommended Buy”) in Friday’s post mostly because I have observed a strengthening of the Healthcare sector over the last few days and singled out these two companies since they were the newest healthcare stocks to be upgraded to “AAS Recommended Buys.”

As I mentioned above, several significant earnings statements will be reported today. Companies of note releasing statements before the opening bell include Merck & Co. Inc. (MRK, “AAS Recommended Buy”) which reported a doubling of Q2 profits, BellSouth Corp. (BLS, “AAS Recommended Neutral”) and Schering-Plough Corp. (SGP, “AAS Recommended Neutral”) which both beat Wall Streets forecasts.

Other significant releases include: American Express Company (AXP, “AAS Recommended Sell”); Kraft Foods (KFT, No AAS Recommendation); SanDisk Corp. (SNDK, “AAS Recommended Sell”) and Texas Instruments (TXN, “AAS Recommended Sell”)

The technical indicators continue to point to a rather bearish market as all but one, the 15-day Stochastic, weakened after Friday’s close. Declining issues significantly outnumber advancing issues in both the NYSE and NASDAQ. Market volatility, as measured by the VIX and VXN increased slightly with Friday’s sell-off, but they remain lower than the prior week’s values. We continue to recommend an asset allocation of between 0% and 25% equities. The total universe of stocks, ETF and funds which Alpha Advisor Service, LLC reviews on a daily basis is 1,745. Of those reviewed, 189 are rated "Buy," 1047 are rated "Sell" and 509 "Neutral."

We’re still looking at the Real Estate, Utilities and Healthcare sectors as places where investors should look to invest. Currently, we see REIT equities as the most favorable real estate investment. We have twelve REIT’s rated “AAS Recommended Buy” and several of which I have mentioned in earlier posts. A newly upgraded REIT is Weingarten Realty Investors (WRI). In terms of utility companies, I like DPL, Inc (DPL) and Equitable Resources Inc. (EQT).

There is a lot of discussion regarding the Technology sector and whether or not value investors should begin buying. We still view technology as an “AAS Recommended Sell” sector. However, it should be noted that Microsoft Corp. (MSFT) was upgraded to an “AAS Recommended Buy” this morning along with Cerner Corp. (CERN).

Other notable upgrades include: Scholastic Corp. (SCHL); Amgen Inc. (AMGN); AmerisourceBergen Corp. (ABC); Stryker Corp. (SYK); Reynolds & Reynolds Co. (REY) and The Great Atlantic & Pacific Tea Company Inc. (GAP).

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