LOOK ME IN THE EYE!

As American investors got to work on Monday, it was already set to be a quiet trading day on account of the Yom Kippur Day of Atonement, and early indications showed the markets would drop. However, despite weakness in market action in the Pacific Rim and its knock-on effect on European markets, U.S. equity futures prices turned from losses to show gains and never looked back.

Indeed the Monday rally took back about half of the losses sustained since midweek. What was behind the move?

Well on the one hand, as we'd indicated before Monday's session, some of the negative sentiment pre-market was due to the surge in the value of the Japanese yen against the dollar. Equity market weakness in the Far East was simply related to its possible impact on earnings at companies reliant on export revenue. A higher yen hurts their bottom line. However, many erroneously blamed the weakness in markets on increased risk aversion, which had a knock-on effect in each time zone.

Blackstone Group's vice chairmen and former Morgan Stanley whiz kid, Byron Wien says that the remainder of this year will be kind to equities and predicts its biggest fourth quarter rally in 10 years. His clarion call for a 1,200 year end S&P 500 index level would mean a 13% jump from Monday's 1,062 close. 

Mr. Wien stands by his starting 2009 prediction and told Bloomberg News that just six months ago "people wouldn't make eye contact with me," when he told them. On its worst day of 2009 the S&P 500 index slipped to 666. Brave old Mr. Wien says that a strengthening recovery will bolster corporate earnings in the fourth quarter.

But it was a flurry of takeover activity on Monday that helped drive equity market gains. In the news were takeovers from Xerox Corporation who looked to diversify into the computer industry with a $6.4 billion big for Affiliated Computer Services Inc., while Abbott Laboratories bid for another cholesterol drug manufacturer. A revenue upgrade for networking-manufacturing equipment maker, Cisco Systems set alight it and the rest of the tech sector.

While the Nasdaq tech index rallied 1.9%, financial concerns were up 3.4% and overall the broad market closed just 0.8% lower than its 2009 peak. A week ago as the market traded so high investors clearly became nervous about the stretched 20.2 times earnings valuation stocks were trading at.

Although the year-to-date value of mergers and acquisitions is the lowest since 2003, September's rebound clearly has investors hoping for better times ahead as takeover financing capabilities are back on the agenda. With fresh money coming in off the sidelines Monday, equities look healthy.

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