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Stocks look to show stability

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Stocks look to firm from their lows after some computer buy programs found stocks rebounding from their lows. As I look at the major index action, it is notable that the morning lows were reversed with the Dow Industrials (INDU) 8,580 -0.49% rebounded just above the psychologically round number of 8,500, with a quick reversal from 8,501.86, while this morning's rebound begins to find near-term resistance right at yesterday's lows of 8,600.

Shares of software maker Rational Software (NASDAQ:RATL) $10.22 +25% are today's second largest gainer and most heavily traded after Dow component IBM (NYSE:IBM) $81.72 -1.61% announced that the two companies have entered into a definitive agreement for IBM to acquire RATL for approximately $2.1 billion in cash or $10.50 per share. Considering this is a cash deal, bulls holding RATL in their account most likely sell the stock at market as upside to $10.50 not worth any potential risk of deal not going through. Today's offer and acceptance of this price is well below last December's valuation of RATL stock of $22.50 and hints RATL looking to partner with a bigger entity in what looks to be a very competitive and difficult software environment.

The announcement of an IBM/RATL teaming has put pressure on RATL rivals Mercury Interactive (NASDAQ:MERQ) $29.44 -3.63% and BEA Systems (NASDAQ:BEAS) $9.76 -2.1%. Pacific Crest said they believe today's announcement between IBM and RATL puts some downside risk into MERQ as IBM's services business is a 5% customer of MERQ, while the deal could be perceived as a negative for BEAS, since it will improve IBM's WebSphere technology. Still, Pacific Crest thinks that both BEAS and MERQ are attractive bullish candidates to be bought on weakness.

President Bush's economic cabinet is seeing some reshuffling today as Treasury Secretary Paul O'Neill announced that he will be resigning his post in the coming weeks, saying "It has been a privilege to serve the nation during these challenging times," and thanking President Bush for the opportunity to serve.

President Bush's top economic adviser Larry Lindsey also announced his resignation today. Lindsey had served as the head of the National Economic Council and had been Bush's top economic advisor since his presidential campaign.

The resignations come as the Bush administration is preparing a fiscal stimulus package centered on a new round of tax cuts, including a likely effort to eliminate the double-taxation of corporate dividends. Mr. O'Neill had appeared lukewarm to the notion of further tax cuts, emphasizing that the economy remained underpinned by solid fundamentals that would allow growth to pick up steam.

Tax-cut advocates seem to applaud O'Neill's resignation as he has clashed with Republican leaders on Capitol Hill, especially angering top GOP lawmakers last year when he said a number of Republican-backed, business-oriented tax measures included in a House tax stimulus package amounted to "show business."

Trading in the bond market seemed to back up some observations that O'Neill's resignation isn't necessarily a negative for the Bush administration and tax-cut enthusiasts. Price action in the longer-dated 30-year now sees price back at the unchanged level, versus early morning buying. The thought here is that O'Neill's resignation removes a "critic" of tax-cut legislation, where the tax-cut theorists look for more money in the consumers pocket to help further stimulate economic recovery. Should such theory play out and the economy recover, then chances longer-term, as depicted by the longer-dated 30-year Treasury, might have the Fed tightening down the road.

Again, these are intraday observations from the markets as it relates to today's news out of Washington.

But the rebound from the morning lows in stocks also seems to partially reflect some of the thoughts regarding today's reshuffling of President Bush's economic team and if anything, grabs some headlines away from this November unemployment rate rising to 6%.

Jeff Bailey

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