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Halftime: Is M&A Becoming Major Market Theme?

Bulls drove the S&P higher on Wednesday with stronger-than-expected jobs data boosting optimism about the economy.

But that’s may not be the only sign that the recovery has gained a foothold.

The Fast Money traders are also watching the flurry of deal making in both tech & retail.

Qualcomm announced a deal to purchase Atheros for $3 billion; that’s about a 20% premium to Atheros’ share price before talk of a takeover began circulating earlier in the week.

Also published reports suggested Sears and Urban Outfitters are weighing rival bids for clothing retailer J. Crew in a potential challenge to TPG Capital and Leonard Green & Partners LP’s $3 billion buyout.

Does the current market environment make M&A attractive? What should you make of these developments?

Instant Insights with the Fast Money traders

Joe Terranova thinks the Qualcomm acquisition is a sign that tech companies with cash on the books are about to put money to work.

And Terranova presents the desk with a list of companies that also have a lot of cash on the balance sheet.

Apple $51 billion
Google $33 billion
Microsoft $44 billion
Qualcomm $19 billion
Cisco $27 billion
Source: SEC Filings

Qualcomm is likely betting the deal will beef up its position in mobile devices, he explains, a market that's expected to explode in 2011 with new tablet computers coming to market. He adds other companies will probably make similar moves to position themselves in "a recovery that is quickly expanding." (The expansion he says is evident by the stronger than expected economic data mentioned above.)

If you’re looking for a trade Terranova suggests putting Aruba Networks on your radar. And as a second derivative trade he recommends Skyworks Solutions.

On a related note, Pete Najarian has spotted unusual options action in Akamai . He explains that on Wednesday, “15,000 calls versus 2,500 puts traded;” with so many options investors favoring calls the action suggests to him this stock could make a sharp upside move. “I’m seeing a lot of activity even up to the $52.50 calls in January," he says. (Najarian doesn't say if the move is on takeover chatter or some other catalyst.)

True to his contrarian nature, Steve Cortes sees these developments in a different way. He thinks it’s a sign that the environment is very hospitable for M&A. “I suspect M&A will be a major theme of the new year. (Companies with cash) want to put cash to work." But rather than look at takeover targets he prefers playing the brokers. These developments are very constructive for Goldman Sachs and Morgan Stanley,” he says. “I want to buy both on the pullbacks.”

Patty Edwards is focused on the chatter in retail. She says Urban Outfitters making a counter offer for JCrew makes much more sense that Sears.

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OIL GOES HIGHER AFTER INVENTORIES FALL

The traders are keeping a close eye on oil, which ticked higher Wednesday after the latest data showed a 4 million drop in inventories.

What’s the trade?

I think it's a signal that we’re seeing true demand recovery, says Joe Terranova. I’m bullish.

I’d keep an eye on airlines such as AMR and United , says Pete Najarian. That’s often a related trade.

Priceline and Expedia are also worth a look, adds Patty Edwards. If higher fuel costs translate into higher airfares, travelers will probably shop for their plane tickets more carefully.

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DOLLAR SURGES

Stronger-than-expected jobs data boosted optimism about the economic recovery, which in turn sent the dollar surging and gold to its lowest levels in 6 weeks.

What's the trade?

I’m short precious metals, says Steve Cortes, and I think weakness in gold has broader implications for commodities across the board.


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Trader disclosure: On January 5, 2010, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Pete Najarian owns (F) bonds; Pete Najarian owns (AXP); Pete Najarian owns (V) call spreads; Pete Najarian owns (HPQ) call spreads; Pete Najarian owns (YHOO); Pete Najarian owns (MSFT) call spreads; Pete Najarian owns (MS); Pete Najarian owns (C); Pete Najarian owns (BAC) call spreads; Pete Najarian owns (DD) calls; Pete Najarian owns (AKAM) call spreads; Pete Najarian owns (TCK) call spreads; Pete Najarian owns (WLT) call spreads; Cortes owns (TSN); Cortes owns (EXC); Cortes is short (LVS); Cortes is short (MOS); Cortes is short (BCS); Cortes is short (XRT) vs. S&P; Cortes is short (XHB) vs. S&P; Cortes is short Gold; Cortes is short Corn; Terranova owns (GM); Terranova owns (C); Terranova owns (VRTS); Terranova owns (UPL); Terranova owns (PEP); Terranova owns (OXY); Terranova owns (GS); Terranova owns (SLW) puts; Terranova owns (GLD) puts; Terranova is short (SLV) futures

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