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Kicking Off 2012: The Bull-Bear Tug-of-War

Monday, 30 Jan 2012 | 5:08 PM ET

From: James Cramer
Sent: Sunday, January 29, 2012 3:24 PM
To: Nicole Urken
Subject: Need research on Thomas & Betts--we had them on, too

Looks like ABB-TNB to be announced tmrw. Thanks!

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Monday, January 30, 2012 6:00 AM
To: James Cramer
Subject: Need research on Thomas & Betts--we had them on, too

Couple of notes attached

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Monday, January 30, 2012 8:07 AM
To: James Cramer
Subject: Pep Boys to be acquired by Gores Group for $15/share

Another M&A announcement from this morning !

Thus far in 2012, we have largely taken a break from the late 2011 patterns of Europeans driving our markets. However, on this late January winter morning, we awoke to ongoing worries in Greece weighing on the S&P.

It is amidst this more subdued sentiment that it is key to circle back to some of the more bullish data we have gotten in the past couple of weeks.

This morning’s acquisition of Thomas & Betts for $3.9bn by ABB is a positive read for the US construction industry—adding yet another positive nibble in the space after the United Rentals-RSC Holdings $1.9bn deal announced in December. ABB’s implied bet on a bottoming in US construction—as TNB manufactures connectors and components used in construction, telecom and power utilities industries—should not be taken lightly.

Even as we have seen marked improvement, construction spending remains well below peak levels. While November’s spending stat of $807 billion SAAR marked a 17-month high, it remains well below the peak of $1.2 trillion.

Plus, as we have highlighted, in residential construction, the recent quarters from DR Horton and Lennar are pointing to a sense of stabilization, which should bode well for the housing derivative plays that we highlighted on Mad Money earlier this month that haven’t run as much as the home builders.

Also in M&A? While the $1bn acquisition of Pep Boys by The Gores Group this morning captures the stock at a price well below its historical highs, the premium to its recent trading levels bodes well for the “do it for me” and “do it yourself” auto markets. We have stressed in our recent auto parts series that the cycle remains in an upswing, with replacement parts markets helping to drive the cohort while we continue to await a more fulsome sales rebound. With estimates of 14mm SAAR this year, we are well off the bottoms 10mm SAAR in 2009 but still well off the peak of 17mm SAAR in 2000. Names like American Axle , Borg Warner and Dana will continue to benefit.

Also in M&A? We have optimism in the chemical space, with Eastman Chemical agreeing to acquire Solution for $4.7bn last week to drive expansion into higher-margin specialty plastics and chemicals. Yet another area of the market that has been undervalued.

The finale of President Obama’s State of the Union remarks last week stressed the strength of America and the American economy: “Anyone who tells you otherwise, anyone who tells you that America is in decline or that our influence has waned, doesn’t know what they’re talking about.” And our companies are mimicking that sentiment, despite the overhangs that remain.

One of the most bullish reports this season? Caterpillar. As they said, in 2011, the company recorded record profit and record sales, “the most significant percentage increase in sales since Harry Truman was president.” The $0.55 EPS beat in the fourth quarter wasn’t too shabby, after all.

And the upside FY12 outlook was outshined by the company’s bullish commentary. In the US in particular, the company noted that construction spending—which has been depressed for years—is showing small improvements in infrastructure-related and non-residential construction. They noted the long-term road ahead (read: upside). And, they are navigating weakness in Europe. Operating leverage off of a still-depressed base remains key for both the US market and global demand. (Even in Europe, they noted that weak sales there over the past few years means need for equipment replacement.) And, CAT expects mining to continue to grow globally (strong order backlog for equipment) with continued demand from China and high oil prices.

This builds on the positive trends we are seeing from the rails—the most positive which was Union Pacific—along with other industrials like the out-of-favor 3M .

While much news is focused on Europe—along with the animal spirits surrounding theFacebook IPO filing!—the industrials are showing a turn. And this bodes well for the building blocks—the fuel—of our economy.

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