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An Industrial-Strength Blip and Bip


The sector's performance is going unnoticed.

We may have an interesting clue from a deal this week that will quickly be forgotten inside a sector most find rather uninteresting -- Industrials (XLI).

Tyco (TYC) made a $2 billion offer for Brinks Home Security (CFL), more than a 30% premium for those shares. It turns out "customers for life," which they chose the CFL stock symbol for, is likely to mean "…or right up until shareholders are offered enough cash."

The buyout marks the biggest for Tyco since infamous dealmaker Dennis Kozlowski went to jail. Does this mark a turn back toward consolidation?

I shared the belief that among all the questions investors faced about what was real and what was not, as they ripped into their annual statements, number one on that list will be what to do about a smaller numeral 1, as in the 0.01% they were likely getting on their money market assets. One lousy "bip", as a basis point is called.

More important for the broader market, that question doesn't just apply to individual investors but also to non-financial corporations with historic amounts of cash.

Last year was the worst for mergers and acquisitions in a quarter of a century. That's the only "low" I'd buy right here. I think that deals will be made in some basic, maybe boring, businesses with positive cash flow that were still able to add customers throughout the credit crisis for so many other more "exciting" stocks.

The Brinks Home Security buyout follows another in the same space. With many eyes on automakers right now, I have for many years preferred to own the company that takes more people to work each day than General Motors and Ford (F) combined -- elevator maker United Technologies (UTX). It decided to buy a security business from General Electric (GE), which has been forced to sell a lot of businesses it probably would rather not. Despite daily reports to the contrary, capitalism is alive and well, and strong balance sheets can feast on weak hands.

General Electric is the largest component of the Industrials Sector, which has served to distort underlying strength in this sector. GE accounts for the same weighting as more than one-third of the other holdings, and that's after its plunge. Even before these few deals took place we were noticing that bidding for Industrial stocks relative to other sectors was growing.

Click to enlarge

This sector is the offensive lineman of the stock market. You hear about big mistakes but rarely does the camera focus on the Industrial products that are sitting all around you right now making room for many of the other sectors' products to be used at all.

We measure each sector to find quiet strength, like in this chart above. We divide each of their individual moves by the overall S&P 1500 move, so that the resulting line shows not how the sector has done on its own, but rather when it's losing or gaining ground versus the entire index.

Above, you'll see Industrials vs. S&P 1500 since September 2007 to capture the entire collapse and recovery. Quiet strength to us would be a period of time where a sector has underperformed (the blue line is break even) but has turned the corner.
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Position in UTX, CFL, GE
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