A very useful question about M&A came in over the weekend. There are a couple of schools of thought as to whether increased M&A activity is bullish or bearish.
History probably supports both notions. The other night I was a last minute fill in on Capital Connection and was asked whether the Dow Jones deal marks a top or not. I said not yet because there are still a lot of funds being started that have yet to be deployed but that a year from now it could be a tipping point to a problem and on second thought maybe a little sooner. Before I go on let me say by "tipping point to a problem" I mean something within the realm of a normal decline.
The bullish spin on M&A is that companies spend money like this on assets they believe are cheap and so by extension the market is cheap, headed higher and they are upbeat on economic and market conditions.
The bearish spin can be summed up with AOL and Time Warner.
Generally speaking I do buy into the idea that increased M&A belies confidence in the environment but that really has nothing to do with whether the specific deals being done are good investments.
Think about the current situation without an eye to the future for a moment. Interest rates are low, capital is plentiful and the trend of the stock market has been fantastic. This has been the case for a couple of years and investors (corporate and individual) should have very few complaints.
Since things have been going well with this back drop what's to say it can't continue for another year or two? The bearish case right now is very compelling, I do lean that way but it has not started to manifest itself yet in equity prices.
Those who think we are in a bubble, well if we are it could last a lot longer than those people think.
The M&A provides fuel. It feels like it could provide fuel for several more months, maybe six or so? I am not a buyer of any of the deal stocks, in fact I noted being a seller when it looked like Yahoo was a deal stock the other day.
The way I look at things I don't have to be right about how long this lasts. If the market knifes lower I am less inclined to get defensive and if the market rolls over slowly I am more inclined to think defense. Does it really matter if the prediction about when is right?
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11 comments:
Models this week:
Timing Model = 4.0
100% long
Global Allocation of long positions
MSCI EAFE Index 40%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 30%
Top U.S. Sectors
U.S. Leisure Goods 4.0
U.S. Oil Equipment, Services & Distribution 3.0
U.S. Telecommunications 3.0
U.S. Utilities 2.5
Composite Internet 2.5
U.S. Mobile Telecommunications 2.0
U.S. Pharmaceuticals 2.0
U.S. Biotechnology 2.0
U.S. Real Estate 2.0
Top Intl. ETFs
MSCI Malaysia Index Fund 3
MSCI Germany Index Fund 3
MSCI Pacific ex-Japan Index Fund 3
S&P Latin America 40 Index Fund 3
MSCI Sweden Index Fund 3
MSCI Netherlands Index Fund 3
MSCI EMU Index Fund 3
MSCI Singapore Index Fund 3
MSCI France Index Fund 3
"Timing Model = 4.0
100% long" Is this a post by Larry Kudlow? Am I supposed to learn from that? Recipe for disaster IMHO.
Layering in another batch of double inverse plays when the SP500 hits 1530. The existing portion has caused very little pain, and is irrelevant compared to huge gains from the speculations on BQI, PTMQF, etc.
Shanghai will again implode and this time it won't just be weekend entertainment.
DaveB,
A timing model like tomK's may not be for everyone but his track record in the short time he has posted the info has been very good.
He has been posting once a week for several months.
Have seen same for months. Value? (same as my posts I gather)
Three cheers for Bill Cara!
"But, meanwhile, CNBC’s talking noggins continue to proselytize. Goldilocks rules. We’re all children, right?
It’s tough, I admit for Joe, Joesy, Mom & Pop to not go along with the rising tide. But just remember, when HB&B decides to pull the plug, or gets in so deep they can’t avoid striking the iceberg, our ship goes down. Theirs will be protected by SRO rules, put options, short selling and delays in getting your orders to market.
I don’t care if you have a billion dollars in their bank, don’t for a second believe you are going to beat these people at their game. They have the place wired.
All you can do is step out of their casino, for a while, and take a deep breath of fresh air while you await the slaughtering of the speculators that is needed before the market can return to normal.
Just be sure to keep your own hands in your pockets and a stiff upper lip." - BC
Moved out of oil stocks today, and bought USO, FXF, and cash with the proceds.
Theory is the market may take down the oil stocks, but not crude. Spigot to SPR turned off making ST excess. La Nina expected to make the year rough on infrastructure.
“A fool and his money are soon parted.”
Thomas Tusser 1524-1580
What I can't figure out is if these takeover targets are good deals now, weren't they great deals three and four years ago (at half the price)? What were the private equity guys doing then?
Hi Roger,
I'm parroting Ken Fisher here, but takeovers are bullish when done for cash. Bearish when paid in stock. The reason: supply and demand. Buying for cash takeovers takes stock out of the market pushing up prices. That's what's happening at the moment. He thinks it will go on for a long time (i.e. years).
What I can't figure out is if these takeover targets are good deals now, weren't they great deals three and four years ago (at half the price)? What were the private equity guys doing then?
Raising funds and buying other companies which were even cheaper - it is not like there was no such thing as private equity in 2003. They were raising smaller funds because they had less of a track record and didn't have so many rolled up gains.
More generally, Roger, the old proverb they taught us in London was that "cash deals are bullish, stock deals are bearish".
Dave B, la nina, Chris Farley is dead, RIP. Science suggested a horrible hurricane season last fall/winter, they were dead wrong. I think predicting the weather is actually tougher than predicting the mkt :)
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