1)? Picking up where I left off last night, I have a trio of items from Random Roger.? Is M&A Bullish or Bearish?? Great question.? Here’s my answer: at the beginning of an M&A wave, M&A is unambiguously bullish as investors seize on cheap valuations that have gone unnoticed.? Typically they pay cash, because the investors are very certain about the value obtained.
From the middle to the end of the M&A wave, the action is bullish in the short run, and bearish in the intermediate term.? The cash component of deals declines; investors want to do the deals, but increasingly don’t want to part with cash, because they don’t want to be so leveraged.
My advice: watch two things. One, the cash component of deals, and two, the reaction of the market as deals are announced.? Here’s a quick test: good deals increase the overall market cap of the acquirer and target as a whole.? Bad deals decrease that sum.? Generally, deal quality by that measure declines over the course of an M&A wave.
2) Ah, the virtues of moderation, given that market timing is so difficult. This is why I developed my eight rules, because they force risk control upon me, making me buy low and sell high, no matter how painful it seems.? It forces me to buy when things are down, and sell when things are running up.? Buy burned out industries.? Reshape to eliminate names tht are now overvalued.? These rules cut against the grain of investors, because we like to buy when comapnies are successful, and sell when the are failures.? There is more money to be made the other way, most of the time.
3) From Roger’s catch-all post, I would only want to note one lesser noticed aspect of exchange traded notes.? They carry the credit risk of the issuing institution.? As an example, my balanced mandates hold a note that pays off of the weighted average performance of four Asian currencies.? In the unlikely event that Citigroup goes under, my balanced mandates will stand in line with the other unsecured debtholders of Citigroup to receive payment.
4) Bespoke Investment Group notices a negative correlation between good economic reports and stock price performance.? This should not be a surprise.? Good economic news pushes up both earnings and bond yields, with the percentage effect usually greater on bond yields, making new commitments to bonds relatively more attractive, compared to stocks.
5) From a Dash of Insight, I want to offer my own take on Avoiding the Time Frame Mistake.? When I take on a position, I have to place the idea in one of three buckets: momentum (speculation), valuation, or secular theme.? What I am writing here is more general than my eight rules.? When I was a bond manager, I was more flexible with trading, but any position I brought on had to conform to one of the three buckets.? I would buy bonds of the brokers when I had excess cash, and I felt the speculative fervor was shifting bullish.? If it worked, I would ride them in the short run; if not, I would kick them out for a loss.
Then there were bonds that I owned because they were undervalued.? I would buy more if they went down, until I got to a maximum position.? If I still wanted more, I would do swaps to increase spread duration.? But when the valuations reached their targets, I would sell.
With bonds, secular themes don’t apply so well, unless you’re in the mid-80s, and you think that rates are going down over the next decade or two.? If so, you buy the longest noncallable bonds, add keep buying every dip, until rates reach your expected nadir.? Secular themes work better with equities, where the upside is not as limited.? My current favorite theme is buying the stock of companies that benefit from the development of the developing world.? That said, most of those names are too pricey for me now, so I wait for a pullback that may never come.
6) I’ve offered my own ideas of what Buffett might buy, but I think this article gets it wrong.? We should be thinking not of large public businesses, but large private businesses, like Cargill and Koch Industries.? Even if a public business were willing to sell itself cheap enough to Buffett, Buffett doesn’t want the bidding war that will erupt from others that want to buy it more dearly.? Private businesses can avoid that fracas.
7) And now, a trio on accounting.? First, complaints have arisen over the discussion draft that would allow companies to use IFRS in place of GAAP.? Good.? Let’s be men here; one standard or the other, but don’t allow choice.? We have enough work to do analyzing companies without having to work with two accounting standards.
8) SFAS 159?? You heard it at this blog first, but now others are noticing how much creative flexibility it offers managements in manipulating asset values to achieve their accounting goals.? My opinion, this financial accounting standard will be scrapped or severely modified before long.
9) Ah, SFAS 133. When I was an investment actuary, I marveled that hedges had to be virtually perfect to get hedge treatment.? Perfect?? Perfect hedges rarely exist, and if they do, they are more expensive than imperfect ones.? Well, no telling where this one will go, but FASB is reviewing the intensely complex SFAS 133 with an eye to simplifying it.? This could make SFAS 133 more useful to all involved… on the other hand, given their recent track record, they could allow more discretion a la SFAS 159, which would be worse for accounting statement users, unless disclosure was extensive. Even then, it might be a lot more work.
10) ECRI indicates better growth and lower inflation coming soon.? I’ll go for the first; I’m not so sure about the second, with inflation rising globally.
11) What nation has more per capita housing debt then the US?? Britain. (And its almost all floating rate…)? With economics, it is hard to amaze me, but this Wall Street Journal article managed to do so.? Though lending institutions bear some blame for sloppy underwriting, it amazes me that marginal borrowers that are less than responsible can think that they can own a home, or that people who have been less than provident in saving, think that they can rescue their retirement position by borrowing a lot of money to buy a number of properties in order to rent them out.? In desperate times, desperate people do desperate things, but most fail; few succeed.? We have more of that to see on this side of the Atlantic.
12) I am not a fan of what I view as naive comparisons to other markets and time periods.? There has to be some significant similarity in the underlying economics to make me buy the analogy.? Thus, I’m not crazy about this comparison of the current US market to the Nikkei in the late 80s.? Japan was a much more closed economy, and monetary policy was far more loose than ours is today.? I can even argue that the US is presently relatively conservative in its monetary policy versus the rest of the developed world.? So it goes.
David – Amateur ? EIG – why do the IPO and then a buy back 3 months later?
May 11 (Reuters) – Employers Holdings Inc. (EIG.N: Quote, Profile , Research) said its board has authorized a stock buyback program for up to $75 million of its common stock, and declared a second quarter cash dividend of six cents per share.
The authorized repurchase would represent about 7.3 percent of the 53.5 million outstanding shares, based on the stock’s closing price on May 10, the holding company of insurance subsidiaries said in a statement.
The dividend is payable on June 14, to stockholders of record as of May 24, it added. (Reporting by Shailesh Kuber in Bangalore)
They mentioned that they would do this fairly early on. Part of their difficulty was not knowing two things:
1. What would market opportunities be like for writing more worker’s comp business by the time the deal got done?
2. What would the demand for stock versus cash be from the participating policyholders?
They sized the deal so that they would have enough liquidity under all circumstances. The only things I might fault then would be upsizing the deal, and the greenshoe. Now they are bringing the excess shares back in; they certainly have the liquidity for doing so.
Lakshman Achuthan of ECRI recently did an interview with Forbes and while their FIG suggests that the CPI is likely to moderate over the next couple of quarters, he also expressed that inflation is the thing he is most concerned about beyond that horizon as a potential catalyst that could be a problem. In prior interviews he has also expressed that the softening in the FIG has been very moderate and not like the cyclical downturn that acccompanied the soft landing in the 1995 time frame. I think their outlook is pretty much in line with yours – other than the reported CPI is likely to be flattish to mildly down over the next couple of quarters…..but then probably resuming an up trend.
If this outlook is correct, I would think that higher long term rates could be a MAJOR problem for the economy and financial markets. It would likely usher in the second phase of the housing bear market and could cause a recession. I doubt the Fed would be very aggressive in tightening, but who knows? Any thoughts?
Inflation forecasts by CXO, FTF show a sharp uptick starting Sep/October. Nice blog, BTW. Do you have any analysis of AIG on this blog?
Hmm.. some problem posting comments. Wanted to say that CXO, for example, is forecasting a sharp uptick in inflation in Sep/Oct. Nice blog, BTW. Any comments on AIG?
re: japanese market similarity.
japan did not mark up the loses and refused to accept these losses onto their balance sheets.
the US the market takes the write down and so pain is quicker but not long lasting. BUT
with so many derivatives constructed from so few underlyings will we get a repeat of the russian debt problem in 97/8 where traders just stopped trading hence no real marking to market?
i guess only time will tell.
RB — no significant comments on AIG here yet. Interesting though from CXO, any rationale behind it?
GBC — time will tell. It depends on how well capitalized those who take losses are.
Dave,
I believe CXO’s inflation forecast is based on past calendar month patterns and past CPI and not on any fundamental factors. Another site at http://www.inflationdata.com uses a similar methodology.
Thanks, I appreciate the feedback.