M&A Up-Cycle?

February 19, 2013


The Markets took a breather last week, with the S&P, Dow and Nasdaq all ending virtually unchanged, while the Russell 2000 small cap did advance by a full percentage point. The action for the week was in individual names, and some are talking about a true Mergers & Acquisition up-cycle [much bigger than the March 2011 false-start]. According to Bloomberg, there were 3,179 deals announced this year [thru 02/15]. These deals total $288B, with an average deal size of $90.7M.

Monday was dominated by Italian and Spanish political turmoil [moreover, 4Q Eurozone GDP shrank 0.6% q-to-q], while Tuesday represented a pause ahead of the State of the Union address.

On Wednesday Comcast reported strong earnings and sooner-than-expected acquisition of GE’s remaining 49% stake in NBCUniversal, which produced 3%+ moves in both stocks.

Warren Buffet stepped up with a $28B purchase of Heinz Thursday, a 20% premium to preannouncement levels.  Wal-Mart dominated mid-session trading Friday when Bloomberg outed internal emails describing its early February sales as a “total disaster”.

Finally, on a much more upbeat note, Maker’s Mark quickly reversed its plan to water its whiskey from 90 to 84 proof. Bill Samuels, chairman emeritus called it the “worst five days in my life”. Its parent Beam, Inc. responded today by advancing 1.8% in a relief rally.

“You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you.”
Walt Disney


Good Enough?

February 12, 2013


Last week stocks continued their advance with the S&P 500 up 0.31%, although the DJIA did slip by -0.12%. Fourth quarter 2012 earnings reports for the 2/3rds of companies that have reported so far are beating lowered expectations and are averaging a 7.3% increase. However, a number of companies have lowered forecasts for the first quarter, citing slowing economies in Europe and a hesitant U.S. consumer. Higher social security taxes and concerns over looming government spending cuts are two of the latest government induced drags on the economy. Analysts are now projecting a rise of just 1.7% for earnings in the first quarter this year.

On March 1, $85 billion in automatic spending cuts are set to go into effect unless Congress acts. There have been a number of proposals by both Republicans and Democrats to replace the across the board cuts with more targeted spending cuts or revenue enhancers (tax increases). These negotiations are likely to dominate the headlines as we get closer to March 1. In the short term this may unsettle the equity markets, but in the long run any compromise which reduces government spending and also reduces the deficit will be a positive.

“A statesman is he who thinks in the future generations, and a politician is he who thinks in the upcoming elections.”
– Abraham Lincoln

Upward March?

February 4, 2013

Last week U.S. stocks continued their upward march with the DJIA up 0.8% and the S&P 500 up 0.7%. Year-to-date the Dow is up 6.9% and the S&P 500 is up 6.1%.

Much of last week’s headlines were focused on the U.S. economy. 4th quarter GDP posted its first decline since 2009. Two major areas of weakness came from a slowing of inventory investment and a drop in government purchases. Encouragingly, residential investment jumped 15.3%, equipment and software spending was up 12.4%, and most notably personal consumption spending was up 2.2%—all supportive of a growing economy despite the headline number.

Last week’s Labor Report for January showed continued improvement of 157,000 net jobs created. The previous two months were revised higher by 127,000 jobs, although the unemployment rate did tick up to 7.9%.

We remain constructive on the markets, but would not be surprised or disappointed to see a near-term pull-back given the nice run-up over the past few months.

“Life is 10% what happens to you and 90% how you react to it.” -Charles Swindoll

The Wall of Worry has eroded, but is still intact

January 28, 2013


The S&P moved up 1.1% last week [in spite of AAPL’s 12% decline], producing a 5.4% YTD advance. Washington has kicked the Fiscal Cliff and the borrowing ceiling deadline down the road, and markets seem to be tentatively concluding that the reduction in DC’s crisis atmosphere [the sequester does hit 3/01] will produce positive budgetary results. If the politicians fail to deliver, markets and their rating agency “spokespersons” will ultimately intervene.

Meanwhile, preliminary fourth quarter GDP will be released Wednesday morning, and expectations are for only a modest 1% increase. This compares with the third quarter GDP, which grew by 3.1% [revised up from 2.7%]. Stronger consumption, smaller trade deficit and more government spending powered the upward third quarter revision, but inventories are at unsustainable levels and government spending should [hopefully] decelerate.  Friday’s jobs report should show further employment increases, although not enough to reduce the unemployment rate.

Finally, it is worth noting that rising market averages are masking lower correlation between individual equity participants [32.4 in December, down from 47.2 last June]. This is reducing daily swings in the S&P and increasing the opportunity for individual stock selection.


January 22, 2013


Some of you , like me, attribute this famous quote to Winston Churchill.  Googling tells me it was FDR not Churchill who spoke these famous words. The context referred to economic fear and concern about declining markets.  Today I read a piece that eased many of my fears on the economy by Citigroup.

The reason for the commentary was a decision to boost their forecast of economic growth from 2.0% to 2.4% for 2013.  In addition they have raised their projected earnings on the S & P 500 to $110 from $108.  One of the undeniable positives is the amount of cash on corporate balance sheets.  In addition to nice dividend increases, corporations repurchased 8 billion shares of their companies in the eighteen month period ending October 2012.

One of the drivers of growth in 2013 will continue to be the housing industry.  Housing starts, housing prices, and housing inventories are all positive. One forecaster predicts the housing industry will be adding 25,000 jobs per month.

The final data point: household wealth last year in the US increased by 8% or $5 trillion.  With interest rates so low, some of this rediscovered wealth should flow over to the equity markets.

Maybe FDR had the right idea about fear.  Prudent investing, taking into account all information available is the way to go.

Inflection Point?

January 14, 2013


This week earnings season really gets in gear with many of the large financials scheduled to report 4th quarter earnings including Citigroup, J P Morgan and Bank of America, as well as Intel and GE. Look for earnings overall to be up about 3% for the quarter for the S&P 500 which is down considerably from analyst estimates of 14% in the spring of 2012. For 2013 most estimates are for a 7%+ earnings go ahead which could be a stretch given the headwinds of recent tax increases and the as yet unknown budget cuts which may be forthcoming from negotiations over deficit spending.

This year is off to a good start with equities leading the way. So far the S&P 500 is up 3.2% ytd and in the week ended last Wednesday $18 billion has flowed into equity mutual funds and $1.1 billion was pulled from U S Treasury funds. With treasury rates still near record lows and investment grade corporates and junk bonds also at or near record lows this could be the beginning of a shift away from bonds with the average stock yielding 2.2% and the average triple A corporate at 1.6%.

Much could depend on talks on the fiscal deficit in the next few months.

“a strategic inflection point is a time in the life of business when its fundamentals are about to change. that change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”
– Andrew S. Grove, Only the Paranoid Survive


January 7, 2013


2012 was certainly an unforgettable year with so many headline risks such as: the election, U.S. national debt, slow economic growth and high unemployment, the Eurozone troubles, China slowdown, Facebook IPO, and so on. In the face of uncertainty, global equity markets posted double digit returns, and even the Dow Jones Industrial advanced a 7.26%.

The fiscal cliff was partially resolved last week. For example, the Bush tax cuts were extended for individuals making less than $400k and households making less than $450k. However, the 2012 payroll tax cut was allowed to expire which will reduce consumers’ paychecks. Congress postponed the sequester (spending cuts) until March 1st and they still need to address the debt ceiling.

Regardless, some progress on the deficit has been made.

Fourth quarter earnings season kicks off this week with Alcoa and Wells Fargo. We are interested to hear from both companies as they provide insight into the U.S. and global economies.

“It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.”
– Chinese Proverb

Broken Hearts

December 17, 2012


In light of the horrific events at Sandy Hook Elementary School in Newtown, CT, we are not posting any market commentary this week.

Our hearts are broken, and our thoughts and prayers go out to all the victims of last week’s tragic event.  The tragedy in Newtown is yet another reminder that each day is a gift.


Three Yards and a Cloud of Dust

December 10, 2012


The markets moved somewhat higher last week, with the Dow Jones Industrials advancing by 1.0%, but the S&P was flat and the Nasdaq declined by 1.1%. The latter were held back by AAPL, which fell 8.9% last week. It has developed both fundamental and technical challenges.

The US economy is still in a slow-growth mode. November nonfarm payrolls increased more than expected, but added only 146,000 jobs [down from last month’s 171,000 originally reported increase {now revised down to 138,000}]. The civilian unemployment rate declined to 7.7% from 7.9%, but this was driven by a decline in the size of the workforce [the “participation rate” was lower].

Moreover, consumer sentiment has turned markedly lower, falling to 74.5 from last month’s 82.7. This decline is variously attributed to the “fiscal cliff” histrionics, ongoing European difficulties [Greece lost its CCC credit rating] or election results implications [ObamaCare rules release, 2013 tax increases details or …].

In the midst of this lackluster environment, it is important to watch the Fed. It continues to print money, and it is never wise for investors to “fight the fed”.

“You can’t change the past, but you can ruin the present by worrying about the future”

Cliff Walk

December 3, 2012


All we hear about these days is the fiscal cliff, which we’re heading for come January 2013.  We read about Obama’s “offer” of $1.6 trillion in tax increases and choke, or we learn that the Republicans want the Democrats to start “acting like adults” and we cringe.  One reason for concern is the estimate that going over the fiscal cliff will reduce economic activity by 1 ½ percent. This on top of an already sluggish economy.

But what would happen if Congress fails to act in time? One prediction is that the 2013 democrats would push through a tax cut for all but the $250,000+ income group.  Additionally, the spending cuts outlined in the fiscal cliff will not hit all at once, mitigating their impact in the early months.

If it makes you feel any better about taxes, the 2010 tax rates are lower than any year in the 1980s.

Also if you look around the world we find that U.S. taxes as a percent of GDP are near the bottom.  Keep in mind the ingenuity of Americans to find ways to reduce their taxes through deductions and loopholes.  Next year is the 100 year anniversary of the federal income tax system.  We can also celebrate 100 years of finding ways to keep our taxes down.

Let the battle begin!!

“Those who are too smart to engage in politics are punished by being governed by those who are dumber.”
– Plato