The Dow Jones, S&P 500, and Nasdaq sustained its record highs last week, as detailed in our last issue.
On the mergers and acquisitions (M&A) front, and as we discussed previously in the Trends Journal, the $70 billion spent in mergers this week spooked the equity markets, where the stock-based mergers (that is, where the buyout group pays only with its own stock) constitute 20 percent of the deals this year, the highest since 2000.
So far this year, businesses have agreed on $3.4 trillion worth of mergers, down from its 2018 peak, but, as the numbers show, many of the purchased companies were overvalued. Acquirers are paying approximately 22.4 times the net income a target makes in a year.
Winston Chua, a TrimTabs analyst, said that an increase in M&A means that “companies attempt to buy growth rather than grow companies organically.”
The business media, referring to the bull markets as “peaks” – or “toppy,” as a chief global strategist referred to it – are comparing it to the periods right before the dot-com boom in 1999 and the financial crisis of 2008.
Many financial analysts see it through a rosy lens, believing the cheap money flowing via low interest rates and monetary stimulus can help keep the M&A market going. Eric Shube, head of the law firm Allen and Overy, said that, “What we’re seeing in the recent bump in M&A activity is that….despite the advanced age of the current cycle, we are not about to descend into recession, rather that the current cycle still has legs.”
Other “experts” say that the market peak doesn’t have much to do with the flurry of M&As, and that any downturn can be averted, perhaps with a U.S./China trade agreement.
TREND FORECAST: A U.S.-China trade agreement will do little to direct the markets next year. Agreement or no agreement, what will sustain equity growth is the continuation of monetary methadone by central banks in the forms of negative/zero interest rates, quantitative easing extensions, and repo market injections.
We have been detailing in the Trends Journal the amount of cash the U.S. central bank has injected into the repo market since 17 September. Since that time, the Fed reported its balance sheet had risen to $4.07 trillion as of yesterday, from $3.8 trillion in September.
Yesterday, they pumped in another $70.2 billion to liquefy the financial markets. The Bank for International Settlements has made it clear that it was the hedge funds that exacerbated the repo market turmoil, with their addition to borrow cheap cash to juice up returns on their trades: “High demand for secured [repo] funding from non-financial institutions, such as hedge funds, heavily engaged in leveraging up relative value trades,” was the key factor in repo market instability, said Claudio Borio, head of the monetary and economic department at BIS.
Clearly, 2020 equity market growth will depend on cheap money flows and not a trade deal with China.
TRENDPOST: With all the talk about the trade war with China, when it comes down to the bottom line of who needs what when and who can make money doing it, it’s the “Art of the Deal.”
As we’ve noted in previous issues of Trends Journal, the African swine fever has halved the population of pigs in China.
China, the world’s largest pork consumer, accounts for about one-third of the world’s demand for pork, sending pork prices soaring 170 percent since the outbreak of the virus.
Imports for pork and chicken have increased close to 50 percent, according to the commodity data group Gro Intelligence.
So trade wars or not, when it comes to food, countries with the cash will do whatever they can to get what they want.
