Tuesday, January 02, 2007

Ignore the Press

Wish all you readers a wonderful new year, filled with love, happiness and success! While I'm not much of a resolution-type of a guy, now's a great time to reflect on your life and your own outlook.

Ok, so much for that! Now, with the new year comes many a piece arguing that you should invest more (which I support) in stocks (I'm not quite so sure of that) because the stock market is cheap (which I disagree!). During one such piece in USA Today, the author argued that one of the reasons stocks would go up is that "the supply" of stocks was reducing because of mergers & acquisitions. What a bunch of baloney! Investors in firms collectively often take on debt to buy stocks of other companies, and those left standing are suddenly worth more? (M&A's are only worth it when the acquired company is selling at a discount to intrinsic value - I'm yet to be convinced of the intrinsic value of Youtube!)

If my memory serves me right, I seem to recollect having read a few instances of M&A activity preceding a bear market, but since I'm trying to graduate, I don't have the time needed to research the topic further. M&A activity recently hit its all-time record of $3.76 billion, besting its Y2K record of $3.4 billion. Wikipedia reports historical M&A activity since 2001, and sure enough, M&A activity fell from $3.4 billion in 2000 to a low of $1.149 trillion in 2003. Let's see, using this relatively short period (which I would never do if I had access to better data or was being paid for it), it looks like M&A activity would serve better as a indicator of when to sell, peaking before the bubble burst and bottoming right before a decent runup to the S&P.

The M&A activity is especially focused on commodity businesses like steel and oil, the very businesses that have been having record profits, and more importantly strong stock market performance. Sounds eerily like the tech companies in 2000!

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