Cheap Money and Corporate America
Most of the Cheap money Central Banks have offered has gone in three things: 1. Buyback; 2. Dividend and 3. M&A.
Not much in new investment
— Deepak Singh (@smarket) June 29, 2016
Cheap money fuelling M&A: There is Merger Mania in the US: All this has happened in last 2-3 days
- AT&T planning to buy Time Warner for $85 bn
- Ameritrade buys Scottrade for $4bn
- British American Tobacco buys Reynold America for $47 bn
- Chinese holding company China Oceanwide Holdings Group buys Genworth Financial Insurance company for $2.7 bn
- B/E Aerospace the aerospace company received a buyout offer of $6 bn from Rockwell Collins
- Chinese conglomerate HNA Group has acquired 25% stake in Hilton Worldwide Holdings valued at $6.5 bn
It is cheaper to buy off competitor than to invest and compete with the competition. This is not good.
S&P500 continues to hold 2120 with two major events ahead: US Elections and Interest rate hike in December 2016.
What has helped S&P500 to hold 2120? - Good Earnings season. Just see how Banks earnings have outperformed consensus estimates
The U.S. economy set to report GDP numbers this week. The expectation is that third quarter growth accelerated to a 2.0+% gain from 1.4% the prior quarter. Fourth quarter growth will likely exceed 2.0% again led by consumer spending.
Dollar Index at 8 month high - Strong economy + Tight Labour market means US Fed will increase interest rates in December. It's showing up in Dollar Index which is trading at 8 month high
Strong Dollar is bad news for Global revenues of S&P500 companies.
The Market does not believe in complex theories. It forms a belief system and then sees events as positive or negative and work accordingly.
Rise in Interest rates = Good for Banks. The reason ETF XLF looks all set for a massive breakout.
Why "Rise in Interest rates" = Good for Banks
Because the rates Bank charges on longer-dated loans such as mortgages and auto loans will increase at a faster pace than the rates it pays on short-term deposits. In simple words, it means Higher Net Interest Margin. Bank of America announced last year that a 100-basis point increase in short- and long-term rates would equate to an additional $4.6 billion in annual net interest income, or up to a $0.43 per share boost in annual EPS.
Too many studies result in strong belief system
According to one estimate highlighted in the International Business Times, released last September before the Fed's first 25-basis-point increase, the top five banks could reap a $10 billion windfall in one year if the federal funds rate increased by 1 percentage point.
What will rise in Interest rates do? - Sectoral Churn
Investors seem rattled at the prospect of higher interest rates, prompting them to rotate out of utilities, telecommunications, real estate, and gold and into riskier technology and financial services stocks.
The Big risk: China
Chinese companies have accumulated about $18 trillion in debt....somebody will have to pay this. Read again $18 trillion...T for trillion
— Deepak Singh (@smarket) October 10, 2016
"To anticipate the market is to gamble. To be patient and react only when the market gives the signal is to speculate." ~Jesse Livermore
— Michael Lamothe (@MichaelGLamothe) October 12, 2016
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers