Monday, December 18, 2006

"In a Merger Wave, a Dangerous Undertow for Stocks "

one more indicator that questioned the upside......looks like there could be rainy days ahead....

ein indikator mehr der eher auf ne unruhige fahrt mit hoher regenwahrscheinlichkeit hinweist....

thanks to mish and his

THE total value of mergers and acquisitions this year is already one of the largest in history. That’s ominous, because past merger waves have coincided with overvalued stock markets.
The biggest single year for mergers and acquisitions was 2000, with the totals for 1998 and 1999 only slightly behind. At the moment, 2006 ranks fourth over all. Of course, those earlier three years were at the end of the great bull market of the 1990s, and a severe bear market followed.

Should we be concerned right now? Yes, because the correlation between stock market tops and soaring M.& A. levels is no coincidence,....

“Periods of high relative valuation are nearly always associated with high M.& A. activity,” he said in an interview, “and the stock market has fallen after each major merger wave.”

Understanding the reasons for the correlation is the difficult part. Though it is easy to see why an overvalued company would want to acquire another — because it could pay for the deal with overvalued stock — it is hard to see why the company being acquired — the so-called target would sell itself for stock that is priced too high.....

.....current merger wave, much of which has been paid for with cash raised through debt financing.

..... “To the extent the current merger wave reflects an overvalued debt market, it stands to reason that it will eventually correct — just as overvalued stock markets eventually correct,” he said. “And it can’t be good news for the stock market if money is destined to become much tighter in coming years.”
The bottom line is this: The current merger wave means that stocks are probably closer to the overvalued end of the spectrum than to the opposite extreme, and that they also are vulnerable to tighter money in coming years.
This doesn’t necessarily mean that stocks will fall in the near future. But it does imply that their prospects are well below average.
just the m&a activity today.....



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