Even a stopped clock is always right twice each day, they say.
And if each day we predict a stock market crash, one day (perhaps) we’ll be right.
Some folks may think that, after spending the past two years or more warning of a crash, we’d jack it in and jump on the roaring stock market bandwagon.
Some folks may think that…but those folks would clearly be unaware of your editor’s stubbornness.
Besides, even if we had the inclination to jump on the stock-buying bandwagon, we would have to do so in the face of evidence that stocks are near, if not at, the top of the market.
What is this so-called evidence, you may ask? We need look no further than the Financial Times:
‘AT&T said it would use its proposed $85.4bn acquisition of Time Warner to build a digital video platform to rival Netflix, as it outlined the rationale for a takeover that stands to transform the telecoms group into one of the world’s biggest media companies.’
We’ll say it now: Assuming the takeover passes regulators, it will go down in history as one of the biggest takeover disasters in history.
It will rival the most famous failed takeover of all, the AOL and Time Warner deal.
It’s a sign of desperation. Telephone and cable companies fear that the world is passing them by, and so they want to get into new markets.
AT&T Inc. [NYSE:T] wants to go from being the owner of ‘pipes and cables’ to being a content owner — owning HBO and the Warner Bros studio.
However, merely owning content isn’t a guarantee of success. Channels Seven, Nine and Ten in Australia own a lot of content. Have they been outstanding investments?
Furthermore, have they been outstanding businesses?
The Walt Disney Company [NYSE:DIS] provides some evidence of that. It owns movie studios and production companies, and it owns the ESPN cable sports network.
The share price has performed well, climbing from below US$20 in 2009 to US$120 in July 2015. But since then, the share price has fallen. It’s now trading for US$93.37.
Our point? In a bull market anything can go up, and it often does.
Take for instance, oh we don’t know, how about Time Warner Inc. [NYSE:TWX]. It has put in a good run since 2009 too. It has gone from US$18.50 to US$86.74.
In which case, we wonder why the geniuses at AT&T decided to wait until now to make their takeover bid.
It’s not as though the idea of ‘cord cutting’ is new. For the past few years, industry experts have reported on the trend of people cutting off their cable TV subscriptions, and instead shifting to streaming or on-demand subscription services.
(Note: AT&T owns US satellite company, DirecTV.)
Of course, the spin around this takeover deal is that AT&T is trying to get into a new market and create a rival for Netflix.
We don’t buy it. The bulls may see it as a stunning new opportunity, but we see it as desperation.
We see it as a desperate sign of a desperate company taking a big desperate risk.
Now, it’s true that AT&T’s revenues and profits have grown. So much for the idea of a desperate company, right?
Not so fast. Yes, revenue and profit has grown, but guess what else has grown. You got it, interest expense and debt.
From the 2014 financial year to the 2015 financial year, long term debt grew from US$75.8 billion, to US$118.5 billion.
Interest expense was only marginally higher, up from US$3.6 billion to US$4.1 billion. And for the past 12 months, it has increased to US$4.8 billion.
We can only imagine how AT&T will cope as or if interest rates start to rise.
Not only that, but AT&T’s debt level will likely have to rise as part of this comically named ‘cash and stock’ offer. It’s really a ‘debt and stock’ deal. According to Bloomberg the cash [cough] component will amount to around US$21 billion.
It has to be debt because at the last balance sheet date, the company had no more than US$6 billion in cash.
Anyway, not surprisingly, the markets loved the takeover action. US stocks were up. Most European stocks were up. And the Aussie market is up today — no doubt on this great takeover news.
But, while the markets hoot and holler over a deal worth more than $100 billion in Aussie dollars, we’ll remain firmly off the bandwagon.
Call us old-fashioned, but we like takeovers when the target company is cheap, usually near the bottom of the market. Not near the top.
The end of an era
Here’s a chart we like to bring up every now and then:
Click to enlarge
It shows the total value of takeover deals going back to 2004. The blue bar on the far right is for 2016. You’ll note that even with the giant AT&T/Time Warner deal, it’s a long way below the 2015 level. And this year is nearly over.
It’s another reason why we believe this deal could be the last desperate attempt by the market before a calamitous market crash.
We’re not saying that investors should pull all their money out of stocks. But we don’t like the idea of having more than 40% of a portfolio allocated to stocks, and we definitely wouldn’t put new money into the market.
Cult of the masterminds
Ah, the ‘cult of the masterminds’ continues. We love that phrase. It comes from Richard Maybury, who wrote an essay on it. Search the internet, you’ll find it.
It’s the idea that folks like central bankers create a cult around themselves. They believe they can finely tune and manipulate an economy to do just as they wish.
And so it continues. You can see it play out perfectly in this report from Bloomberg:
‘The Federal Reserve is inclined to raise interest rates higher than otherwise if the next president pursues a more stimulative fiscal policy.
‘U.S. central bankers say they would welcome such a step as shifting some onus for supporting the economy away from the Fed. But they suggest they would offset the extra demand that a bigger budget deficit would spur by making monetary policy less stimulative.
‘The reason: With the economy already operating close to capacity, it’s not in need of an added boost right now.’
The cult of the mastermind. What games they play.
A brave trick
Reading that report from Bloomberg, we can visualise one thing. The party trick where someone attempts to pull away a tablecloth from a table laid out with cutlery, crockery, and glassware.
Only in this instance, the party trick isn’t just about pulling away the tablecloth, it’s simultaneously trying to replace it with a new one.
We’ve seen the original variation of the trick. It’s neat when they can pull it off. Trouble is, they don’t always pull it off. Sometimes the cutlery, crockery, and glassware goes everywhere.
And furthermore, we’ve never seen anyone try to replace the tablecloth by inserting a new one rapidly between the table and the tableware.
This is sure to be an exciting spectacle as the Fed whips out its tablecloth, and the US government tries to replace it at the same moment.
Publisher, Money Morning
Editor’s Note: This is an extract from an article originally published in Port Phillip Insider.
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