Do you ever get the feeling that today’s CEOs have run out of real ideas to boost value? That they’re just flailing around trying ANYTHING to boost their share prices (Not to mention pad their own wallets and the wallets of their investment bankers)?
Market Roundup
I ask that in light of the news today that merger-mania is getting even more manic. Specifically, Dow Chemical (DOW) and DuPont (DD) are reportedly looking to tie up in a transaction that could be worth $120 billion or more.
The deal would unite two of the oldest names in American manufacturing, and it’s a response to activist investment pressure from the firms Third Point and Trian. But frankly, I don’t see anything revolutionary or inspiring here.
For starters, both companies have been spinning off divisions, buying other firms, firing workers, and otherwise engaging in a host of financial-engineering transactions for several years. DuPont just unloaded a titanium dioxide pigment business, for instance, while Dow sold some chlorine-focused operations.
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| Dow Chemical and DuPont are looking to tie up — is this a case of America playing not to lose? |
Yet their shares haven’t done squat anyway. Dow closed yesterday at roughly the same level it did 10 years ago. DuPont was recently trading for the same price as it did in 1999.
And get this: IF the companies do manage to overcome financial and regulatory obstacles to a deal, guess what they’re going to do afterward? Turn around and break up again – into three business units focused on agricultural chemicals, specialty chemicals, and materials. As a Wall Street Journal writer put it today, the proposed transaction signals that “This is not an America playing to win. It’s an America playing not to lose.”
Then there’s the latest news out of Yahoo (YHOO), the Internet search and advertising firm. The company now says it won’t spin off its Alibaba stake after all. Instead, it plans to spin off every other business except for the Chinese e-commerce business as a new entity.
| “Yahoo: The plan shows that the last few years’ worth of investments haven’t succeeded.” |
The idea is to give shareholders some kind of transaction that results in lower taxes. It’s a response to pressure from activist investment firm Starboard Value LP. But it also shows that the last few years’ worth of investments haven’t succeeded in turning around the Internet company, and that management is basically punting.
I have nothing against strategic transactions that make sense, or rational cost-cutting and investment plans. But you know what I see here? Late-stage/late-cycle behavior by corporate execs and investment bankers who have run out of revolutionary ideas or inspired plans, and who are instead throwing whatever they can against the wall to see what sticks.
That’s my take, but now I’d like to hear yours. Is a Dow-DuPont tie-up, or the latest plan from Yahoo, the kind of thing that will create lasting shareholder wealth? Or are these just financial engineering schemes that are doomed to fail?
Are there any recent mergers that you believe have a solid strategic rationale? Or are these deals another sign the bull market is on its last legs? Use the comment section as your outlet.
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Meanwhile, yesterday was a very active day at the Money and Markets website with comments on several topics posted.
Reader Chuck B. weighed in on China’s global ambitions, asking the group: “Would you be surprised if the would-be unidentified purchaser of Fairchild Semiconductor International (FCS) was Chinese? I saw that the flow of capital out of China is booming. Where would it be flowing to except the U.S.?”
Reader Peter W. also shared some thoughts on China’s long-term strategy, saying: “China’s economy is having difficulty, but so are Europe and the U.S. China’s advantage is that they are at war with no one. They will trade with anyone, no sanctions — period.
“The West plans for the next quarter. China plans for the next quarter-century. Thus, it is not important that China’s economy is slipping, but whose economy will survive without a revolution of some type.”
On the topic of government reaction to oil weakness, Reader F.M. said: “Let the free market work. We don’t need the Fed or Capitol Hill to come up with more government aid to the oil patch. Rescind the current laws and allow America to export oil.
“We get a lot of new jobs, cash from other countries for our oil, and a positive trade balance. No more government programs, just free-market solutions.”
As for where the U.S. currency is headed next, Reader $1,000 Gold offered this take: “A stronger dollar is coming, as are higher rates and inflation. We’ve reached full employment, so demand for credit will uptick next year. This will move long-term rates higher and cause the Fed to tighten, all leading to a stronger dollar.”
But Reader Al McN. sounded much less optimistic on the outlook for the U.S.: “Junk bonds are falling from grace, student loans are starting to increase in defaults, and the auto loans are doing likewise. Of course, we all know that corporate debt has gotten out of control. That isn’t a good sign considering the falling commodity markets.”
Thanks for sharing, everyone. I believe China is really hurting here, and that growth is likely far below what the “official” figures show. You can cook GDP data, but you can’t cook the price of iron ore, oil, copper, zinc, aluminum and so on.
As for the U.S. outlook, what can I say? I’m a slave to my indicators, particularly those focused on the credit markets. They are all suggesting rough sledding ahead, just as they did in advance of past periods of market turmoil. So I’m more firmly in Al McN.’s camp than I am in $1,000 Gold’s.
Any ground I didn’t cover yet? Other comments you want to add to this debate? Then don’t hold them in. Post ’em below.
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Here come the dividend cuts. Commodities giant Freeport-McMoRan (FCX) said it would scuttle its 20 cent per share annual dividend to save $240 million a year. Oil and gas pipeline giant Kinder Morgan (KMI) slashed its payout yesterday by 75%, to just 50 cents per share on an annual basis, to help offset worries of a credit rating cut.
Time magazine has named its 2015 Person of the Year: German Chancellor Angela Merkel. Editors cited her handling of the Greek debt crisis, the Russian territorial gambits in Ukraine, and the European refugee influx.
Bloomberg has an interesting piece today on how it is consistently costing more to buy protection against stock market declines than it is to speculate on stock market advances, at least in the options market.
The “skew” toward more expensive puts than calls may stem from overall nervousness. But Bloomberg also says it may be banks “hoarding” downside protection in order to fare better in Federal Reserve stress tests.
Do you think Merkel deserved Time’s accolades? What about these dividend cuts — are we going to see even more in the weeks ahead? And how about the fact so many people seem to be making bets on a market collapse? Is that a contrarian buy signal or a reason to be scared stiff? Let me hear your thoughts when you have a minute.
Until next time,
Mike Larson
P.S. Supercycle Trader is about to release a NEW bundle of recommendations! Click here to activate your membership in the wealth-building service that led members to 13 winners in 14 completed trades last month.
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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From a macro standpoint people are getting older and not purchasing. Younger people don’t have the income or are not spending their money. Thus the economy is in a cycle of contraction. No amount of “interaction” is going to change that.
As for the current spate of seemingly pointless maneuvers in the corporate world it may be like playing Solitaire. Sometimes when you’re playing Solitaire you run into a hole. Moving cards around suddenly can unlock a stack and boom the game is won. So these moves may seem uninspired but they could unlock lots of unseen opportunities.
I’m still waiting for the Jay Gould mega merger proposed in the 1880’s to kick in, it came within one vote of happening. It involved the Gould, Huntington, and VanderBilt railroads. Imagine Union Pacific and CSX Transportation as one company. The one vote was Fed Ames. In spite of Gould’s reputation, UP wouldn’t be what it is today without him, not by a long shot.
You are 100-percent correct that CEOs are flailing around trying to impress Wall Street. It may have to do with 24/7 media coverage of financial markets and the resulting hyper-importance of Wall Street’s valuations as the raison d’etre for corporate decisions. One can tell that this phenomenon is reaching ridiculous heights when the YHOO ticker may soon be a proxy for BABA and nothing more.
cars are selling like crazy and people are driving everywhere because of dirt cheap oil, just like i said they would. so demand for money is increasing and banks will be able to charge more for loans. this means long-term rates will rise (slowly), which is why the fed must begin raising the funds rate (slowly). what’s important is we’ve turned a corner. we’ve now crossed the line from deflation to inflation. we’re all going to have to reprogram our thinking from here on. instead of stimulating the economy, the fed will now have to hold it back. i’m an old guy. i’ve been down this road before. for you young guys, you’ll have to invert your thinking as we gradually climb the interest rate mountain again for the first time in decades.
the economy will become so overheated in the next few years that fed will have to put the kibosh on the party with a yield curve inversion, which means a recession, which means another buying op.
ask youself this question. how long do you think it will be before we see 4% rates on the 10 year? if you haven’t asked yourself this question, you have no idea where we’re headed.
this is what cheap oil brings.
Lots of the people driving those new cars are paying with subprime loans for 7 or 8 years at near 20% interest. They lose their job, and lose their transportation, too. Used repossessions will be a dime a dozen, so to speak, driving down the price of even new cars. It’s called deflation. Nice for us old guys and gals – not so good for the newbies looking for work, and a meal on the table. Especially if they have families.
they’ll be buying houses next. nothing like cheap oil to get you out of the house and spend money. nothing worse than expensive oil to make you stay home and watch tv.
I would really like to share your optimism but the current State of America has no real precedence. I don’t think anyone can have any idea what’s going to happen next. How many times in your life have you witnessed zero interest rates, four rounds of QE, $20 trillion in government debt,$30 trillion in private debt, $700 trillion in derivatives, millions of disloyal immigrants, and the possibility of a twenty year war ahead of us? Believe me, it’s different this time. Jim
i’m going to open a gas station and charge $4/gal so you guys feel good about gas again.
LOL! Jim
think short sighted for a while. a teeny-weeny rate hike by the fed will push buyers into the housing market hoping to get in before rates get too expensive. also, the fed is trying to push the scaredy-cats out of bonds into stocks with a rate hike. look for both these things to happen next year. a rate hike next week would normally strengthen the dollar, but don’t be surprised if the opposite happens.
I think the oil market is more volatile than a lot of people think. “Paper Barrels” figure more than they used to. I expect it to be bid down to absurdly cheap levels followed by a vicious rebound. The same is true with gold and silver. Nothing’s easy anymore. Jim
i don’t doubt that things could go lower first. this correction we’re in could just be beginning, but we’ll come out the other side in a new up wave.
good point
Cheap(er) gasoline seems to me to be highly over-rated as an economic stimulus for the average person.
Yes: I am looking for relief in 90 day T-bill’s like 2005 at 5 %
Looking out across the landscape it is very difficult for me to believe the rosy economic news that is flashing an interest rate hike by the Fed. My stepson has a small heating and cooling business and just found out how much more he is going to have to pay for health insurance and his deductible in 2016. He is devastated! As far as Merkel goes, most of the the German People believe that she is choosing the Muslim invaders over her own countrymen. Is Europe growing closer and closer to an explosion? Is Obama doing the same to us? Why is Trump so popular in spite of “the powers that be” trying to kill him?
Some of the healthcare companies are starting to indicate that they will be getting out of Obamacare. And there is now indication that the huge influx into Medicaid that it wrought is damaging the debt rating (further) of many states that just do not have any mechanism to pay for more “free” Obamcare. The wheels are slowly but surely coming off the obamacare bus and it is going to be a mess of gigantic proportions. Obama was hoping he would be out of office before the implosion but he might not make it out the door.
You ask is Obama allowing the Muslim invaders free reign? One can analyze his response to the situation and logically ONLY come to that conclusion. Prior to Putin and France bombing ISIS’ tankers….Obama refused to take them out and still demands that the drivers be spared (?). He refuses to aid the Kurds, the best ISIS fighters in the field. ISIS has publicly stated now for 2 years that their base of ops is Raqqaa and Mosul but we have never bombed their HQ. We run 6-8 sorties a day when in other campaigns we have run upwards of a 1,000. Only a moron would judge that Obama is trying to stop ISIS…….just based on his actions. Most Americans know he is a fraud.
It is becoming obvious (if you get news from other than U.S. propaganda networks) that Putin’s Russia is doing far more against ISIS than Obama’s America. Yes, it’s to help his ally, Assad, but what about those who are said to be OUR allies? We leave them hanging by a thread.
Your point on Obama care, are you just figuring out that he wants health care for everyone like we have in Canada and England? That explains why Insurance co”s are getting out of that business.
Angela Merkel was named Person of the Year for governing against the will of her people. Sound familiar? Jim
Trump is popular for one reason and one reason only. Seven years of Barack Hussein Obama. Jim
The majority of us elected B. O. – unfortunately. ‘Doesn’t say much for the smarts of most of us. Regimented by modern education(?), probably.
Jim, I agree completely…and that’s sad, since I’m a democrat myself.
Everyone is fed up with big government getting even bigger. At least some of what Trump says makes a little sense….which is a LOT more than can be said for what’s coming out of Washington DC these days!
For instance: It would seem that a normalized health insurance plan would be a positive, but Obama-care has turned out to be a money-grubbing fiasco! No wonder more jobs are being created…all the businesses around here are restricting their current part-timers’ hours and hiring more part-timers so they don’t have to pay through the nose for their employees’ health insurance! Maybe Trump will get this health insurance mess straightened out…we can only hope……..
I’m a disillusioned lifelong Democrat myself. I agree with you completely. Nothing is sadder than the the could of been that wasn’t. Jim
i’m a lifelong democrat too, but so far trump is the only candidate i can’t eliminate. i sure hate to vote for a guy i don’t even like.
I remember when Obama stated lets pass this( his affordable care act) theres money in this for all of us
we’ll put, jim. and no competition from the likes of jeb, mario, ben, hillary, bernie, etc. it’s not that trump is so good, he’s just the only one left standing after you eliminate the rest.
Goldie, I think we are in a real pickle whatever our particular political,persuasion may be. I don’t like any of them but Carson, but he doesn’t have a prayer. Jim
I’m going to cast a write in vote for Dennis Miller! Jim
The only great leader of my lifetime was John Kennedy. He had personal flaws, but I believe he truly wanted Peace and Prosperity for his People. This could only come at the expense of the Elites, so they killed him, and America has never been the same since. Jim
i like carson too, but he’s an intellectual with no common sense. in other words, he’s too stupid to be president – in spite of his pedigree.
B.O. looks like a genius besides the rank and file dodo’s running for the GOP. One is a mouth piece maybe two, one fabricates information as he sees fit. Ben Ben is switching from one side of the plate to the other, Carly out in full costume and mindset and Halloween has passed. About 6 or 7 are in the 1% we love you crowd. Throw in an electorate that is fed up with political correctness and being handed the same old drivel from the past. All Hillary and Sanders need to do is stand back and let the self destruct and keep their campaign funds in the bank.
Hey Gordon, you must be a relative of Harry Reid!
In my lifetime, the Democrats produced FDR, Truman and Kennedy – all fine leaders, who made hard decisions and stuck with them. The Republicans had Eisenhower, who did a pretty good job of bringing the nation back to a peacetime economy, even in the face of the Soviets. Neither party has had a leader of any worth since, and I include Reagan and Bill Clinton, even though they tried. This nation doesn’t produce leaders of worth anymore, it seems. The current crop of name calling a..h…s especially included. Until and unless we do, we are on our last legs as leaders and examples for the world. I’m sorry, but that is how I see it.
Jim, I don’t think that’s the only reason but it is a big one. I believe it is that most politicians don’t even mention or discuss the real problems, this PC situation gets you branded a racist or a bigot if you dare to suggest Obama is incompetent. Trump is pointing out what most of us know, things are not going well in this country and seem to be getting worse, yet our ‘Leaders’ everything will work out, that they have things under control. Trump has made even our ‘Leaders’, on both sides of the aisle, I use the word loosely of course, at least have to sit up and take notice.
Obama really terrible. One of the few countries in the world with reasonably decent economy. Millions have health care who didn’t have it before and relied on taxpayers to cover their emergency room visits. Hasn’t sent a whole bunch of America’s youth to die in fruitless foreign wars. Yep! bring on Trump. He’ll change all that.
P.S. Blame Marco Rubio if Obama Care fails. He managed to slip into recent spending bill item reneging on protection that was offered to insurance companies to protect them from going broke if the they were insuring too many sick persons.
The merger of Dow and DuPont may produce an increase in asset price (probably temporary) but it’s unlikely to increase real wealth.You need gains in real net investment, entrepreneurial activity and gains in labor hours to create wealth. Most likely the result will be just the opposite.
Makes me think of the Studebaker and Packard merger in the 1950’s . You just get a bigger dinosaur.
Both of those companies made better cars than anything by the Big Three, but people wouldn’t pay for quality. My dad had a Packard that unfortunately blew a transmission 1000 miles from home on vacation. Packard paid for food, accommodations and a long tow to a Nashville dealer, flew my parents home, flew in a new transmission, flew my dad back to pick up the car when it was fixed – no charge. Car was fine for the rest of his usual 3 years and he bought another one. Would GM, Ford or Chrysler do that? HAH!
Again i ask the question! Has Weiss yet changed its prediction on the demise of the Euro ?
The Euro Dollar exchange rate gone from 1.05 to 1.10 in a few daya ????
There must be a wall of money following the euro instead of the dollar ?
Look at the trend, not just a few days.
Mike,
Yep, you are right on..The fortune 100 is running out of ideas and capabilities to grow their businesses after squeezing all they can out of workers as part of a financial engineering ploy to become fabulously wealthy over the last several decades. This, is unfortunately, the price you pay for concentrated global elitism..Now that the middle class (aka the golden goose) has been killed, is there any reason to wonder why there are no more golden eggs????
Mike, you also need to look at what happens to the CEOS. If Yahoo is bought, or goes under, the CEO gets one hundred fifty eight million dollars cash, and additional lifetiime benefits. If I was the CEO, why would I want the company to succeed? I would be set for life, asw would any children and grand children I have. What a golden parachute. If salary were tied to performance it would make more sense, I had a friend who ran the dietary unit at a nonprofit. She was responsible for non personnel money decisions. She was given a budget. Her salary was the money not spent. If a CEOS salary was a base salary and bonuses or decreases were based on company performance, what would occur?
The CEO’s would milk the figures to make the company look as good as possible, then take the bonus money and run. ‘Sound familiar?
Why are you so “down” on China, Mike?
Seems as though they’re one of the few nations with real, substantive growth, coupled with huge cash reserves!
china is less than 1% of our gdp. china can’t hurt us.
The Pew Research Center released a new study that showed, between 1971 and 2014, middle income people fell from about 62% of the American population to just over 50%. MI is between $42,000 and $121,000, in 2015 dollars. Lower income population rose to about 29% and upper income population rose to 21% from 17%. However, between 2000 and 2014, incomes FELL across the board: about $2300 for LI people, $3300 for MI’s and $6000 for UI’s, in 2015 dollars. Allowing for inflation, wealth has migrated over the years to both the upper and lower income people, at the expense of the middle income majority; but everyone is suffering a relative reduction in earnings. Is Congress and the Administration listening?
Correction: …wealth FELL…, not …income FELL…
There is the old saying,”United we stand or divided we fall”.Is there a country more divided than the U.S.?
Not doing good. Love dad
Yes it is a sign that the stock market is on its last legs but the Dow and Dupont merger seems rather smart. I worked for Dow Corning for 30 years and Dow Corning is an integral part of the whole plan. First of all the market for materials has merged into heavy competition over the last decade with China etc. supplying far more low quality materials which has changed the game substantially. Low quality has become important on the world market.
So it seems the merger allows expertise in these worldwide firms to capitalized on. They seem to have chosen the primary markets and kept them simple rather than complex. It should allow rather huge economies of scale and allow each business to be run more efficiently with less workers and less management. I think they are doing this merger exactly because the stock market is about to collapse and along with it followed by a prolonged period of depression.
Plus I think you missed the point of the merger. I suspect it is to hold on to markets and remain competitive in the future and the stock price has little to do with what is driving the merger.