I am beginning to sense a change in the winds…While I’m certainly not a dooms-dayer, I am starting to show my bearish teeth as the capital markets are definitely starting to slow their momentum. Virtually anywhere I look, I’m seeing markets showing cautionary signals which I believe merit some analysis for those of you looking ahead.
The good news is that healthy upward trending markets need to rest on a plateau or even suffer a minor retracement in order to sustain long-term growth. The bad news is that I believe this not to be the case…While I don’t believe current market conditions are reason for panic, I wouldn’t be at all shocked to see the economy move toward slow growth or no growth (can you say recession) over the next 12 months.
I hope that the text contained in today’s post will provide a bit of insight as you make your plans for the New Year…
Let’s start with a quick synopsis of the mergers and acquisitions markets. There is an interesting paradox developing in the M&A market in that the capital targeted for new acquisitions is at an all-time high, yet both the number of transactions as well as the aggregate transaction volume has fallen for two consecutive quarters. Q3 transaction volume fell to 1900 transactions down from 2200 transactions in Q2, and total transaction value slipped to $230 billion dollars down from $290 billion dollars during the same period.
The statement that there is too much money chasing too few quality deals has never been more accurate. Private equity firms, hedge funds, as well as corporate and institutional investors have appeared more like sharks in a feeding frenzy than sophisticated investors over the past few years. The voracious appetite of those on acquisition binges has been in large part responsible for driving valuations to ridiculous heights. Many entrepreneurs have been rewarded by holding-out for premium valuations with no lack of suitors knocking at their doors. However, things may be changing as it appears that the smart money is starting to wake-up and exercise some discernment if not straight-out caution…Companies will need to fight harder for valuations next year as the frenetic pace of the last few years will slow in the year ahead. The times are changing and my advice is to get your capital while it is still available…
Let’s turn our attention to the stock market…Even though the Dow Jones Industrial Average has continued its march into record territory in recent weeks, the closing bell yesterday marked the worst day in four months for the Dow with the market falling 158 points. Are yesterday’s closing numbers just indicative of profit-taking or could this be a sign of things to come? You might consider that the New York Stock Exchange recently announced that it took a $28 million dollar charge-off to fund severance payments for more than 500 employees expected to be cut from its payroll by March. A workforce reduction by the NYSE in a heated bull market seems a bit odd, doesn’t it? I wonder if perhaps they know something we don’t…
The economy, in general, is also showing signs of rapid slowing. While many believe the housing market has hit bottom, it still remains very weak which had a dramatic effect on consumer confidence in October. This weakness in consumer confidence has also had an impact on retail sales numbers as holiday sales are off to a much slower start than forecasted. Wal-Mart, the world’s largest retailer reported a 0.1 percent decrease in same-store sales over recorded numbers last year at this time. This is Wal-Mart’s first reporting deficit in a decade and may be yet another indicator of a slowing economy. Further confirming this trend is the fact that the US Dollar hit a 20 month low against the Euro yesterday pointing to concerns that foreign investors may be sensing a weakening US economy as well…
My point in sharing these observations is not to send you rushing to make adjustments to your portfolio. I’m simply attempting to point out that signs of market transitions are starting to show themselves. My advice in that regard is to consider the impact of weaker capital markets on your business, and to factor this into your forecasting for next year. An acronym drilled into me from my days in the military is the principle of the 7 P’s: Prior Proper Planning Prevents P*ss Poor Performance…Plan well!
