Recently we mentioned that a classic sign of the bubble tip was narrowing leadership of the market. We also mentioned the financial stocks would probably be the last bulls standing, having profited so much from the easy money era. Well, financial stocks got whacked big earlier in the week. Is the end now nigh?
Goldman Sachs (NYSE: GS), riding a wave of investment banking fees, managed to report a 29% rise in profit in the first quarter amidst the technical breakdown in American financial stocks. What we don’t really know yet is whether the blooming subprime meltdown is a precursor to much tighter credit conditions in world capital markets-or just a retrenchment in American household consumption. Either way, it’s going to be hard for stocks to rally into this ill-news headwind.
Another classic sign of a market top is when-in addition to liquidity- merger and acquisition activity reaches record highs. Are mergers and acquisitions between major firms supposed to cement solid business relationships the way blue-blooded European monarchs used to marry each other? Hmm. Maybe Europeans were less likely to fight one another when they were all related in murky, unspeakable ways. But with stocks, we are concerned with the creation of value and valuations.
Does M&A activity create value? Did the Time Warner/AOL deal create value? Did the Daimler/Chrysler deal create value? Did Tyco’s growth into a diverse conglomerate create value?
As far as we can recall, the last wave of M&A activity was simply a prelude to the undoing of the M&A deals, in which Frankenstein-like corporate balance sheets were carved up and sold back to the public (with the investment banks again collecting a piece of the deal). Money shuffling, pure and simple. How is this different from the “asset stripping” accusations against pirate equiteers?
We posted a chart of M&A activity over at the website, courtesy of the Reserve Bank of Australia. Our conclusion: the spike in activity is not a reason to buy stocks. It’s a reason to sell them.
Markets and Money