Is the Corporate M&A Bubble in Trouble?

We think its not...yet. The current level of activity suggests that corporate managers will continue to buy rather than build.

In a recent CNBC poll, some 56% of companies said that they plan an acquisition in the coming year, up from 40% last October and the first time since 2010 that more than half plan to do something. But even if such plans were to generate a surge later this year, it would make a bullish argument for equities, not the bearish one accompanying much of this recent buzz.

M&A, quite simply, is a vote of confidence in market values and the future generally. Companies buy each other when they see a reason to expand and when other firms look attractively cheap. The same goes for private equity, which is no less in the acquisition business than corporations. If these decision makers saw stocks as expensive, they would pursue their expansion with direct investments in new equipment, premises, and in a hiring program. Since they are buying these days and doing relatively little building, they have effectively announced that stock values still make a purchase the more attractive way to expand.

Table 1. M&A Activity (monthly rates)

Period	Number of Deals	Value ($ in bil.)
2013 4Q	817	$79.6
2014 1Q	959	$108.7
2Q	1,000	154.8
3Q	1,003	108.1
October	1,123	96.5
November	1,006	194.0
December	983	103.6
2015 January	995	$78.4
February	938	114.3

Source: FactSet

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Top geopolitical risks to watch for

Synopsis of Eurasia Group's Top Risks 2015 

Read more details >>

1 - The Politics of Europe
Europe's economics are in substantially better shape than at the height of the Eurozone crisis. But the politics is now much worse. That's true on three different levels: bottom-up, intra-EU, and outside-in.

2 - Russia
Last year, we highlighted Russia as one of the top risks to global security--that was before Moscow carried out the most brazen redrawing of European borders since World War II, and then fell into a severe currency crisis. The conflict with the West over Ukraine has crystallized a newly aggressive and explicitly anti-Western Russian foreign policy. Western sanctions, a sagging oil price, economic stagnation, and the ruble's plunge are weakening Russia economically and financially, though not driving it to the point of crisis. 

3 - The Effects of China Slowdown
We're quite optimistic about China this coming year. President Xi Jinping has consolidated an extraordinary amount of power since ascending to the presidency. He has launched policies long overdue to rebalance the economy, pushing ahead on improving air quality, pursuing a series of measures aimed at making state-owned enterprises more efficient and spearheading a massive anticorruption campaign within the Communist Party.

4 - Weaponization of Finance
The United States remains the world's only superpower, but Washington is now using its influence in important new ways. After World War II, American dominance was established by the forging of us-led alliances such as NATO and multilateral institutions such as the IMF and the World Bank that enshrined US-authored rules and standards.

5 - ISIS, Beyond Iraq and Syria

In 2015, ISIS faces setbacks in its core bases in Iraq and Syria, but its military power remains significant, and its ideological reach will spread throughout the Middle East and North Africa. It will grow organically by setting up new units in Yemen, Jordan, and Saudi Arabia, and it will inspire many jihadist organizations to join its ranks. Ansar Bayt al Maqdas in Egypt and Islamists in the Libyan city of Derna have already pledged allegiance to ISIS leader Abu Bakr al Baghdadi.

6 - Weak Incumbents
Political risk stemming from weak incumbents who recently won reelection will weigh on key markets in 2015. With the important exceptions of India and Indonesia, the wave of emerging market elections in 2014 saw incumbents win underwhelming victories. Sluggish growth and mounting popular demands were not enough to displace ruling party candidates in Brazil, Colombia, South Africa, and Turkey, and are unlikely to do so in Nigeria in 2015.

7 - The Rise of Strategic Sectors
In 2015, success and failure for business will depend increasingly on governments. For decades, the perception was that multinational companies were developing greater autonomy from policymakers, both in their home governments and in the countries where they operate, eroding state authority to regulate the flow of goods and services around the world. Instead, government influence is expanding, focused more on political stability than on economic growth.

8 - Saudi Arabia vs. Iran
Saudi-Iran tensions will spike during 2015, worsening the Sunni-Shia sectarian rift across the region.
The relationship will be especially volatile this year because: 1) there will be an unprecedented number of theaters of proxy conflict 2) domestic politics in both countries will enhance conflict and 3) the evolution of diplomacy on Iran's nuclear program, regardless of the outcome, will provoke more strife between Riyadh and Tehran. 

9 - Taiwan/China
Relations between China and Taiwan will deteriorate sharply in 2015 following the opposition Democratic Progressive Party's (DPP's) landslide victory over the ruling nationalist party in November's local elections. Taiwan's political class will focus overwhelmingly this year on throwing elbows at one another ahead of the 2016 presidential election. President Ma Ying-Jeou is already a lame duck, and we expect no progress toward an agreement with China on any form of trade liberalization.

10 - Turkey
For the second year in a row, Turkey makes our list. Lower oil prices have been good news for this country, but that's about all that's going well. Heavy-handed rule, short-sighted political decisions, and bad foreign policy bets will all conspire against Turkey. At home, Erdogan has used election victories in 2014 to ensure decisive defeat of his political enemies (of which there are many) while remaking the country's political system to tighten his hold on power.

Red Hearing 1 - Asia Nationalism
Red Hearing 2 - The Islamic State
Red Hearing 3 - Petrostates
Red Hearing 4 - Mexico

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Know the Lifetime (and Retirement) Financial Equation

For a sound lifetime and retirement financial planning one needs to know its complex equation of contributing factors.

Make the most of the things that you can control but be sure to evaluate factors that are somewhat or completely out of your control.

Planning for retirement can be overwhelming as individuals navigate various retirement factors over which we have varying levels of control. There are challenges in retirement planning over which we have no control, like the future of tax policy and market returns, and factors over which we have limited control, like longevity and how long we plan to work.

The best way to plan for a secure retirement is to focus on the factors we can control: optimize saving, understand and manage spending and adhere to a balanced approach to investing.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

The effects of bulging corporate purses.

High cash levels, accumulated by S&P 500 corporations, are being put to work. Above charts are showing growing levels of capital expenditures, M&A activities, dividends, and stock buybacks by the nation's largest corporations.

If sustainable, this will benefit the economy. Capital expenditures can add to the industrial growth. Dividends and stock buybacks will probably add to consumer spending and housing sector strength. Corporate mergers and acquisition activities may strengthen equity markets.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Factors shaping investment markets. April 2015.

Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe. They are the motive behind the ongoing global easing cycle.

A stronger U.S. dollar and the resulting foreign exchange market volatility argue for greater differentiation amongst portfolios, in accordance with their reference currency. Hedging has become a must.

Euro markets will benefit from both liquidity injections and the materializing economic recovery – a positive outlook that supports our preference for risky assets over cash.

A more balanced approach is required when it comes to U.S. dollar- and Swiss franc-based portfolios, given the more limited equity market upside.

External debt levels and commodity intensity are dividing the emerging economies into two camps: those who can afford to loosen monetary policy (Asia) and those who are forced to keep rates high (Russia, Brazil).

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Are property valuations chasing future rent increases?

First, let pictures (charts in this case) speak their 1,000 words. 

Commercial property market valuations, in almost all categories, have eclipsed 2006-2007 picks. 

Valuations are even higher in key markets like Tri-State, Boston, Washington DC, Southern California and San Francisco.

" Capitalization rates have dropped to historical lows of 3% to 4% for industrial and multifamily deals in particular." Orange County Business Journal wrote on March 16, 2015.

Yet the largest and most sophisticated investors, led by pension funds, private equity funds, and insurance companies, are in the midst of buying spree.

The rational on the part of buyers? Potential rent increases in the near future. It seems the largest aggregators of capital believe in the continuing economic growth.

The Secrets to Valuing Hot Tech Companies.

This week Bloomberg Business shed some light on on this.

The opinion was built around a photo-messaging app raising cash at a $15 billion valuation. Bloomberg Business doubts that this company is actually worth more than Clorox or Campbell Soup and was curious where did investors come up with that enormous headline number?

Here's the secret, Bloomberg thinks, to how Silicon Valley calculates the value of its hottest companies: The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they'll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round's valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren't taking the same risks a public-market shareholder would. By the time a company does go public, the valuation it got from VCs may not align with its balance sheet. 

Our own opinion? The above is not exactly a great confidence builder.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Is the deleveraging over?

Economic growth may go into higher gear if U.S. households are finally done deleveraging  There may still be room for more deleveraging as well. These processes may impact inflation, interest rates, commodities, retail and housing activities, equity markets, debt markets, etc.

The charts above (click to enlarge) look at the current state of consumer finances. The chart on the left shows the makeup of the household "balance sheet" and the top right chart shows what percentage of disposable income is spent on debt service, highlighting the consumer deleveraging we have observed over the past few years. The chart on the bottom right looks at household net worth, which is the sum of all assets, including home equity, less all liabilities.

Chart: Market Insights. 1Q 2015. JP Morgan Asset Management

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Is the fiscal situation in Greece a global threat?

In reality the fiscal situation in Greece is not a global economic threat. Greece is only going through a debt crisis.

To evaluate the matter, it is important to differentiate between the stock of debt and the flow of new debt.

We should not be complacent about the stock of debt: it is high and probably unsustainable at 180% of GDP. Even with higher growth of economy this level of debt would be a challenge. Greece's growth is very low, demographics are unsupportive, productivity is very week. However, we should not forget that Greek debt has already been significantly restructured in such a way that it is manageable in the short-term. Altogether, current high level of Greek debt is a threat to Greece. It will probably impact its creditors as well.

On the other hand, Greek debt flows fundamentals have exceptionally improved, and have been strong. What Greeks did is almost unprecedented. Within five years, they turned their government primary balance to a surplus. Similarly, their current account, over the same period, went from a deficit of 115 to a surplus of over 1%.

So, we have a country that runs a primary budget surplus and a current account surplus, but where, partly because of austerity, there is no growth possible. Hence, the stock of debt crisis only. It can add to market volatility. If poorly handled by Eurozone powers, it can result in Euro weakness. This will hardly result in global economic threat.

Asset allocation of endowments

Endowments and sovereign wealth funds are expected to invest with the longest time horizon and view.

The chart sums up latest disclosures of investment holdings by endowments and Corporate Pension Funds.

The first observable fact: low level of lack of fixed income in endowment portfolios, 9.00%.

Second, 53.7% of endowment holdings are in "alternative" classes: hedge funds, private equity, and real estate.

Equities are only 27.00% of endowment portfolios.

Alternatives investments, offering lower liquidity and lower volatility, are not so "alternative" for endowments, who are assuming that returns will be better from hedge funds, private equity, and real estate.

As a result, almost 99% of endowments expect better than 7% annualized returns over the long run, while only 66% of pension funds expect the same.

Source: Market Insights. 1Q 2015. JP Morgan Asset Management.