April 14, 2014
- Merger activity heats up: The perfect way to take advantage
- Traders quake with fear… and it’s not even a “correction” yet
- The next catalyst for gold… Palladium’s big move
- Two military-tech headlines you read here first
- A jaw-dropping tax-season outrage… readers get worked up about deflation… the upside if Alaska were returned to Russia… and more!
2014 is shaping up as the year of mega-mergers. Play it the right way and the trend could put lots of money in your pocket in very little time.
Already in the first quarter of this year, the total value of mergers and acquisitions (M&A) is 25% higher than last year — indeed the highest since 2008. And the pace isn’t letting up now that we’re in the second quarter…
- Two cement giants with combined sales of $44 billion — France’s Lafarge and Switzerland’s Holcim — announced merger plans last Monday
- Mars announced on Wednesday it’s adding to its stable of pet food brands, picking up Iams and Eukanuba from Procter & Gamble for $2.9 billion.
Ernst & Young recently surveyed 1,600 senior executives at companies worldwide. Their plans to do deals of at least $500 million have doubled in the last 12 months. And plans for deals of at least $1 billion have doubled in only the last six months — “a clear sign that plans for transformational acquisitions are accelerating,” says E&Y’s Pip McCrostie.
“I’m sure you’ve noted it plenty of times,” says Rick Pearson, one of the recent additions to our team: “Another company announces a merger, and the stock spikes.
“The trick is getting in way ahead of it so you enjoy the announcement pop!”
Imagine pulling down a 200% gain in one day… during the Panic of 2008. That’s exactly what happened to Volkswagen. “Developments moved fast in September 2008 for the carmaker… triggering a run on the stock from $60 to more than $215 per share in just days!”
At the time, Porsche was seeking full control of VW. “Porsche announced it had raised its holding from 35.2% to 42.6%. Adding in the options it had on a further 31.5% of shares, it now owned almost 75% of the company. VW shares shot up over 200% in a day.
“Porsche’s stock fell 14.5% on the same day, but it could be consoled by the billions it had made on those VW options.
“I had seen Porsche do the same thing back in 2007. In fact, most of Porsche’s profits from that fiscal year came from VW options.”
Mergers and acquisitions are one of the five “Newton Profit Triggers” that spark a fast — but lasting — change in a company’s share price. We told you about one of the others last Thursday — an earnings announcement that surprises the Street but is easy to spot in advance with an up-close understanding of the company’s competitive situation.
Rick has spent a decade identifying plays just like the VW example. And we’re privileged to offer you the chance to have him explain all five of the “Newton Profit Triggers”… and how they can triple your money in the space of a day. Your chance to be among the first to know comes this Thursday at 1:00 p.m. EDT.
It won’t cost you a thing to watch Rick’s exclusive briefing. To ensure access this Thursday, just take 60 seconds to sign up at this link.
The “line in the sand” for the S&P 500 has been swept away by a stiff desert wind.
Two weeks ago today, Jonas Elmerraji of our trading desk said in our virtual pages that 1,850 was a critical level. If it goes, look for a new wave of fear to enter the market.
On Thursday, 1,850 broke. Indeed, the S&P tumbled 50 points last week, a 2.65% loss…
“The most important takeaway from this chart,” he says, “is the fact that the risk-reward tradeoff is sweetening again. The bottom of our long-term trendline is just below 1,800 at the moment. We’ll look to be buyers on a bounce higher.
“One thing’s for sure: You can expect investor sentiment to be even more fearful of stocks by the time our bounce comes.”
And about that correction the media keep touting? It hasn’t happened yet.
“This is not a stock market correction,” says Greg Guenthner in today’s Rude Awakening. Not yet, at least. No, the action you’ve seen over the past couple of weeks is a minor pullback at best.
Even the Nasdaq, down 3% last week, has yet to touch its February lows.
“Now’s not the time to try to pick out comeback plays,” he warns the trading-minded. “I’m very skeptical of any market rally. Every move higher is a dead cat bounce until proven otherwise.”
Something to bear in mind as we write this morning: The S&P 500 has recovered 15 of the 50 points it shed last week…
Gold is likewise catching a bid this morning — up more than $12, to $1,330. Silver has recovered the $20 level.
The strongest performer in the precious metals complex is palladium — up 1%, to $810 an ounce.
“Palladium prices have recently jumped out of their one-year price channel,” says Matt Insley of Real Wealth Trader. “The market is pricing in longer-term shortages driven by the South Africa miners strike. And this may just be the start.”
That’s because palladium is mostly an industrial metal, Matt explains: “While only 10% of gold is used for industrial purposes, 50% of silver and 60% of platinum… over 90% of palladium is used for industrial purposes (mainly for the production of catalytic converters in cars.)
“In this kind of market, shortages matter. You can’t just grab a bunch of leftover palladium jewelry and bullion and melt it down — other than mine stockpiles, it doesn’t exist!”
Even with a run-up in recent days from $770 to $810, palladium has room to go higher before touching its 2011 high over $850.
A new catalyst for gold might be coming from India: “The stage appears to be set for India to reduce import duty on gold,” Mineweb reports.
India steadily ramped up the tariff on imported gold to 10% during 2013. It’s had the desired effect: New figures show a 40% drop in gold and silver imports in the previous 12 months. And that’s enough to help push down the country’s overall trade deficit 27%.
The former governor of the India’s central bank says if that trend holds, “There is no reason to control gold imports, particularly if (gold) prices are reasonable.”
Reducing the gold duty would also put a dent in India’s gold-smuggling boom: The number of arrests exploded in the last 12 months by 750%… and the value of gold seized by Indian customs has leaped 442%.
The “deep-sea” drone we described on Friday has been pressed into service to help find the wreckage of Malaysia Airlines Flight 370.
The “robotic submarine” you might have seen headlines about this morning? That’s what our military-tech expert Byron King tipped you off about 72 hours ago after a briefing at the Pentagon. Bluefin 21 is its name…
Bluefin 21 will create a 3-D map of the ocean floor…
The vessel will search a 15-square-mile area in the first 24 hours.
“Bluefin 21 is just one version of an entirely new concept of deep-sea intelligence gathering, specifically in the arena of anti-submarine warfare,” says Byron. “The U.S. Navy and its contractor community have developed the technical means to work in ultra-deep waters, following the oceans’ ‘deep sound channels.’ We’re looking at new submarine tracking capabilities that are many multiples better than what navies across the world used in the Cold War.”
Nor is Bluefin 21 the only technology making headlines that you read about here first…
“It’s now reality and it’s not science fiction. It’s actually real. You can look at it. It’s firing,” says Rear Adm. Matthew Klunder, chief of naval research.
It’s called a railgun… and sea trials are now being planned. Using electromagnetic energy, it can fire an inexpensive 23-pound projectile at a staggering seven times the speed of sound.
How inexpensive? $25,000. Compare that with a $1 million missile — the typical approach now.
“If the other side has, say, cheap drones or low-cost cruise missiles,” Byron explained here last June, “what’s the current military solution? Shoot super-expensive rounds at the cheap drone.”
The railgun flips the cost equation the other way around: “That… will give our adversaries a huge moment of pause to go: ‘Do I even want to go engage a naval ship?'” says Klunder. “You could throw anything at us, frankly, and the fact that we now can shoot a number of these rounds at a very affordable cost, it’s my opinion that they don’t win.”
We’re privileged to keep you ahead of the curve on developments like the railgun and Bluefin 21. But we’d be even more delighted if you could use that information to pad your portfolio. That’s what Byron’s Military-Tech Alert is all about. Access here.
“They gave me no notice, they can’t prove that I received any overpayment and they use intimidation tactics,” says Maryland resident Mary Grice, “threatening to report this to the credit bureaus.”
A few weeks ago, the feds intercepted Grice’s federal and state tax refunds. The reason didn’t come in the mail till days later.
The Washington Post explains — or tries to, anyway: “When Grice was 4, back in 1960, her father died, leaving her mother with five children to raise. Until the kids turned 18, Sadie Grice got survivor benefits from Social Security to help feed and clothe them.
“Now Social Security claims it overpaid someone in the Grice family — it’s not sure who — in 1977. After 37 years of silence, four years after Sadie Grice died, the government is coming after her daughter.”
Since 2011, the Treasury has collected $424 million in debts more than 10 years old — an effort that began with the passage of a one-sentence amendment to a farm bill “lifting the 10-year statute of limitations on debts owed to Uncle Sam.”
Grice is suing the Social Security Administration. “The craziest part of this whole thing,” says her lawyer Robert Vogel, “is the way the government seizes a child’s money to satisfy a debt that child never even knew about. They’ll say that somebody got paid for that child’s benefit, but the child had no control over the money and there’s no way to know if the parent ever used the money for the benefit of that kid.”
“Though you referred to the Fed’s ‘pathological’ fear of deflation,” a reader writes after our musings about the Federal Reserve’s 2% inflation target, “you failed to make clear the connection that deflation will make our national debts much harder to pay off. This being the exact opposite to inflation making them easier to pay off.
“This is in large part why the Fed’s policy is so dangerous. It is akin to trying to boost the campfire with gasoline.”
The 5: Amen. We turn again as we did Friday to our fearless leader Addison Wiggin’s Little Book of the Shrinking Dollar. “A government with massive debt will always like a little inflation to quietly erode the cost of that debt. No government wants the real burden of its debt to increase, just like the negative equity homeowner or the junkie who owes his dealer for the last fix.”
“Mr. Wiggin must be an academic, not a businessman,” another reader chimes in.
[Ummm… he runs a multimillion-dollar publishing business. But please, go on…]
“The shrinking cost of iPads,” our reader continues, “isn’t due to deflation, which is a monetary phenomenon. The example also lacks perspective. Where is the incentive to invest in a factory if its production brings diminishing returns to recoup that investment at the same time as new factories cost less and make competing impossible? Technological innovation is exceptional.”
The 5: Yeah, yeah, we get it: “Inflation” is a rise in money supply, and rising prices are the consequence and deflation is its opposite.
We’re not sure we follow you on your second point. What is it about “technological innovation” that’s “exceptional”? Are you implying computers are the only field of endeavor in human history that yielded ever-higher performance at ever-lower cost?
“After living in Alaska for 45 years, I would have to say I am not excited about becoming a Russian citizen,” writes a reader about the preposterous petition at the White House website we mentioned Friday.
“But at least under Mr. Putin’s administration we could get rid of EPA, BLM, Greenpeace and the Park Service, all steps in the right direction.”
“Now that Obama has kept moving the health care deadline,” reads a final inquiry, “how far can we move the tax filing date? Can we the people that pay him make our own rules?”
The 5: In a just world, yes. And if you ever locate that world, please let us know…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. No, you can’t push back the tax deadline… but you can seize upon an abundance of completely legal and above-board tax breaks buried within the tax code.
We want you to have access to 97 of the best in our special report Vanishing Point: How to Disappear From the IRS This Tax Season and Save a Boatload of Money in the Process. It’s free, and the best time to get your copy is now, while April 15 is fresh in your mind. Here’s where to go.
Last week, China warned of a slowing economy. China’s giant national construction project is slowing, and its trade with the rest of the world is slowing even faster.
“China’s top economic leader appeared to prepare the public for a new low in China’s growth,” reports The Wall Street Journal. An “unexpected” drop in exports leaves the Communist Party leadership facing a difficult trade-off between stimulus and reform.
For now, it looks like reform is a bigger priority. China has been a huge driver of global trade for the past decade. Now that its economic reforms are shifting focus to the domestic economy, trade patterns will be disrupted.
FedEx Corp. (FDX: NYSE) is one of many U.S.-listed stocks highly exposed to global trade. We’ve recommended avoiding FDX stock for over a year. Yet the stock has kept rallying and retains its blue chip reputation.
FDX reported disappointing earnings last month, but investors gave the company a pass due to the severe winter weather. Plus, investors feel reassured by management’s economic forecast: a gradually improving economy in 2014 relative to 2013, with growth rates accelerating in 2015.
That’s a rosy set of assumptions, especially considering China’s growing threat to global trade patterns. When FDX reports in June, it will probably withdraw its bullish economic forecast.
Meanwhile, at the company level, the story revolves around an aggressive debt-funded stock repurchase. Over the past nine months, FedEx has repurchased stock not with free cash flow, but with proceeds from borrowing: Since last May, long-term debt is up from $2.7 billion to $4.7 billion.
The $2 billion FedEx spent on buybacks occurred at an average price of $128 per share. Buying back stock at high prices, especially at this late stage of the economic cycle, will result in disappointing shareholder value creation.
Continue to avoid FedEx (FDX) stock.