‘Smart Money’ Unloads, Sits on Cash, Waits for Stocks to Swoon

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Mergers and Acquisitions activity in the US jumped 60% this year over the same period last year, according to a Goldman Sachs report. But LBOs?

After years of a relentless run-up in stock prices, corporations are busy gobbling up overvalued companies with their own overvalued shares of which they can print an unlimited amount, and with debt that is nearly free after inflation, and/or with the cash on their balance sheets rather than investing it in plant, equipment, and personnel.

The higher the price, the better. Bidding up each other’s stocks collectively has been one of the powerful drivers behind the soaring stock market, which has encouraged even more acquisitions, and everyone on Wall Street knows this, so they push M&A activity relentlessly. And then there are the big fat fees extracted from every deal.

Companies have other reasons. Acquisitions add to their revenues when organic revenue growth has stalled or turned negative. They’re a way of getting rid of a pesky competitor and clear the way for an oligopoly that has more pricing and lobbying power. And best of all, acquisition accounting allows acquirers to lump all sorts of expenses paid for with real dollars and real shares, both of which come out of the stockholders’ pocket, into a “non-cash” acquisition-related charge that analysts and investors have been well-trained over the years to ignore. Expense problem solved.

And so corporate M&A activity has soared this year. But according to a Goldman Sachs report cited by the Wall Street Journal, the number of LBOs has collapsed.

A typical LBO involves one or more private equity firms, in association perhaps with some lenders, who take a publically traded company private. In the process, they leverage up the acquired company with a mountain of debt. For instant gratification, PE firms then often draw cash out of the acquired company via a special dividend.

But not this year.

PE firms are awash in cash: $465 billion “recently,” up nearly 20% from the same period last year, according to the report. PE firms are the ultimate smart money; instead of buying companies and doing new LBOs, they’ve been dumping their prior LBOs, either by selling them to the public as IPOs or by selling them to large corporations that can print an unlimited amount of their overvalued shares to buy an overvalued company from a smart PE firm…. You get the idea who is going to pay for this.

This year, public-to-private LBO volume plunged to $3 billion, the lowest level since crisis year 2009, when deal volume dropped to zero.

Last year, there were still $80 billion in public-to-private LBOs, including four deals of over $5 billion each:  H.J. Heinz, Dell, BMC Software, and Neiman Marcus. Between 2004 and 2013, the average was $75 billion in these deals per year. The record? LBO bubble year 2007, just before the house of cards came crashing down: $275 billion in deals.

This included the most gigantic LBO of them all, the buyout of TXU, the largest electric utility in Texas, which was acquired in a $47 billion masterpiece of Wall-Street engineering by KKR, TPG Capital, and Goldman Sachs. The smart money piled $40 billion in debt on the utility. Now, Energy Future Holdings, as it has been renamed, is trying to sort out its future in bankruptcy.

While PE firms are ferretting out opportunities overseas, there’s no appetite for public-to-private LBOs in the US this year – despite the near record amounts of cash PE firms are wallowing in. But there’s a reason.

Unlike corporations that can just print more of their overvalued shares to buy already overvalued companies at a big premium, PE firms are turned off by the current valuations. Their business model gets very tough if they overpay by ridiculous proportions for their acquisitions. And so the smart money is more interested in selling its current holdings into this wondrous stock market, rather than buying at these levels.

And when will PE firms, the ultimate smart money, become buyers again? Goldman gives it a good guess: they will likely wait until after the stock market has come down from its lofty heights. And this could be by a lot, because that’s what it would take to make the equation work. Until then, the ultimate smart money will just keep its powder dry.

These ebullient markets are in no mood to listen to the Fed’s rate-hike cacophony, the San Francisco Fed found. And it frets that the disconnect could cause financial instability. Read….. To Avert Sudden Market Collapse, the Fed Tries to Spook Utterly Unspookable Markets

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  3 comments for “‘Smart Money’ Unloads, Sits on Cash, Waits for Stocks to Swoon

  1. Vespa P200E
    Sep 10, 2014 at 9:59 am

    Dearth of PE LBO activities shows the end is nigh… PE firm’s can borrow at ultra low interest thanks to the banks flushed with QE giveaway money looking for decent yield let alone their huge cash warchest.

    In the mean time all small investors are bombarded by bankster influenced liberal media exhorting that the indices hitting all time highs daily.

    Yeah this is not gonna end well…

  2. Vespa P200E
    Sep 10, 2014 at 10:04 am

    Wold – not to derail your astute observations but interesting stories lately about the big boys buying “protection” puts and gold even from Soros…

    Professional Investors Are Preparing For A Stock Market Crash
    http://etfdailynews.com/2014/09/10/professional-investors-are-preparing-for-a-stock-market-crash/

  3. Gil Obrero
    Sep 11, 2014 at 12:19 am

    Its a dangerous time . Anyone invested is about to lose a lot of paper profits and the ones who lose are the biggest fools of all
    The public.
    then the money managers, they are basically incompetent and are salary men.
    then the corporate executives are going to get relieved of everything they thought they had. They cant dump hundreds of billions of stock they got into into a falling market without driving to down ever more.

    The biggest and smartest speculators will make a killing.

    It started already, I figured the bull run ended first week of April, that’s when I noticed some unusual behavior.

    It took a few more weeks to be sure but by early June a bounce had topped out, and by that I do not mean the market quoted index, that can still reach new highs even as the bears are at the back of the room maneuvering.

    But this will not be a bear market driven by bears either, they will be in and out taking profits where they can.

    No this will be a pure speculators dream.
    I think it needs another 2 weeks or so to be sure, thee are some interesting things happening that will give strong indicators where this going in the next couple of weeks and i figure end October to early November to be sure.

    Keep your powder dry . There is a chance to beat even the speculators but you need nerve and patience.

    Sell everything you have right away. Don’t lose a minute because the first out are the winners here. and i don’t mean today, I mean late October or early November when you see and only when you see the market really coming off the boil.
    No need to panic either.. In fact many things could go wrong and the market indeed may turn around and start going ever higher still even to 2500.

    political risks wars. all these things are bullish, both for stocks and commodities.

    But if you see that tun in November get out of the market and hibernate until January with your cash under the mattress.

    Then start selling short, and keep your nerve.
    When you see a bounce sell short again. there will be many chances, and don’t go all at once.

    Feed your cash out slowly. But never buy or cover.
    Speculators will be looking to relieve you of it if lose your nerve, they are smart and know many will panic.

    Once you have everything in the market short, go away and forget about it.
    This is going to be a long haul.
    When the market bottoms it will be far away from where it is now, and the only thing that could upset everything then is if a war started in earnest or inflation started to go through the roof. Then cash out.

    Play it long.
    Don’t panic, and hold your position.
    Maybe one year or two years later will be buying stock on cents to the dollar as the utter carnage starts to clear.

    You will know when its time to cover and get out when you offer to buy and to cover your short and the prices rise.
    Then pay whatever is asked. But you will be rich man then.

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