Four years ago, bankers, politicians, and traders were patting themselves on the back after Petroleo Brasiliero (Petrobras) raised a stunning $70 billion in the world's largest share sale, as Bloomberg reported at the time, investors bet on its plans to double output within a decade by tapping offshore fields. Things haven't worked out so well...
This may not quite be the blow-off top in the merger bubble as companies rush to frontrun the ECB and buy whatever still isn't nailed, but it is getting close. Because while earlier today Baker Hughes announced it would accept the Halliburton offer to buy it unchallenged in a $35 billion transaction leading many to wonder just how much lower the price of oil is still set to drop, moments ago the Allergan "White Knight" swooped from up on high, and as had also been leaked in recent weeks, Actavis agreed to buy the botox- maker which Ackman and Valeant had been so eagerly chasing for months in order to let the roll-up pharma pad its non-GAAP books with another 2-3 years of pro forma "synergies" add backs. This means that between Halliburton and Actavis, today we have had the first $100 billion "Merger Monday" in over a decade.
As its recent 10-K confirmed, AAPL's domestic cash - the amount of cash available for such corporate transactions as dividends and buybacks - had dropped to just $18.1 billion (and that is including the several billion in commercial paper issued in fiscal Q4), the lowest domestic cash hoard since March 2010, a time when AAPL's offshore cash was a tiny $24 billion compared to the near record $137 billion last quarter! So knowing full well that a buyback a day keep the Icahnator away, AAPL, urgently looking to refill its domestic cash since its offshore cash remains untouchable (absent being taxed on its repatriation), did the only thing it could do: prepare to issue more bonds, which is what we forecast would happen a few weeks ago, and what the WSJ overnight confirmed is already in progress.
When all else fails, and there is no growth, what you gonna call? Buybackbusters!
Because after doing the math, we find that the biggest stock market surge in 2014 was over what boils down to be a central bank injection of... $5 billion per month?
The Magic Number Is Revealed: It Costs Central Banks $200 Billion Per Quarter To Avoid A Market CrashSubmitted by Tyler Durden on 10/21/2014 11:58 -0500
"For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off."
One would think that after last week's market rout, the worst in years, that Goldman clients would have just one question: why just a month after you, chief Goldman strategist David Kostin said to "Buy Stocks Because Hedge Funds Suck; Also Chase Momentum And Beta", are stocks crashing? No really: this is literally what Kostin said in the first days of September: "investors should buy stocks which should benefit from a combination of beta, momentum, and popularity as funds attempt to remedy their weak YTD performance heading into late 2014." Turns out frontrunning the world's most overpaid money losers wasn't such a great strategy after all. In any event, that is not what Goldman's clients are asking. Instead as David Kostin informs us in his weekly letter to Jim Hanson's beloved creations, "every client inquiry focused on the same four topics: global growth, FX, oil, and small-caps."
Investors worldwide poured a net $15.8 billion into bond funds in the week ended Oct. 8. As Reuters reports, this is the biggest inflows in dollar terms since records began in 2001, according to EPFR Global. Money market funds also saw the biggest inflow since October 2013 as it appears the real great rotation is from stocks (biggest outflows in 9 weeks) into 'safe' assets. The up-in-quality, and up-in-capital-structure trade is alive and well, as BofA notes, investment grade inflows exploded as high-yield spreads widened further - now at one-year wides (despite small inflows). "Money is flowing out of PIMCO," warned one analyst but as BofA notes, PIMCO flows are reported monthly and so it is unclear as to the extent these flows are "overstated."
Just a month ago, Goldman Sachs' head progonsticator David Kostin went full bulltard, telling clients to buy high-beta, high-momentum stocks because (paraphrasing) "hedge funds suck" and will need to play catch-up. Today, his tune has changed. The "dash-for-trash" meme has outperformed dramatically in the last few years as Fed experimentation breathed life into the zombie-est weak-balance-sheet companies and traders rode that artificial wave. However,as Kostin notes, tightening financial conditions have the greatest impact on firms with high leverage and weak balance sheets; and thus, with the Fed more biased towards tightening than loosening (and the market discounting that), the "dash-for-trash" is over (as we noted in July).
It's Official: Hewlett-Packard To Split In Two, Fire Another 5,000; Goldman Notches Second Spin-Off Success After PayPalSubmitted by Tyler Durden on 10/06/2014 05:41 -0500
While the WSJ already broke the news yesterday that Hewlett Packard would split in two companies, and as such today's "shocking" announcement will hardly have the impact of the just as "surprising" split of PayPal which came on the last day of September, what is probably most notable - in addition to the news that HPQ will fire another 5,000 workers, bringing the total to 55,000 - is that just as in the case of PayPal, so for Hewlett-Packard, the financial advisor, i.e., the company which pitched the spin off to executives, was none other than Goldman. One wonders where else Goldman is advising on "spin offs" to take advantage of the bubbly stock market valuations. As a reminder, HPQ is only doing this deal and accessing the public markets now because several years ago it tried to do exactly the same thing in a private transaction with a strategic or financial buyer, and found no bids. Luckily, now we have central bank froth and pervasive risk euphoria to help management bail out at the highest possible stock price.
Market weakness, as BofAML reports, has taken a toll on mutual fund and ETF flows, with stocks (-$9.56bn), HY bonds (-$1.56bn) and levered loans (-$1.17bn) all reporting significant outflows last week (ending on October 1st). There is a clear "up in quality" and "up in capital structure" rotation among investors as investment grade bonds saw huge inflows. Notably, most PIMCO funds, including the Total Return Funds, do not report flows weekly, and hence the bulk of this outflow was not reflected in the last week’s data. In a statement PIMCO said that outflows from the Total Return Fund totaled $23.5bn in September, so we will have to see just where that outflow hit.
The wobble in world markets continues, with stock indices across all time zones down steeply in recent sessions. Investors are not only realigning their exposure in anticipation of tighter liquidity conditions as the US Federal Reserve finally brings its asset purchases to a close later this month (see More Fools Than Money?). After today’s European Central Bank (ECB) meeting they are also looking nervously at the magnitude of the task facing eurozone policymakers. And they appear to be coming to the conclusion that generating a rebound in growth may be too tough a job for Europe’s leaders to accomplish in the near term.
It appears the post-PIMCO-effect is not wearing off. Having had a weekend to soak up the reality of what outflows will mean for Gross' old shop, credit markets are once again flashing bright red this morning as managers reach for protection ahead of expected redepemtions which would force selling into an illiquid market. High-yield spreads are 25bps wider at their highest since early Oct 2013. Equity futures are legging lower with the weakness...
Just 2 months ago, the illustrious muppet catchers at Goldman Sachs stated that both stocks were 30-45% overvalued but lifted its year-end target in what we subjectively described as 'moronic drivel'. Then, 2 short weeks after that 'upgrade', the same thought-provoking sell-side strategist downgraded stocks on the basis that a 'sell-off in bonds could lead to short-term weakness in stocks'. Now, with the S&P 500 closing at new record highs on the worst employment data of the year, Goldman is at it again - upgrading equities to overweight for the next 3 months, rolling index targets forward, and piling investors into high-yield credit. Welcome to muppetville...
"two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes." - Albert Edwards