TME Weekend: 2024 will see a merger & buyback bonanza
What did I miss...?
Premium subscribers could over the weekend read the following stories:
1. How MSFT is emerging as a real AI winner and why there is still upside in the stock.
2. Positioning is now seriously long and that there are warning signs for bulls.
3. How Europe is trading at a record discount.
4. Why things are looking much better for the healthcare sector for 2024 and why the sector is a buy.
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M&A potential
M&A activity has collapsed. Prospect of lower rates may unlock corporate market activity.
Source: Barclays
Mergers making a comeback
Morgan Stanley's leading indicators for M&A activity shows the majority of indicators flashing green. HY issuance is up 89% y/y, liquidity is improving and corporate cash levels are higher. Deal announcements already inflected up +35% y/y; expect announcements to continue accelerating and completions to follow. Two years of extraordinarily weak M&A activity should drive up activity levels off a low base as CEO confidence builds. (Morgan Stanley)
Believe it or not, buybacks are in a slump
Earnings have rebounded strongly in 2023 but buybacks have failed to pick up from their 2022 slump. Positive.
Source: Deutsche Bank
Buybacks at the bottom
The ratio of buybacks to earnings is at the bottom of the post-GFC range.
Source: Deutsche Bank
Grossed up
Gross exposure for US fundamental long/short hedge funds are at 93-96%tile on a 3-5 year look-back.
Source: GS Prime
The most bullish since 2018
Consensus Inc conducts weekly surveys of futures market newsletters/brokerage reports and aggregates the percentage that is bullish. At this point their stock index series is the most bullish since 2018.
Source: Consensus Inc
Cuts don’t seem to necessarily juice the economy up
"We catalogued the start of the last 11 rate cut cycles going back through the 1970s, and showed the resulting changes in US GDP. Notably, while most of these instances occurred during or just before recessions, the largest average slowdowns in GDP occurred 4-6 Qs out, before seeing reacceleration. Also worth flagging, GDP was lower 2 Qs out in nearly all cases, with one exception being a cut cycle that began at -8% GDP growth. The point is, cuts don’t seem to necessarily juice the economy up, especially if it is in the process of slowing down." (Jefferies)
Cuts do juice stocks up
Cuts do juice stocks up. At least in the long run. We also used the same dates to track SPX performance going out over the next 2Y. We found that while cuts can help when there is a recession, getting cuts without one has sent returns nearly parabolic. 12mo returns average 16%, while 24mo returns average whopping 42%. That said, whether there is a recession or not, returns tend to be a little squishy over the first 3mo after the initial cut, with SPX performance negative on average in both scenarios. As a result, the longer the Fed waits to cut (if they are going to), the greater the chance of a slump later this year.
Source: Jefferies
Bumpy inflation
Morgan Stanley: "We still see a bumpy path ahead that supports a June start to the cutting cycle".
Source: Morgan Stanley
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