Ford: Traction Missing in Economy
Brain Ford analyzes another week of mixed business news.
Time now for the Monday morning business news analysis with Certified Financial Planner Brian Ford, who joins us now from RVC Wealth Management. Good morning, Brian.
Ford: Hi, Wayne, how are you doing?
Just fine. How are you this morning?
Ford: I'm doing fine.
Well, another week of mixed news a little bad, a little good; no firm trends align. What is it, just the summer blahs?
Ford: Well, I think that has something to do with it. I mean you do sort of hit the nail on the head that was another low volume, which means not a lot of trading activity. A summer week in the markets, which means that, you're right, there was some good news in the area of corporate earnings announcements, also mergers, which we're going to talk about in a little bit. But, some bad news when you look at global growth trends and also some manufacturing activity, so, it was kind of a good news/bad news type of week. But, it wasn't the type of week that left you sort of scratching your head because we were only down less than one percent for the week. So it wasn't all that bad. I liken it, Wayne, here in the summer to running through sand--you know, as you're on the beach and you're trying to run through sand, it's not really easy. You do kind of get there, but it takes a lot of extra effort and sometimes you take two steps forward and one step back.
Ford: Yes, no traction. That's a good point.
Well, you mentioned some mergers and acquisitions.
Ford: Yes, this has really been on the top of everyone's list lately. I thought it would be good to delve into this mergers and acquisitions story further. We've heard a lot recently of companies making bids to buy out other companies. For example, you may have heard that an Australian company, BHP Billiton, is trying to buy Potash of Canada; Intel is buying McAfee for software security. Dell is trying to buy a company called 3PAR. We now heard just this morning that Hewlett Packard is trumping Dell's offer for 3 PAR for by several dollars a share. What's going on here now all of a sudden? Don't these companies know that we're in a weak economy? Well, yes and no. We've talked for years on this program how it's considered bullish when M and A activity goes up. Now, why is that? It's because it generally shows that companies are willing to put their own money to work. However, it's not always fool proof, Wayne, as a predictor of stock market growth. Back in mid-2007, right before the recession, companies went on an ill-timed, very large buying binge and we know what happened there. But, the present set of facts are relevant and deserving of further scrutiny for several reasons and here they are, Wayne.
Number one, the third quarter of this year--the third quarter of 2010, which we're in now, is on track to be the biggest quarter since the third quarter of 2008. That's a big sign of growing confidence out there among companies. The second thing is that these deals are mostly being done as all cash offers, simply because companies have so much cash lying aroung and the cash yields so little. Also, many of these companies' stocks are too cheap to use when buying other companies. These M and A deals are also important, Wayne, because it reveals that organic growth--what we'll call raw demand--is still soft. So, they know they have to go out and buy it somewhere else. And, lastly, these large expenditures of cash show that more confidence in overseas markets, especially emerging markets. I saw where over 60 percent of the mergers and acquisitions deals are being done outside North America, so if M and A is very important, it will continue to be a good story.
We have two and a half minutes. Within this first decade of the 21st century we've had a huge bubble in high tech and then another bubble in real estate, both of which burst spectacularly. Are we in danger of another bubble in the future?
Ford: Well, I don't know. It's certainly a hot conversation right now, but, there is talk about another investing bubble, as you say, and you're right. Normally, we think of tech stocks, oil, maybe, real estate. There's a lot of debate as to whether or not we're seeing a bubble in, of all places, bonds, particularly government bonds. This has come to the forefront recently as bond prices have shot up and their yields have inversely have gone down to levels almost where they were in the depths of the financial crisis. Also, officially, the Dow Jones Industrial Average stocks--those top 30 stocks--now yield more in dividend than does the benchmark ten-year U.S. Treasury Bond, which is well below three percent now. That's kind of an interesting fact. This is not just a U.S. phenomenon, as Germany and England, among others, have seen very strong demand for government bonds as investors seek to avoid deflation. This is a really big issue which has really good arguments on both sides because it seems to us that a lot of the individual investors may not understand really that it's quite possible to lose money in bonds, especially in bond mutual funds. We think it's worrisome because we know that well over 90 percent of all money that's currently going into mutual funds right now is in bonds; and I think there is a pervasive feel that if you just buy a bond you'll be safe. But it is quite possible to lose money in bonds and so we are concerned about this growing trend.
Brian, have you been Googled lately? It's hard to believe that Google has been around only six years. It's become so ubiquitous, so universal now in our daily lives.
Ford: It is amazing. I saw this last week, Wayne. It was the sixth anniversary of Google's IPO as a public company. You know they're both a noun and a verb now--just Google it. Clearly one of the biggest companies in the world. We are watching the stock, which debuted below 100 dollars and went over--what was it--700 dollars? In quite a run back below 500 now, but the company is clearly on the forefront of a lot of internet technology.