Deals, deals, and more deals. Merger-and-acquisition activity has been on fire the last few years, with volume poised to set a record of around $4.6 trillion globally. That would eclipse the credit bubble peak of $4.3 trillion, according to Dealogic.
There’s just one problem. The easy money that fueled the M&A boom (or bubble, if you want to call a spade a spade) is starting to dry up.
Investors are selling bundles of previous takeover loans, driving their prices lower, as I explained last week. Plus, they’re getting less willing to fund new takeover offers amid worries companies have taken on too much debt and defaults are going to spiral higher.
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Example: Several banks had to yank a $5.5 billion debt sale earlier this week. The offering of higher-risk bonds and loans was supposed to fund the purchase of Symantec Corp.’s (SYMC) data storage business. The private equity firm Carlyle Group LP (CG) announced the $8 billion transaction in August in what is the largest proposed leveraged buyout this year.
But investors wouldn’t play ball and buy what Bank of America (BAC), Morgan Stanley (MS) and the other lenders were selling. That forced them to give up, and could leave the banks carrying the debt on their own books for much longer than anticipated.
You can see the impact the drying up of easy money is having on shares of CG. The stock has been falling virtually nonstop since the spring, losing more than 46% from its May peak.
Carlyle is far from alone, too. Look at a stock like KKR & Co. (KKR). You can see that the private equity firm is trading around its lowest levels since the spring of 2013. Other similar private equity, hedge fund, and alternative asset investment firms such as Fortress Investment Group (FIG) and Och-Ziff Capital Management Group (OZM) have also been in virtual freefall.
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Most important from a broader market perspective: These stocks remain far below their spring highs, and they badly underperformed the averages on the recent bounce. That is yet another major divergence … a clear sign liquidity is starting to dry up … and an indicator that the endless “M&A bid” under the market may soon be lost.
Bottom line: Stay relatively cautious, with a higher allocation to cash and less equity exposure overall. Also consider select hedges or investments that profit from downside in vulnerable stocks, like those I’m using in my Interest Rate Speculator service. I believe it’s extremely unlikely that the broad stock indices can power ahead considering the credit market deterioration I highlighted for you today.
Until next time,
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