Capitalogix Commentary 03/20/09

As the recession deepens, the Federal Reserve announced a plan to revive the struggling economy. It will pump more than an extra $1 trillion into the mortgage market and longer-term Treasury securities.  Short-term, equity markets did push higher.

The problem with desperate measures, though ... they can end up stoking fear, not confidence.   In this case, the plan to buy-up bonds caused the decade's steepest one-day fall in the Dollar against the Euro as investors worried that the Fed's decision to print new money would lead to inflation.  

One Man's Trash Is Another Man's Treasure:

In business, I'm constantly facing a build or buy decision.  Namely, is it cheaper to develop something that does what I want, or can I simply buy something that does it already? 

Well, that equation may soon produce a different result for many companies.  A key indicator is flashing.  Companies are starting to notice. What is it?

For the 4th quarter of 2008, Argus Research notes the "Q" ratio declined its lowest level since the 4th quarter of 1991.  This implies that it is cheaper to buy a company than to build a replacement.  To me this is an early indicator that merger and acquisition activity is about to increase.  So, expect to see more deals like IBM's proposed acquisition of Sun.

Sector Rotation: Will Financials Take the Lead?

Sector rotation theory posits that Financials are a leading indicator of the economy.  Historically they start to perform well six to twelve months before the general market.  Perhaps one of the reasons is that they tend to generate big fees from M&A activity.  And M&A activity starts to get interesting while certain assets are still cheap.  Consequently, I'm watching the Financials and the level of deal activity.

Last week I posted a chart highlighting the performance of the banking sector, noting that it hadn't been able to sustain a rally longer than a week for quite a while. Well, it looks like decision time.  Just a few weeks ago, Citi's stock price was under $1.  Saturday Night Live made a joke that it was the first major bank to make it onto McDonald's value menu.  Well, it has tripled since then. And the rally has taken prices in this sector to interesting levels.  The chart below shows that the rally has a series of heavy technical burdens to overcome.

However, making it past this price area would go a long way towards convincing me that an intermediate term rally was starting. 

One other potential negative, indicating a reversal back to the down-side (at least in the short-term), is that the Equity Put-to-Call ratio just hit its ten month low ... and that is often a reliable sell-signal.

Business Posts Moving the Markets that I Found Interesting This Week:

• Fed to Buy $1 Trillion in Securities to Aid Economy. (NYTimes)
• Geithner's New Plan to Revive U.S. Banks. (Bloomberg)
• The Fed's Downside to Desperate Measures. (WSJ)
• Looking to Learn From Prior Bear Markets. (Economist)
• More Posts Moving the Markets. (My List)

Lighter Ideas and Fun Links that I Found Interesting This Week

• Bush Book Deal Worth $7 Million. (TDB)
• Which of 14 Types of Twitter Personality are You? (Media Caffeine)
• Why money messes with your mind - New Scientist. (NewScientist)
• Old age begins at 27 - scientists claim after new research. (DailyMail UK)
• More Posts with Lighter Ideas and Fun Links. (My List)