Investors start the week upbeat following a long weekend as the broad market indexes post a 0.7% gain.The prompt for the move higher on Tuesday was credited to Merger and Acquisition activity. The Heinz deal with Berkshire Hathaway got everyone in the mood to believe the next wave of momentum for the broad market is companies buying other companies to use the cash on their balance sheets to expand revenue and growth. The general belief is that companies will benefit from this activity, but in reality not many turn out as well as announced. Thus… the big question, is this the beginning of an M&A wave on Wall Street? The answer to that question may also provide the answer to the uptrend continuing or not.
To take this thought another step further who stands to benefit from an increase in this type of activity? The obvious answer is the company being acquired. The challenge would be knowing in advance who those companies will be, but that becomes insider information. There was a headline late on Tuesday night stating… “FBI launches Heinz probe”. They are looking into suspicious options trading activity in the stock prior to the announcement. Oops, someone thought they could use the inside news to make money. That is not the kind of information you want to make money from this type activity. However, what about the companies doing all the work to put the mergers together like Goldman Sachs? They stand to grow profits from this activity and they are the companies to research or own looking forward relative to this activity. We may not make as much money here in the company being acquired, but it is better than spending our days guessing who is next.
iShares DJ Broker-Dealers ETF (IAI) is one way to capture all of the firms in this category versus attempting to pick which of them would benefit the most from a pick up in merger and acquisition activity. The sector has already gained from the run higher in the financial and banking stocks over the last three months. a boost as the one discussed above would only further extend the move to the upside.
On a different path of concerns the issue of sequestration is still looming with a March 1st deadline in Congress. Of course they are on break and some believe it is likely the outcome will be mandatory spending cuts at this point. Do investors care? The activity in the market would say no, but we all know in reality they do, and they will react to such an event. Once again the art of procrastination is at work in Washington. Some believe they will meet and kick the can down the road again. Either way the issue of settling the problem still looms, March 1st or October 1st doesn’t matter, the cuts will impact the economic outlook, and in turn challenge investors relative to their conviction on owning stocks. Just another area of concern that will have to be watched moving forward.
The outlook today is for more of the same… a drift to the upside. Watch the healthcare providers as Humana fell more than 6% on Tuesday. The impact of the new healthcare bill coming into effect isn’t helping them in Florida. The outlook in the sector is for more volatility. IHF, ishares Healthcare Providers is worth our attention on the downside short term. After moving lower by more than 2% it did manage to move back to even on the day. Watch and see if this presents any opportunities going forward.
Keep your focus and manage your stops.