Written by William Kurtz
Amid the recent flurry of merger & acquisition activity, surely two of the most prosaic and least “techie” transactions must be Berkshire’s acquisition of Heinz and then, through Heinz, its acquisition of Kraft. Not “Baubles, Bangles, and Beads” – rather, “Ketchup, Pickles, and Cheese.” It is said that Mr. Buffett favors plain food and businesses that he can understand.
Still, these two transactions were the humdrum exceptions in a field of high-stakes “technical” joinders that have come into being at the very top of the Great Rally which began in March 2009. As has happened in the past, blockbuster “Baubles, Bangles, and Beads” acquisitions are one of the markers of a market top, just as is the competitive craze to build the tallest building in the world – and if any of them now on the drawing boards actually come to completion, they will likely be too late to capture the economic vitality of the peak. For example, the Empire State Building in New York was conceived during the halcyon days of the late 1920’s, but opened in the depths of the Depression.
We read of extreme bullish sentiment at the investor level and at the investment advisor level – so far out of kilter that the readings themselves have become a contrary indicator. There are hardly any Bears left; almost everyone is a Buyer, which means that, as a group, they have cornered the market. They are the market. Investor borrowings in order to buy shares are close to an all-time High. Mutual funds have very little cash on hand, being almost fully invested. The New York Times carries a story this morning about the most sincere form of corporate self-flattery: a company’s purchase of its own shares, on the theory that such purchase is a wise expenditure of the company’s cash. Worst of all, companies are even borrowing mon.ey for that purpose. When the tables turn, Managements will rue the day that they burned through excess cash in order to buy back stock, rather than paying down debt. But after all, these are ga-ga times, and everybody’s doing it. Aye, and that’s why it it’s so dangerous. There was a time when the President of Citicorp said that “If you come to the party, you have to get up and dance.” He ceased to be President of Citicorp not long thereafter, when the whole System nearly collapsed in 2008.
When the small investor elects to join the fun and dance the Whip, it might be well to remember that it is he who is at the end of the Whip; and as it turns faster and faster, it is he who loses his grip because of centrifugal force, and winds up cast off in the bushes. The little guy is always just along for the ride; but the show is under the control of the Deep Pockets.
I think that it’s more likely than not that the Dow Industrials and the S&P 500 have already peaked and turned down. The NASDAQs might make another run to a new High, but that’s not assured. I’m keeping my eye on the Dow Composite. If it were to drop to 6220, I think the jig would almost certainly be up for the Dow and for the S&P 500.
The aroma in the air is like that of autumn 2007. It stinks. You can hold your nose and pretend that it smells just fine; but that won’t make the stink go away.