Petrodollars and the Urge to Merge
We think one of the reasons we were wrong (early?) on expecting a correction in the equity market is the huge interest in doing deals. According to Ritholtz Research & Analytics the total value of 2006 deals announced through November 17 "had reached a record $3.368 trillion. . . the surge is being driven by companies which, after years of big stock buybacks and dividend increases, still have large amounts of cash. The flood of money into private equity funds also needs to be put to work." An added factor is that of corporations and countries trying to secure sources of supply of raw materials and energy through the equity markets.
Another spin on this comes from Peter Thiel in the 11/27 issue of Barron's. His contention is "that volatility has been suppressed across all global markets as a result of the flow of petrodollars into the world economy. Basically, there was a $1 trillion dollar tax increase on oil, and while that's bad for consumers, its actually been very good for financial markets because the money has been reinvested in financial markets: gold, real estate, tech stocks, emerging markets and equities."
We think this increases the attractiveness of companies trading at cheap ratios of Enterprise Value to EBITDA. Prior to the announced merger, Phelps Dodge Corp was trading under 5x. This could result in value continuing to play better than growth in the equity market.
Strategy Update: The Dynamic Fx Plus Strategy's goal has been to add 2-4% each year over the Lehman Aggregate Bond Index (AGG). As can be seen here it has outperformed the index by nearly 4% year-to-date. So far so good. We have decided to slightly broaden the Strategy's security selection universe to include some new currency-related exchange-traded funds (ETFs), as well as various existing foreign closed-end bond funds. These will provide the Strategy with improved income and appreciation potential, as well as enhanced FX flexibility, as its name implies. Visit our website for more information on strategies investing.
Another spin on this comes from Peter Thiel in the 11/27 issue of Barron's. His contention is "that volatility has been suppressed across all global markets as a result of the flow of petrodollars into the world economy. Basically, there was a $1 trillion dollar tax increase on oil, and while that's bad for consumers, its actually been very good for financial markets because the money has been reinvested in financial markets: gold, real estate, tech stocks, emerging markets and equities."
We think this increases the attractiveness of companies trading at cheap ratios of Enterprise Value to EBITDA. Prior to the announced merger, Phelps Dodge Corp was trading under 5x. This could result in value continuing to play better than growth in the equity market.
Strategy Update: The Dynamic Fx Plus Strategy's goal has been to add 2-4% each year over the Lehman Aggregate Bond Index (AGG). As can be seen here it has outperformed the index by nearly 4% year-to-date. So far so good. We have decided to slightly broaden the Strategy's security selection universe to include some new currency-related exchange-traded funds (ETFs), as well as various existing foreign closed-end bond funds. These will provide the Strategy with improved income and appreciation potential, as well as enhanced FX flexibility, as its name implies. Visit our website for more information on strategies investing.
posted by WRA Strategy Group at 3:58 PM
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