What’s the Name of the Game Right Now?

by Mitchell Clark, B. Comm.

Merger and acquisition (M&A) activity is always good for investor sentiment. News of big acquisitions always makes Wall Street happy. The “buy side” of the Street gets happy when there are big buyouts, because they usually own a position in the stock and they just made a bunch of money without doing anything. The “sell side” of the Street is always happy when there are big buyouts, because they garner a substantial amount of new fees for themselves. All in all, big M&A deals give a real boost to Wall Street and investor sentiment.

In an equity market that desperately needs a break, I must say that I am wary of the current state of the stock market. Yet, I don’t like to fight the tape. It’s a mixed sentiment that I think a lot of investors share this moment.

I know institutional investors share this sentiment, but we can’t forget that they get paid to be fully invested and this is why the stock market keeps ticking higher. No money manager wants to be left behind when the most basic of benchmarks — the index — is willfully moving higher. I suppose this is how bubbles get created. A money manager can’t afford to be left out of the current action, because he or she will pay the price in terms of quarterly performance and management fees. I don’t think there’s a money manager out there who doesn’t wish they were really working for Warren Buffett.

I have to reiterate my previous view that, while stocks may be experiencing further upside now, if the numbers don’t come through come earnings season, the market could be in real trouble. The good news is that it’s probable that third-quarter earnings won’t be that bad, because corporations are already so lean. A lot of very big companies are still laying off workers and most have frozen new hires. So, with any uptick in revenues, the bottom line swells immediately.

There’s a lot of room at most companies for additional productive capacity to deal with a modest uptick in demand. This means that a company in this environment doesn’t have to make new investments in plants and equipment to deal with an increase in sales.

So, perhaps Wall Street speculators do have it right. You just don’t want to be the one without a chair when the music stops. I’m no bear, but strong risk management is the name of the game now.