Deal Making is About to Get White Hot

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Not only is the market rally on, but trigger-happy bankers and private equity wheeler-dealers are about to send it even higher.

The reason is simple: There are trillions of dollars of cash just sitting on the sidelines looking for a deal.

That means deal action-of all kinds-is about to get white hot.

In fact, the combination of positive capital flows and the pursuit of greater economies of scale has us at the beginnings of a multi-year deal-driven bull market.

Here's where we are, where we're going, and why deal making will propel stocks higher from here.

A Tidal Wave of Capital

First of all, it doesn't matter that we're approaching all-time highs, or, when we get there, if the market backtracks and we get a correction.

It would actually be healthy to have some price consolidation at lower levels– especially after such a steep run-up.

But, that may not happen because the capital waves just keep rolling in.

According to Thomson Reuters' Lipper service, stock mutual funds and ETFs raked in $34.2 billion in the first month of 2013. That January total is the best four-week stretch since 1996, says Lipper analyst Matthew Lemieux.

New York City-based Deloitte Center for Financial Services, in its 2013 Private Equity Fund Outlook, reports assets under management in 2012 rose to a record $3 trillion, consisting of $1 trillion in uncalled commitments (investible capital) and $2 trillion in the market value of portfolio companies.

But, it's not just money coming into the market and money idling at deal-hungry investment shops that's going to stimulate mergers, acquisitions, spin-offs, and public offerings.

Corporations are also sitting with trillions of dollars of cash on their balance sheets.

In a Money Morning article entitled "The Great Rotation Makes Stocks a Generational Buy" I point out that, "American nonfinancial corporations are said to be sitting on almost $2 trillion of cash and liquid instruments.

But not even the Federal Reserve, which collects such data, really knows.

According to the IRS, which tracks worldwide holdings of U.S. corporations, Fed data underestimates the true amount of corporate cash, which the IRS suggests is three times what the Fed reports.

And it's not just U.S. corporations which are sitting on huge piles of cash. Last November Canada's finance minister, Jim Flaherty, criticized Canadian companies for hoarding some $526 billion in cash and not putting it to work.

According to ISI Group, Japan's "corporate liquid assets" are $2.8 trillion.

Companies around the world are flush with cash, not just as a defensive reaction to economic uncertainty, but as the result of decade-long trends.

Technological advances, productivity gains, reduced inventories, better supply-chain management and just-in-time manufacturing and production schedules have all worked to boost corporate cash.

Dry Powder for an Explosive Move Higher

As economic uncertainty gives way, first to macro-event distress fatigue, then acceptance that we are in the midst of a New Normal, idle cash will initially slip into first gear and without a lot of warning or fanfare rev-up and propel global markets to greater and higher heights.

We're seeing a not-so-subtle shift in market sentiment already.

Last Wednesday U.S. GDP turned negative in the fourth quarter and the markets took it pretty much in stride. The plus-side of the downward turn in gross domestic product was that it came from a sharp contraction in government spending, not from consumer and corporate retrenchment.

On Friday, the U.S. headline unemployment figure ticked up from 7.8% unemployed to 7.9%. And again, just as the market digested the disappointing GDP number, investors chose to look beneath the headline figure and embraced positive underlying data points.

The Dow Jones Industrial Average finished up 150, just 154 points, or 1.09%, below its all-time high.

Loaded for good times, corporations are now staring down targets that are productive, profitable and provide accretive earnings to core operations and expand economies of scale. For corporations, there's no faster way to add earnings and grow operations than by acquiring assets that can instantly propel companies toward management's objectives.

And once that happens in any industry, there's an overwhelming likelihood, call it corporate necessity, that competitors will step up to meet growing challenges by growing themselves, and doing so quickly.

Deal making is going to create a lengthy chain of self-perpetuating deals whose cascading effect will drive equity prices and global markets higher.

It's already started.

The last three months of 2012 saw the highest three-month deal totals and highest deal spending in the past two years, with the year ending on a high note.

According to FactSet Research Systems, Inc., "U.S. M&A activity went up in December, increasing by 20.2% with 918 announcements compared to 764 in November, the second largest increase in 2012."

In its M&A Spotlight: 2012 Review, FactSet points out:

"Five of the most active months for strategic deals with public buyers came after June. Highlighting these deals is Softbank Corp buying a stake in Sprint Nextel Corp for $12.0 billion in cash, and IntercontinentalExchange, Inc.'s recently announced deal to acquire NYSE Euronext for $8.0 billion in cash and stock. Public companies going private via private equity buyers showed the most significant relative gains to close out 2012. In the 2nd half, there was more than a 50% increase in deal activity and almost twice as much spent on deals."

The table has now been set and companies, investment bankers and private equity deal dogs are on their way to the party. There are no industries that won't be looking at deals in 2013.

With the power of deals to lift equity markets, it's not a matter of when will we break above the old 2007 market highs, but how high they will go.

[Editor's Note: The dealmakers themselves stand to do even better. In one recent deal, for example, they outgained the market nearly 40 to 1. And now - for the first time - you have an opportunity to "get in" on the best of these upcoming deals. Take a look. This is the first time Shah's ever done this.]

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Jeff Pluim | February 4, 2013

    This is all true. But publicly traded companies are not the lion's share of the GDP. Privately held companies are sitting on a lot of cash right now. And don't expect them to be spending a whole lot of it until the interest rates rise. Private corporations have cash but not at the levels that publicly traded companies do. So when a private company wants to go buying up its competitors, it needs to borrow some of the money from the bank. Here's the problem. The banks cannot lend out money right now because they know that it is inevitable that the interest rates will go up, probably sooner than later. So here is the bank, paying out 1% to their depositing customers. Then the bank takes that money and lends it out at 4% to the businessman who is looking to grow his business. So the bank is making a tidy little profit of 3%. Then the interest rates go up. The bank's depositor is no longer happy getting 1% on his money so he insists on 4% or 5% or whatever the going rate is at the time. The businessman who borrowed his money at 4% is happy because he locked in the rate when it was low. So now the bank is in a position where it has lent out money at 4% and is paying the depositors 4% or 5%, and the bank is losing money on the interest rate squeeze.
    So it is no wonder that banks are not lending out money. They can see that rates must climb and they do not want to get caught in the above mentioned scenerio. I have been a business broker for over 26 years, and this is the tightest that I have ever seen the banks be with their lending in that time.

  2. Tommy Masters | February 4, 2013

    It is scary and shocking to see you come to this conclusion Shah!

    After spending 20 years in this market as an Investment Banker and Investment Advisor, I can tell you that this market is positioned to absolutely CRATER and will likely be back at the 2009 lows within 2 to 3 years.

    The highs are in for all indexes and the WILL NOT go higher from here.

    If you follow technicals, this conclusion couldn't be more clear.

    However, if you follow FUNDAMENTALS, it is even clearer.

    U.S. GDP just dropped to a negative for the first time since the recession of 2009, yet the market just hit new 5 year highs….think about it!

    Deflation is taking hold, just look at Gold, Silver, Copper, etc…

    The world's economic engine is stalling out…it's only a matter of time before the fake paper money inflows in to the markets creates a "flood", washing away the wealth of the ignorant and unprepared sheeple, rushing into overpriced markets just because the idiots on TV say it's all clear.

  3. Darryl Hanson | February 4, 2013

    So I read the article and now, I'm supposed to know what to buy? Or, am I to buy something more to get information?

    • Walter Baltzley | February 4, 2013

      Buy LOW, Sell HIGH. Right now ALL stock values are down, making it a great time to buy most stocks. The market will rebound, especially when the consolidation frenzy begins. Focus on companies whose stock is down, but who are likely to be fought over by larger players.

  4. Curtis Edmark | February 4, 2013

    I do not share Mr. Gilani's optimism. In every past Bear trend, there are at least 3 steep drops and recoveries before we ultimately emerge from it. In the current Bear trend that began in March of 2000, we have only had two such drops: March 2000-July 2002, and October 2007-March 2009. History says we are bound to face at least one more.

  5. Walter Baltzley | February 4, 2013

    Past behavior does NOT predict future activity. You have to examine underlying drivers and recognize differences. This situation is unlike any we have encountered before in American history…the playing field is shifting and the rules are changing. The markets simply do not operate as they have in the past.

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