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 boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.