The Year of the Takeover Deal (Follow-Up)

Posted On Sep 11, 2018 By Dave Gonigam

  • The next big merger deal isn’t so big after all
  • Biggest takeover deal of 2018 (ever?) could come tomorrow
  • Stocks meander, gold stagnates, crude jumps
  • Morning in America for small business (or is it twilight?)
  • What’s a zero among friends at the White House?
  • Dope smoking and security clearances… dope smoking and gun ownership… a reader challenges the Unified Trump Theory… and more!

Here comes a media mega-merger.

Over the weekend, the board at CBS forced out CEO Les Moonves, who couldn’t overcome the stigma of #MeToo accusations.

With Moonves gone, CNBC reports a deal could be in the works with Viacom — owner of the Paramount movie studio and a slew of cable networks including MTV and Nickelodeon. Moonves was the major obstacle to a merger.

It wouldn’t be the first time CBS and Viacom were under the same corporate umbrella; the two companies were one between 1999–2005. Even now, the two firms have the same controlling shareholder, a giant movie-theater owner called National Amusements.

And yet this “mega-merger” would amount to chump change in the scheme of 2018.

CBS’ market cap is about $20 billion, Viacom’s $12 billion. A $32 billion company is nothing to sneeze at, but it would be dwarfed by AT&T’s $85 billion acquisition of Time Warner. (It’s a done deal, by the way, although the Justice Department is still trying to undo it on antitrust grounds.)

Earlier this year, our Zach Scheidt said 2018 would be “the year of the takeover deal,” and by midyear there was no doubt he’d be right.

Total merger-and-acquisition activity reached $2.5 trillion during the first half of 2018, according to data from Thomson Reuters. At that pace, 2018 would top the current full-year record set in 2015.

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What’s more, the volume of mega-deals — $10 billion or more — reached $950 billion. That smashes all previous records.

Without a doubt, one of the major drivers of this “M&A” activity is the new U.S. tax law.

Between a cut in the corporate tax rate from 35% to 21%… and an incentive to “repatriate” corporate cash held overseas… companies are swimming in cash, and they’re looking to put it to work.

Yes, companies are raising their dividends and buying back shares. A few are even investing in new plant and equipment — actually investing in the future and creating new wealth. (Imagine that!)

But that $2.5 trillion in M&A is a huge piece of the puzzle as well. Companies are sitting on boatloads of cash they didn’t have before… and investors expect them to do something with it.

Which brings us to the biggest cash pile of all — held by the biggest public company of all, Apple.

Apple has shrunk its cash holdings this year — mostly by buying back shares — from a record $285 billion at the start of 2018 to $244 billion now.

As you might be aware, Apple’s annual dog-and-pony show to roll out new models of the iPhone is set for tomorrow. The buzz is all about a phone with a 6.5-inch screen, which would be Apple’s biggest to date.

But it’s possible Apple could also use the occasion to announce its biggest acquisition in years — something that would set several industries on their ear at once. And Zach Scheidt has uncovered a way to play the news in advance that could pay big if it happens… with low downside risk if it doesn’t.

With the event set for 1:00 p.m. EDT tomorrow, time is obviously of the essence. Follow this link to learn what Zach expects to go down, and how you can profit. There’s no long video to watch.

To the markets, where all the major U.S. stock indexes are creeping into positive territory on the day.

At last check the Dow is up a third of a percent, back within 50 points of 26,000. The S&P 500 is likewise up a third of a percent, while the Nasdaq is up about a half percent. Gold, meanwhile, languishes at $1,193.

After spending nearly 24 hours hugging the $67.50 price level, West Texas Intermediate crude zoomed upward at midmorning. At last check the price is only 13 cents away from $69.

Looking around for catalysts, we see nothing. The jump did coincide with the release of the latest storm track for Hurricane Florence, but we’re not aware of any big oil installations at risk that weren’t at risk already. So all we’re left with is what we’re always left with: Crude futures are one of the most manipulated markets in existence, next to gold futures.

Smallbusiness owners haven’t felt this good ever. Or at least not in the 45 years the National Federation of Independent Business has been taking the pulse of small business.

The NFIB’s monthly Optimism Index clocks in at 108.8 — eclipsing the previous high set in July 1983.

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The number started jumping shortly after the 2016 election. But the reasons for the jump have changed over time.

“At the beginning of this historic run, index gains were dominated by expectations: good time to expand, expected real sales, inventory satisfaction, expected credit conditions and expected business conditions,” says NFIB Chief Economist Bill Dunkelberg.

“Now the index is dominated by real business activity that makes GDP grow: job creation plans, job openings, strong capital spending plans, record inventory investment plans and earnings. Small business is clearly helping to drive that 4% growth in the domestic economy.”

To be sure, tax cuts and a slowdown in new regulations are making a difference. Not that dissimilar from when the index’s previous record was set, which as we say was in July 1983.

But while there are big similarities between now and Reagan’s first term, we’d be remiss not to note some critical differences, too.

In July 1983, the economy had emerged only eight months earlier from the vicious “double-dip” recession of 1980–82; it was early days for an economic expansion that continued until mid-1990. In contrast, the current expansion is nine years and two months old — the longest expansion on record except for the 10-year stretch covering March 1991–March 2001.

Also in July 1983, the Federal Reserve’s benchmark interest rate stood at 9.4%. Which sounds staggeringly high by today’s standards, but compared with a peak of 19% two years earlier, borrowing costs looked dirt-cheap! In contrast, the Fed is now nearly three years into a rate-raising cycle. And a fed funds rate close to 2% is historically low — but it’s way more than the near-zero rates of 2008–2015.

The tax cuts have undoubtedly bought some additional time for the post-Panic of 2008 recovery. But as we’ve pointed out before, the tax cuts weren’t matched by spending cuts, so it’s all phony sugar-high prosperity that’s destined to end sooner or later.

For now, however, the boom phase of the boom-bust cycle remains firmly in place…

But… the boom is not this strong…

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In reality, it’s only 10 years.

It was left to the chairman of the Council of Economic Advisers, Kevin Hassett, to step before the cameras yesterday and “walk back” the tweet.

Here’s the best he could muster: “I don’t know the whole chain of command,” he said, “but what is true is that it’s the highest in 10 years, and at some point, somebody probably conveyed it to him, adding a zero to that, and they shouldn’t have done that.”

Well, Hassett knows a thing or two about inflated numbers. He’s the guy who in late 1999 co-authored a book forecasting Dow 36,000 by 2004. As noted above, we’re still 10,000 shy of that in 2018.

Oh, hell yeah…

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As we noted briefly last week, Tesla CEO Elon Musk took a puff of weed during a podcast interview with livestreamed video.

Fox Business subsequently reported that — because cannabis remains illegal at the federal level — the Air Force was launching an investigation into whether it should yank the security clearance Musk holds as CEO of his other firm, SpaceX — which has many government contracts.

Not true, says the Air Force: “It’s inaccurate that there is an investigation,” a spokesperson tells the tech website The Verge. “We’ll need time to determine the facts and the appropriate process to handle the situation.”

So they’re doing an investigation to determine if there should be an investigation. Got it.

Snicker all you want — and we certainly are — but if Musk faces no consequences, what about people who aren’t rock-star CEOs? “Many individuals who engage in minor drug use may still lose their security clearance over even one usage, depending on the circumstances,” writes suburban D.C. lawyer John Berry.

“The ultimate result will likely highlight the distinction between high-level individuals and other clearance holders (the other 99%).”

Yep. Even for the bulk of the 5.1 million Americans who hold security clearances, reality is just as the late George Carlin said: “It’s a big club and you ain’t in it.”

After we pointed out last week that 1930s “Reefer Madness” followed closely on the heels of Prohibition’s repeal — that is, it gave G-Men something new to do — a reader writes…

“Ever wonder why ATF (Bureau of Alcohol, Tobacco, Firearms and Explosives) is a single agency? Under the Department of Treasury, no less?

“Note that the National Firearms Act — the first federal gun law other than limitation of mailing pistols through the U.S. Postal Service — was enacted in 1934, barely six months after Prohibition’s repeal. More work for idle still-smashers?”

The 5: Honestly, that hadn’t occurred to us till now. But surely you’re onto something.

(For the sake of accuracy, though, ATF’s jurisdiction moved from Treasury to Justice after the Sept. 11 attacks.)

As long as you brought up the confluence of cannabis and firearms, we’re compelled to address the present-day case of Fort Smith, Arkansas, resident Krissy Noble.

Last December, alone at home and 11 weeks pregnant, Ms. Noble used her husband’s .40-caliber pistol to shoot and kill an intruder. Prosecutors investigated and found the shooting was justified.

But earlier in 2017, Noble had pleaded guilty to a felony pot-possession charge. She got a five-year suspended sentence — the terms of which included no possession or use of firearms.

So now she’s charged with being a convicted felon in possession of a gun — facing up to 24 years in prison. “That’s my baby’s life,” she tells ABC News. “I won’t even know my child.”

The NRA issued a statement expressing its outrage, committing its legal defense fund to spare no expense on Noble’s behalf.

Just kidding: As we pointed out a year ago, the NRA appears to believe you forfeit your Second Amendment rights if you partake of the herb.

“Dave, your Unified Trump Theory, while interesting, has one major flaw,” a reader tells us.

“Why would Trump expect anybody to keep their end of the bargain?

“If there is such an agreement and then after Trump leaves office the Deep State reneges on the promise, what recourse will Trump have? The Deep State will have got what it wanted and then Trump gets screwed.

“I think the hatred against Donald Trump is so great that if they can’t force him out of office then they will still want to punish him even as a private citizen regardless of what he may have done for them while in office. Plus, it would also provide another very important benefit to the Deep State, sending a very powerful message that no one outside the establishment should even contemplate trying to repeat what Trump did.

“Yes, to believe in your theory, one has to assume that all agreements will be honored, everyone is telling the truth and the Deep State rats can be trusted. Sorry, Dave, I just don’t see that.”

The 5: Well, yes, the Deep State could easily go back on its end of the bargain.

But if Trump doesn’t follow orders, there will be no bargain to keep in the first place and Trump would face certain prosecution upon leaving office. Even a slim chance of avoiding that fate would be better than no chance.

Anyway, thank you for the input. We reiterate what we said when introducing the theory — we are merely engaging in a thought experiment. It might prove unfounded as events unfold over the next few weeks or months.

But Trump sure appears to be snapping to the Deep State’s tune with its biggest geopolitical priority of the moment — ramping up U.S. involvement in the Syrian civil war, thus bringing U.S. forces to the edge of a shooting war with both Iran and Russia.

We see in his latest syndicated column from Washington, Pat Buchanan picks up where we left off on Friday: “Many in this Russophobic city would welcome a confrontation with Putin’s Russia, even more a U.S. war on Iran. But that is the opposite of what candidate Trump promised.

“It would represent a triumph of the never-Trumpers and President Trump’s relinquishing of his foreign policy to the interventionists and neoconservatives.”

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. What if the biggest news from Apple’s big announcement tomorrow isn’t a new lineup of iPhones?

What if instead it’s a takeover deal for a company that dominates a service where Apple’s always come up short?

“That unique service — backed into Apple’s signature gadgets — would be the crown jewel of the tech behemoth’s empire,” says our Zach Scheidt.

Even if the deal doesn’t go through tomorrow, Zach has identified a big-upside, limited-downside way to play it. Check it out right here.


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