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The weekend papers were a-buzz with takeovers and rumours of takeovers.
The Sunday Telegraph points out that more than a fifth of the FTSE 100 has been involved in takeover rumours in the past month. Companies such as Hammerson, ICI and Hanson have all seen their share prices surge as tongues wag all over the Square Mile.
The takeover fever may still have some way to run. After all, the market is only just catching on to how inexpensive mining stocks are, for example. The massive surge in Rio Tinto’s share price last week just shows what can happen when the market starts to realise that almost any company can become prey in these days of cheap and easy money.
Against this fevered backdrop, the threats of rising interest rates and a slowing US economy can seem like distant and easily dismissed inconveniences. But we‘re far from being the only ones who are worried about the long-term future of the global financial system…
Regular readers of both MoneyWeek and Money Morning will know our bearish tendencies rather well. When property, stock and almost every other market is booming all around us, this can at times, seem a lonely furrow to plough.
So it’s nice when we’re reminded that we’re far from being the only ones who are worried about the foundations of the current boom.
In today’s Telegraph, Ambrose Evans-Pritchard discusses Steven Drobny’s book, ‘Inside the House of Money’, based on 13 conversations with hedge fund managers. Interestingly, a lot of these guys have a very MoneyWeek view on the current boom – namely that it’s been fuelled by overly cheap money, which comes down to central banks keeping interest rates too low for too long.
For example, Evans-Pritchard quotes hedge fund founder Christian Siva-Jothy as saying: “My gut feeling is there will be a lot of pain because we still have to pay for the 1990s, and that worries me.”
And Dr Sushil Wadhwani, an ex-member of the Bank of England Monetary Policy Committee, and one of the few people ever involved in central banking to believe that asset price inflation matters, says: “If you take your eye off the ball vis-à-vis asset price misalignments, then you are storing up trouble. What you’ve got now is huge asset market distortions and one of these days the chickens will come home to roost.”
As Evans-Pritchard says, the regulators are now fretting about the amount of money involved in hedge funds, and the fact that so much money is basically being staked on the same horses. In other words, just one, possibly fairly mild, economic upset, could result in vast swathes of people nursing huge losses.
But they’ve only themselves to blame. “Hedge funds have multiplied on a sea of credit, and who is ultimately responsible for that excess credit? Central banks, of course.”
Meanwhile, a headline in the Sunday Times business section reads “Will the credit bubble burst?” The piece discusses the huge amount of debt being taken on in all these takeovers – $4 for every $1 of equity, says Hugh Willis of hedge fund group, Blue Bay Asset Management.
One trader tells Louise Armitstead: “Debt markets are a slippery problem. If you say you’re worried, you look like a real doom-monger in the middle of all the breaking deals. But everybody’s thinking about a bubble.”
But the most interesting aspect is the fact that it’s now the hedge funds, not the corporate banks, who control the most debt. “The credit hedge funds have recently usurped banks as the primary holders of corporate debt, taking on debt the banks would probably seek to write off,” says Armitstead.
One chief executive complains that it’s now difficult to “have a grown-up conversation” with the company’s debtors if anything goes wrong, because “we haven’t a clue who owns” its debt, as banks now parcel up the loans and sell them on.
That’s all fine while nothing is going wrong. But just as the sub-prime market in the US went into meltdown because banks were so keen to sell more debt to parcel on, we can’t help but feel that a similar over-enthusiasm could well be behind the next downturn in the corporate credit markets.
And with no one really sure whose fingers are in which pies, the denouement could get very, very messy indeed.
Turning to the stock markets…
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London stocks ended the week with strong gains on Friday as M&A activity boosted the likes of Standard Chartered, Reuters and Rio Tinto. The blue-chip FTSE 100 index added 41 points to close at 6,565 – although it was off a session high of 6,577 – and most of the broader indices were also higher. For a full market report, see: London market close
On the Continent, the Paris CAC-40 ended the day 37 points higher, at 6,050, whilst the Frankfurt DAX-30 was also higher, ending the day 64 points firmer, at 7,479.
Across the Atlantic, US stocks closed higher on positive inflation data. The Dow Jones made triple-digit gains, adding 111 points to close at 13,326. The tech-heavy Nasdaq was up 28 points at 2,561. And the S&P 500 added 14 points to end the day at 1,505.
Friday’s upbeat US data also gave Japanese exporters such as Toyota and Nissan a boost. The Nikkei 225 index added 124 points to end the day at 17,677. Meanwhile, China Mobile led the Hang Seng 537 points higher to a close of 21,006.
Crude oil had risen to $62.67 this morning, and Brent spot was barely changed at $65.98.
Spot gold has risen to $672.50 from $670.60 in New York late on Friday and silver had fallen to $13.18.
Turning to currencies, the pound had fallen to 1.9834 against the dollar and was at 1.4649 against the euro this morning. And the dollar was at 0.7834 against the euro and had risen to 120.26 against the Japanese yen.
And in London this morning, publisher Informa agreed to buy analysis firm Datamonitor for £502m. The agreed price of 650p cash per share is 2.2% above Datamonitor’s Friday closing price of 636p. Informa’s stock had fallen 0.2% in early trading while Datamonitor’s had risen by as much as 1.9%.
And our two recommended articles for today…
Why the US will lose out through protectionism
– By bashing China with protectionist policies, the US has nothing to gain – and plenty to lose. To find out why Morgan Stanley economist Stephen Roach believes one major consequence could be an effective tax hike for America’s already beleaguered middle class – click here: Why the US has everything to lose from protectionism
Is the Euro bull running out of control?
– The ECB may be doing all it can to debase the Euro, but still the world wants to bid up the currency. And that could spell inflation disaster for the countries of the Eurozone, says Adrian Ash. For more on which countries will be hardest hit by a strong Euro, read: Is the Euro bull running out of control?