Monday, Merger Mania Continues

 |  Includes: FXY, IFNNY, INTC, LUV, SNY
by: Philip Davis

It’s another busy Monday for M&A activity.

Sanofi-Aventis (NYSE:SNY) announced a $18.5Bn CASH offer for Genzyme (GENZ) ($69/share), Intel (NASDAQ:INTC) buys Infineon's (OTCQX:IFNNY) wireless unit for $1.4Bn in CASH, and Dell (NASDAQ:DELL) and HP (NYSE:HPQ) are still in a bidding war over 3PAR (NYSE:PAR) (and HPQ thinks their own shares are so cheap they are buying back $10Bn worth of them). The biggest winner in this weekend’s acquisition game is - ME! I live in northern N.J. and, with the merger of Continental (NYSE:CAL) and United (UAUA) going through, Continental is forced to diffuse some of their concentration at Newark airport and that ends up giving Southwest (NYSE:LUV) 18 slots, bringing some much-needed additional competition to Newark, which has been pretty much dominated by Continental for years. LUV is a great buy at $11.13 and a fun way to play is the Jan $10/11 bull call spread at .60, selling the Jan $10 puts for .55, which is net .05 on the $1 spread with a 1,900% upside and your worst-case scenario is you own LUV at net $10.05 - what’s not to LUV?

Speaking of diffused concentration, the Glenn Beck rally was a bit of a disappointment with just 87,000 people showing up (Fox had a permit for 300,000 and keeps using that number as if that’s how many came while Beck himself has been claiming between 300,000 and 650,000 were there and Michele Backmann (R-Minn) claims it was the biggest rally ever held in Washington, with no fewer than 1M people in attendance). This has now backfired on Beck, Palin and the Tea Party as a "show of strength" becomes a show of apathy (to the people who can count, anyway) - it probably would have been smarter to hold the rally next weekend but Fox wanted to time the rally for the start of Jon Stewart’s vacation, although it didn’t stop him from commenting in absentia (where I hear Jon has a lovely bungalow). For a more "fair and balanced" view of the rally, see the very nice coverage from Reason TV.

During an interview on "Fox News Sunday," which was filmed after Saturday’s rally, Beck claimed that Obama "is a guy who understands the world through liberation theology, which is oppressor-and-victim - People aren’t recognizing his version of Christianity," Beck added. Beck’s attacks represent a continuing attempt to characterize Obama as a radical, an approach that has prompted anxiety among some Republicans, who worry that Beck’s rhetoric could backfire. The White House has all but ignored his accusations, but some Democrats have pointed to the Fox News host to portray Republicans as extreme and out of touch. Beck made the remarks in answer to a question about his previous accusation that Obama was a "racist" who has "a deep-seated hatred for white people." He contended that that statement "was not accurate" and that he had "miscast" Obama’s religious beliefs as racism.

Fox (NASDAQ:NWS) and the Republicans have been scoring big poll points by portraying Obama as a Muslim (not that there’s anything wrong with that) and the release of the PEW poll on the 18th caused the White House to finally go on the offensive, responding in a statement after the poll’s release, reiterating that Obama "is a committed Christian." Obama, asked on NBC about polls showing confusion over his religion, pointed to "a network of misinformation that in a new media era can get churned out there constantly."

So this is the shape of the political backdrop - one that will loom large for the next couple of months as we roll into the mid-term elections. Even after the November election, few expect a different dynamic. “We’re already in a gridlock situation, and nothing substantive is going to change,” says Bruce Bartlett, who was a Treasury economist in the first Bush administration. “Clearly, a weak economy in 2012 will be very good for whoever the Republican presidential candidate is. It’s hard to see how the Republicans lose by blocking stimulus.”

I discussed the Fed meeting in Wyoming in "Weekend Reading - What’s Next?" so I won’t go into that all again here, but let’s just say it sure wasn’t a rallying cry for the markets as our top economic dogs expect a very slow recovery - at best. Note from the chart below that the 10-year note rate (2.5%) is at the lowest level since the end of WWII so there’s really not much more the Fed will be able to do from a rate standpoint to stimulate the economy. Even during the Great Depression, rates were between 2.5 and 4%. As in WWII, it is in the government’s interest to drive down rates while they are borrowing money, isn’t it?

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Speaking of manipulating the markets - ProPublica did a great job digging into the CDO scam that was run by Wall Street Banksters who, faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, hit on a solution that preserved their quarterly earnings and huge bonuses: They created fake demand.

As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.

"All these banks for years were spawning trading partners," says a former executive from Financial Guaranty Insurance Company, a major insurer of the CDO market. "You don’t have a trading partner? Create one." Keeping the assembly line going had a wealth of short-term advantages for the banks. Fees rolled in. A typical CDO could net the bank that created it between $5 million and $10 million — about half of which usually ended up as employee bonuses. Indeed, Wall Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business.

To me, the most amazing thing about this is that it’s still NOT CLEAR whether or not this behavior is illegal. Not only COULD it happen again but it is still a viable strategy for banks to make money (if they can find another bunch of suckers, of course). The full implementation of FinReg is still years away (maybe decades, the way Congress is now gridlocked) and it’s not likely that investors will have their confidence restored any time soon while we still haven’t put the last scandal to bed.

Click to enlargeA Grant Thornton survey shows business leaders are increasingly pessimistic about the economy, expecting the recession will continue until 2011 at the earliest, and don’t expect to hire more workers any time soon. Paul Krugman says Bernanke’s message is one of denial as the Chairman claims: "Just around the corner, there’s a rainbow in the sky," while failing to cite any reasons to believe so. The NY Times cites that "Widespread Fear Freezes Housing Market" and there is not a lot of chance that fear will abate without signs of economic stability.

Without housing, we are not likely to get a natural return to private hiring and that puts the job creation ball back in the Government’s court and that brings us back to gridlock, which brings us back to how critical this election is going to be if we are ever going to finally change the course from the disastrous policies that have taken this country so far down the road to ruin. The number of foreclosures is climbing again but HAMP, the government’s foreclosure relief program, in many cases simply stretches out borrowers’ slow bleed of resources and is now benefiting borrowers less than the lenders who created the mortgage mess. I was dumbfounded when we had our meeting with Treasury officials and they defended this program as a success when so clearly it was a classic case of putting lipstick on a pig.

As expected, the BOJ added 10,000,000,000,000 Yen to an exitsting 20,000,000,000,000 Yen lending facility while the Prime Minister promises a stimulus program to be unveiled tomorrow. Unfortunately, $30Tn Yen is "only" about $355Bn and that is just not enough to pop the Yen bubble as our "3am trade" once again makes a mint as the Yen rises from 85.9 to the dollar on Sunday night (pre announcement) to 84.6 this morning - a huge one-day move in a currency! Still, we are getting some dollar strength this morning and that should hold the markets down as we put pressure on commodities and the dollar keeps hugging its own breakout along the 50 dma at 83.

Overall, Asia had a good morning with the Nikkei up 1.76% and the Shanghai matching at 1.61%. The Hang Seng was a bit behind at 0.68% and the Bombay Sensex was flat at 0.19%, floating along the critical 18,000 line at 18,032. Europe is up 0.89% in the UK, up 0.65% in Germany but down 0.47% in France as the CAC is failing our 3,500 mark. The DAX is just below their own critical 6,000 line and the FTSE is 50 points below 5,250 so we need to see a lot more pep out of the EU markets if we are going to be able to get back over our own watch levels.

It’s going to be a low-volume week so we can’t take it seriously. Things should start popping after the holiday weekend, when we should get some real upside action if the world continues not to actually end for another 8 days - is that too much to ask?