United Tech/Honeywell Merger? Britain To Leave EU? - Bezek's Daily Briefing

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Includes: DEO, FXB, HON, SPY, USO, UTX
by: Ian Bezek

Summary

Markets continue higher. Bears need to make a stand soon or they'll be run over.

Is Britain really going to leave the EU?

United Technologies and Honeywell are talking merger.

The market rally continued on Monday. Led by a huge move higher in crude oil (NYSEARCA:USO), all the major indices closed roughly 1.5% higher on the day.

I previously discussed 1,950 as being the key level for the S&P 500 (NYSEARCA:SPY). A close above that level, and what's left of the bear case goes into hibernation, making a visit to 2,100 and perhaps new highs quite likely. Well, tap tap, the bulls are knocking at the door now:

^SPX Chart

^SPX data by YCharts

Bears have technical resistance here at 1,950 to hang their hat on. But there's little else to aid them if that gives way. The selloff was driven by old and stale news related mostly to China and oil.

Now that those have faded in urgency, earnings season is winding down, and the European banking spasm appears to be alleviating, what's left?

If you want a big sell-off, you need a new catalyst to motivate selling. With levels of bearishness at recent highs, people have already sold stocks. Now the natural tendency for the market is to go higher, as people that got scared at the lows now timidly start to buy back into the market.

There's a time and a place for everything, including a bear market. The bear is coming soon, but it isn't here just yet.

Is Britain Leaving The EU?

The British Pound (NYSEARCA:FXB) got whacked on Monday. After the sharp decline, it has hit its lowest level since 2009, getting just US$1.40 per pound.

At fault are concerns that Britain may decide to leave the European Union in an upcoming referendum. Prime Minister David Cameron several years ago offered to allow the people a choice to leave the union, presumably so as to increase his bargaining power when negotiating with the EU.

Now that the referendum is officially in play, markets are nervous. However, this nervousness seems misplaced. There appears to be little chance that the Outs will win the vote and cause a so-called Brexit.

Britain is so economically connected to the rest of Europe that it can't realistically isolate itself nearly as much as people may think. Germany and France, when combined, account for more British trade than even the United States.

As one commenter for Bloomberg Views put it:

The June 23 referendum should affirm Britain's position as a nominal EU member. Its likely positive outcome will be no more meaningful than a royal warrant of appointment on a Barbour jacket or a tin of Twinings tea.

We've already been through this once. In 2014, Scotland had a vote but chose not to upend the existing status quo.

While things may change and the situation should be watched, for now the presumption is on the referendum failing and nothing noteworthy occurring.

For investors, the opportunity may be to buy British stocks here while the temporary currency discount is in effect. Right at the top of my shopping list would be Diageo (NYSE:DEO).

United/Honeywell Mega-deal?

The Wall Street Journal reported Monday that:

United Technologies Corp. confirmed it had engaged in what it described as "preliminary, exploratory conversations" about a possible combination with Honeywell International Inc., but decided not to pursue such a transaction because of regulatory obstacles and other concerns.

The companies, which are each worth more than $70 billion and together employ more than 300,000 people, make everything from elevators and thermostats to jet engines and landing gear, overlapping significantly in some areas.

In a statement late Monday, United Technologies said combining two of the biggest players in the aerospace and commercial building-equipment businesses "would face insurmountable regulatory obstacles and strong customer opposition."

Despite the apparent denial of the deal, both of the stocks were on the move. Honeywell (NYSE:HON) went lower:

HON Price Chart

HON Price data by YCharts

Whereas United Technologies (NYSE:UTX) moved higher on the rumors:

UTX Price Chart

UTX Price data by YCharts

For those of us buying United Tech recently, it was a nice development.

Now the question is, will there be a deal?

Both firms derive roughly half their revenues from the aerospace industry making for huge potential synergies. However, with huge size comes huge antitrust concerns. Both companies have market caps in excess of $70 billion, this is no garden variety consolidation.

Honeywell's market cap has passed United's recently, despite United having a much larger revenue base. If Honeywell were to take control of the combined company, it would be a bit of a fish swallowing the whale outcome. Control of the combined company has been a point of dispute in the talks.

However, Honeywell has sent various proposals to United Tech over the past months. It's clear that there is deep and persistent interest in trying to make a deal happen, despite the numerous roadblocks to a potential merger.

For investors, it's a reminder of the good things that happen when you buy great companies at fair prices. Prior to Monday's pop, this was about the cheapest United had been on a valuation basis in years. Good things happen to cheap stocks with good businesses.

Disclosure: I am/we are long DEO, UTX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.