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M&A May Offer Excitement, but Leadership and Consumption Yield Growth

The recent malaise in the US stock market continues to reflect the same pattern of uncertainty discussed in the August 13, 2010 issue of Signature Update.   So much so that it’s becoming increasingly difficult to ascertain if the difficulties in the housing and employment markets are cause or effect for the equity market’s fluctuations in recent weeks.  What is relatively certain is that the markets are looking for leadership, of which there appears to be little on the horizon.

Though the markets are trading well off their late-April/early-May high’s of over 11,000 on the DOW, the markets are currently trading in the same range as late May and have a good chance of once again besting the “sell in May and go away” protagonists who regularly come to the surface in early summer.

It’s true that we can continue to argue that PE ratios make many US stocks look cheap and that there are numerous indicators suggesting we’re dealing with an undervalued market.  There are also credible concerns being raised by knowledgeable market observers and there’s no discounting the impact  9.5%+ unemployment is having at the household consumption level. 

On the brighter side, recent M&A (Mergers and Acquisitions) activity has provided excitement; not just because of the upside potential available to shareholders of targeted corporations, but because it signals that some of those with the greatest resources to invest see that there are some real bargains to be had in the current market.   Among those deals sparking the most interest have been the Dell-3Par competitive bid against rival Hewlett Packard, the BHP-Potash hostile takeover bid and the Stryker-Gaymar acquisition announcement; each one offering excitement to an otherwise lackluster market.  In the end, it’s going to take more than M&A activity to give legs to the current market; investors are looking for leadership and sustainable, increased consumer demand – both of which would appear to be in short supply based on current indicators and in light of uncertain economic conditions.  But just how uncertain are they?

Clearly the trajectory of the mid-term 2010 elections has put into question what the fiscal and regulatory environment may look like in 2011-2012.  Few but the most ardent supporters of President Obama are prepared to suggest he’ll succeed in a bid for a second term, but the markets have already discounted for potential, near-term outcomes – higher taxes, higher spending and more regulation courtesy of an increasingly larger federal government.  As the summer winds down and the direction of early-November election outcomes become less vague, the markets appear poised to reward patient investors who stayed the course and resisted the urge to take on a more defensive portfolio.

Disclosure: no positions