by Jon Markman
Commentary: Greed returns to Wall Street, and it's about time
SEATTLE (MarketWatch) — Like the swallows returning to San Juan Capistrano signal the start of spring, the return of hostile takeovers and one-day IPO doubles heralds a return of the bull market to Wall Street.
Two years ago at this time, it was "Get me out of IBM at any price, stat!" Now Chinese dot-coms are jumping 150% before the coffee cools, and corporate boards are hoisting the Jolly Roger to prey on wounded rivals.
This sentiment swing is much clearer than any statistical review could be. Forget that stocks have walked up and down the unchanged line in the past week like prisoners on a chain gang. The fact is that the smell of greed is in the air, raising the curtain on a new year likely to brim with excess and more excess.
Latest evidence came out of the blue late Thursday with word that Community Health Systems Inc.(NYSE: CYH - News), had launched an unsolicited bid for Tenet Healthcare Corp. (NYSE: THC - News) at $6 a share, a 43% premium over that afternoon's close.
The transaction would run $7.3 billion, with $3.3 billion in equity and $4 billion in debt. The offer was originally made in a letter to the Tenet board on November 12, and rejected on December 6. The battle became public when Community fired off another letter to Tenet late this week.
Get your game on
This is exciting. When was the last time we had a hostile bid on the wire? It's like the mid-1980s all over again. Gordon Gekko is in the house! It just goes to show the urgency that companies are feeling to put their cash to work, and the compulsion to consolidate to save costs. The combined company would have around $22 billion in annual revenue and own or operate 176 hospitals in 30 states with 32,830 beds.
Just hearing the symbol THC evoked memories of a different time and place for those who have been covering the market or trading for a couple of decades. Feast your eyes on the accompanying chart, to recollect a moment in time when hospital stocks were the hot momentum names and THC was the king of kings.
Back in the graveyard of dot-coms that was the 2000-2002 bear market, the market needed heroes and THC was it. Until, well, there was this matter of a federal investigation. And suddenly the whole group tipped over like a badly placed bedpan.
I mention this to remind that the market suffers from fads when money is loose and strays from fundamentals. A sector can get hot for six months or two years, and when it is on fire every argument in the world is mustered to explain why it will never end. And then it ends, poof, in tears, and won't come back for years.
So as the coming bull cycle begins to cast its spell, remind yourself of that fact whenever you feel you are falling in love with emerging markets, or digital storage device makers, or virtualization software makers or high-energy food makers. You want to be a part of the fad, but you must be ready, mentally and physically, to grab your keys and walk.
In that context, here are some more bull market tips for those who are new at this.
Fads: They will burn a hole in the part of your brain where common sense lives. If you start to study valuation metrics that are based on anything but price, sales, or book value, check yourself into rehab.
Emerging markets: Love them when the dollar is falling. Love them while they are rising. Love them because that is where the greatest growth in the world is occurring. But soon as you hear the magic words "capital controls," take the next Tata out of town.
Twitter & Facebook: They will go public, and the public will go crazy. They will be seen as the next Google, Amazon.com, and Netflix, and puffed into the biggest hype bubble since, well, Google, Amazon.com and Netflix.
But please, read the S-1 prospectus. Try to figure out how they will actually earn money from their ubiquity — which they do not do at present. Google was profitable almost from day one. Amazon.com was focused on commerce from day one. Netflix, same. But advertising and commercial leverage have been shunned with Twitter and Facebook — two arch practitioners of hippie capitalism. I'm not saying they will flame out; I'm just saying that the current profitability mantra which goes, "We'll figure it out," should make you squeamish.
Believe big: Now for some guidance that purposely contradicts the prior three points. You see, cheap money and rising stock prices act like nitrogen-laced Red Bulls on the imagination of entrepreneurs.
Success breeds success, and over the next few years you will see products, services and companies you cannot even imagine today. So don't get too skeptical. Dream a little. Remember that bubbles are only bad when they pop. When they are expanding, they are money-making machines without parallel. Keep the antidote close at hand, but don't let fear of trouble down the road prevent you from enjoying the journey in the present.
Energy and materials, banks and tech: Early in the business cycle, as a new generation of MBAs, buyout artists and social programming princelings get the lay of the land, the great old-fashioned sectors of yore will carry the day.
Look to oil and gas producers, oilfield service providers, coal miners, steel makers and refiners, regional banks whose balance sheets are clean and ready for new loans. In the land of digerati, focus on chip equipment makers, device makers and network speed and security providers.
These companies are mostly still nursing wounds from the last decade of investment sadness, and their shares won't be cheap for long. Start here, and work your way up the value chain later. Schlumberger Ltd. (NYSE: SLB - News), Occidental Petroleum Corp. (NYSE: OXY - News), Tesoro Corp. (NYSE: TSO - News), ARM Holdings Plc (NYSE: ARMH - News), Apple Inc. (NYSE: AAPL - News), F5 Networks Inc. (NYSE: FFIV - News), Broadcom Corp. (NYSE: BRCM - News), Google Inc. (NYSE: GOOG - News). These stocks are like your black dress or blue tie. They are basics that go with everything.
Japan and Europe: Both are messed up in different ways, but they've been around a long time and will figure out how to rebound. If the Continent could make it out of the Dark Ages, and Japan could survive two atomic bombs, I am pretty sure they can survive the age of technopop and anime. Well, technopop anyway.
In summary, if the latest signs of an economic spring are right, it is time to prepare to be swept off your feet. Still, be sure the brakes are close at hand — just don't squeeze too tight.
Jon Markman is a money manager and investment adviser in Seattle. For more ideas like these, try a two-week trial to Markman's daily investment newsletter, Strategic Advantage, published in partnership with MarketWatch, or his daily trading newsletter, Trader's Advantage. His Twitter feed is @jdmarkman.
Jon Markman is a MarketWatch columnist. He runs a money-management and investment-advisory firm in Seattle.