This commentary originally appeared at 12:25 p.m. EST on Feb. 19 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
Jim "El Capitan" Cramer makes a compassionate and a seemingly compelling plea for stocks in "No Desire to Argue With Billionaires."
In his most recent post Jim explains the natural instinct to fight the tape -- it was Marty Zweig (R.I.P.) who popularized the notion of not fighting the Fed -- and that it is not winning now.
Both points are valid, though the market is capable of reversing itself just when everyone (especially the charts) gets comfortable.
Jim also observes that the lack of any pause is unprecedented -- that it is being induced by a supply shortage.
Finally, the real theme of his great post is what is driving the market: According to Jim, it's "the urge to merge, the rush to get married, even the desire to elope on weekends -- something we haven't seen in eras long since bygone."
But here I have a problem with Jim's causality between the deals and the market.
Let's start with the OfficeMax (OMX)/Office Depot (ODP) combination merger Jim opines that is "a merger borne of confidence -- confidence that, despite the runs in the stocks, there's much more upside because things are just plain better out there than we might realize. The confidence says that, even though the stocks are up from where they were, they are down huge from when the good times were being had."
Here is where I differ with Jimmy.
It is hard to see how this merger is an expression of confidence. To me, the merger is being undertaken for survival. These are two companies, Office Depot and OfficeMax, with only $1 billion enterprise values, whose time has come and gone, as their business models have been in steady deterioration for years as the competitive landscape changed.
Over the past several years Office Depot shares have gone from $45 to $4, a 90% fall. While OfficeMax shares have dropped from $50 to $10, an 80% fall. And this particular merger probably portends layoffs and further business rationale through cost reductions. It even is likely to put a modest dent into the commercial real estate market.
Up next for Jim is Heinz (HNZ), which has been "ripe for the taking for years and years." This one I also take exception to: I don't think this takeover really helps the market. For Buffett, in particular, this is an addition to his portfolio.
Next up is Dell (DELL), which Jim thinks is "not much different than Heinz." I disagree here, too. Heinz is a consistent grower, a global franchise in which Buffett et al. paid up for. By contrast, Dell faces secular challenges, and Michael Dell is paying down for it, as investors have abandoned it. Michael Dell is being opportunistic at $13.65/share (75% below its all-time share price high) -- just look at the long-term chart.
I am going to take a pass on the Kinder Morgan (KMI)/Copano (CPNO) and Liberty Global (LBTYA)/Virgin Media (VMED) deals, because I am not familiar with them.
As to Comcast (CMCSA) buying the rest of NBC Universal from General Electric (GE) "well ahead of when he had to," it is a one-off -- there was an inevitability to this deal.
Bottom line: I don't believe all of the recent deals underscore a return of business confidence. Some of these deals are one-offs; others have been fueled by the liquidity provided by the Fed's zero interest rate policy (the half-life of which is dissipating).
To me, business confidence will only be demonstrated when corporations expand their capital spending commitments or when companies such as Home Depot (HD), which has recently announced a large increase in temporary workers, stop using temporary workers to partially replace their permanent workforce (an important factor in the relatively listless and structurally impaired jobs market). These are the factors that will buoy domestic economic growth, not M&A, which most often has a contraction-like impact (shedding of redundant workers and operations).
I would also take issue with the notion that the aforementioned deals are a tell for a better market. Historically, greater M&A activity follows a good market; it rarely leads it. But once sentiment in the markets change for the worse, no matter what the reason and whenever it is, takeovers stop abruptly. M&A activity may persist, but it is typically great for the acquired and less great to bad for the acquirer (which was exactly what Ken Langone said on "Squawk Box" this morning).
The fact is that heightened takeover activity tells little regarding the future direction of the market as a whole.
To me, it is amazing how the past rhymes. Deals are done closer to tops not to bottoms. This helps to explain why most CEOs (in either buying back their own shares or in terms of acquisitions) were inactive when the S&P 500 sold at 800, 900, 1000 or even 1100.
Instead, they and market participants get excited when the S&P climbs above 1500.
It feels like déjà vu all over again.
