My morning partner David Faber sent a chill through me yesterday when he said that the M&A prospects are dimming because of all the uncertainty in Washington.
Put simply, there couldn't be anything worse for the bear markets in this rally, namely consumer packaged goods, retail, and oil and gas.
Each area is challenged in its own way. Each area needs growth in earnings and in sales, or at least one, and the only way to get it is through deals.
Let's take them one at a time, starting with energy. We constantly hear these days that with modern technology the all-in price for oil in the Permian has come down to the low $30s for many of the producers. If that's the case, then you would think there has to be some attractive M&A opportunities. That's because it is cheaper to drill for oil on Wall Street than in Texas, at these prices.
Unless either the major oil companies don't believe that oil is going to stay above $40 or perhaps they, themselves, are hurting beyond what we know about. That would mean that the decline in the whole complex is justified and no values have been created. What a dreadful scenario.
Then there's the packaged goods stocks, specifically those in food. When you have an Amazon (AMZN) -run Whole Foods (WFM) being pitted against retailers like Target (TGT) and Walmart (WMT) and Kroger (KR) , you aren't going to have a lot of power if you are making foods that nobody really wants.
If the "center" of the store has such weak sales as we always hear, at what point do these grocers shrink the shelf space devoted to these companies and just cut them out? If the food companies have no clout and don't offer anything that's selling well, I mean anything other than marginal products, their margins will be crushed.
But if they pool their resources, then they have hope. However, I don't see much pooling. I know that we heard yesterday about the possibility that Kraft Heinz (KHC) is going to come back for Unilever (UL) in a hostile bid, but David dismissed that out of hand. So, it ain't happening. Nevertheless, deals like that need to be cut. There has to be some parity in the negotiations with these threatened grocers.
Last night when JC Penney (JCP) announced the departure of its chief financial officer, all I could think of is: How in heck can Penney make it through this era? One way? Merge with another outfit and close all the underperforming stores.
Have you noticed, though, that there has been almost no mergers-and-acquisition activity in the mall? It's almost as if no one believes and the stocks are totally telling the truth.
Plus, when I say there is almost no M&A, the only M&A of note is Amazon buying Whole Foods!
I know it sounds cold-hearted, but the way to get these companies right-sized is to merge them and take a gigantic charge that no one will even care about to close tons of stores and lay off thousands of people. You get a window to do that only with M&A.
What happens without M&A? Pretty simple: You get the free fire zone we have right now with all of these sectors. The selling's done either through ETFs or individual knockdowns, and it is part of the brutality you see every day on your screen.
We know after Costco (COST) reported that terrific number that earnings and same store sales won't stop the rain.
Only takeovers can. Without them, these groups are at the mercy of short-sellers. And, alas, they have no mercy.
