When we talk about mergers and acquisitions, we think they run the gamut of industries. In fact, they don't, and the two areas where we have seen no consolidation are the two areas whose stocks are just acting horrendously at this moment. This makes sense. When there is no consolidation, there's no ability to rationalize and take out costs. Without consolidation, there's way too much competition. Without takeovers, you just can't boost estimates, the lifeblood of all positive stock moves.
Which two industries am I talking about? The banking stocks and the industrials.
I have watched the sickening dribs-and-drabs selloff in the banking group for what seems like ages now. My Action Alerts PLUS charitable trust has watched SunTrust (STI), which reported a terrific quarter, see its shares pretty much give up a few pennies a day, except for the days when it gives up $0.25 or $0.30. It's totally gut-wrenching. I look at the stock of Wells Fargo (WFC) and I wonder what happened to that spike to $53 on that fabulous quarter. KeyCorp (KEY), which was knocking on $15's door, now looks like it can slice through $13.
Meanwhile, Bank of America (BAC) got permission to raise its dividend for the first time in seven years -- obviously something that wouldn't have been done if it were about to be bankrupted by the U.S. Justice Department. Yet the stock is now below the level where it had been when the firm had gotten the go-ahead.
We know the degradation is occurring because interest rates on U.S. Treasuries have gone down to the point at which the earnings estimates -- which analysts set when these companies reported a month ago -- are now too high. They are all vulnerable to number cuts.
Here's what's more important, though: This was a group that, before the Great Recession, used to be the subject of endless merger talk. Shares of a bank such as SunTrust couldn't go down like this without prompting the worry that a name such as BB&T (BBT) would take it over. You could expect to hear a big Spanish bank knocking on the door of a bank such as KeyCorp at this point. First Horizon (FHN) would have been gobbled up by a name such as Royal Bank of Scotland (RBS). Wells Fargo would be snapping up banks left and right, and JPMorgan Chase (JPM) would be right there with it.
No more, though. The potential acquirers from Europe are shedding assets. The concentration of banks from the Great Recession is now way too great for any authority to bless a big bank buying a little one. So the group, without any yield support to speak of and no takeovers imminent, just languishes, as higher rates are needed before anything good can happen.
Industrial shares, for their part, seem frozen from the time when the MH 17 Malaysia Airlines flight tragically went down last month. But, in truth, they haven't really kept pace, and real doubt has emerged about the value of some of their acquisitions.
Eaton (ETN), after initially wowing the street with its buy of Cooper, is now reviled for the straitjacket this deal has put the company into. Ever since B/E Aerospace (BEAV) failed to get a bid earlier this spring, the whole aerospace group has been a pathetic place to be. The agriculture business, the mineral business, the industrial conglomerates: They have all done nothing to consolidate.
The one big deal, General Electric's (GE) buy of Alstom, came with so many restrictions that I believe GE's stock would have gone up if the company had walked away. Emerson (EMR), Parker Hannifin (PH), Danaher (DHR) -- they have all disappointed. Even the good ones, such as 3M (MMM) and Honeywell (HON), inevitably retreated. I think this is strictly a sign that Europe has gotten uncertain since Russia and Ukraine have started going at it, and the industrial confidence has been sapped.
Yep, a deal-less sector in a deal-filled world is not going to get any takers. Banks can't, and industrials won't -- and that creates a huge void in these two gigantic segments of the S&P 500.