Investment Trends
Corporate takeovers are leading the news this morning as $13.5 billion is being spent over two deals. Abbott Laboratories announced that they will buy Solvay SA’s pharmaceutical unit for about 4.8 billion Euros ($7.1 billion). This will give Abbott full control of the TriCor cholesterol drug and a bigger presence in emerging markets. With about two and half hours before the opening bell, Xerox just announced that they have agreed to buy Affiliated Computer Services in a deal valued at $6.4 billion.
We have been noted in recent weeks, the market is being moved by the large amounts of money that are moving out of money markets and into riskier asset classes. This has helped to keep municipal rates at levels rich to treasuries, treasuries meanwhile have stayed quite stagnant despite the record levels of new debt, and corporate bonds continue to keep a tight spread to treasuries. According to a Bloomberg article this morning, investors still have cash equal to 73 percent of the net assets of companies within the S&P 500 index. This is after the 11 percent decrease in money-market accounts already seen this year. To put this level into perspective, at the peak of the bull market in 2007, the measure of buying power was 62 percent. Since March 9 the government has spent or guaranteed $11.6 trillion while the Federal Reserve kept rates near zero which helped to push the S&P 500 up 54 percent.
As third quarter earnings season approaches this week, it might not take much good news to keep the market rally going. Market movement is not always aligned perfectly with fundamentals and when you have trillions of money moving into an asset class, supply and demand takes over. I will continue to look for more evidence that the “worst is over” but looking at it fundamentally, the unemployment rate is still at 9.7% and according to estimates for this Friday, it is expected to rise to 9.8%. So while investment of cash is strong, the consumer is also quite important in sustaining an economic recovery.
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