Why is tech M&A booming?

Fortune

The speed and volume of mergers and acquisitions large and small in the technology industry has ramped up. Global tech M&A volume in the first half of this year was up 55% over last year, reaching its highest level since 2000.

Part of the reason for the buying spree is because tech companies have massive cash piles on their balance sheets. There’s also the acqui-hire trend, where tech companies are created cheaply, raise seed funding easily, fail, and then “sell” to Yahoo [fortune-stock symbol=”YHOO”], Facebook [fortune-stock symbol=”FB”], or Google [fortune-stock symbol=”GOOG”] – which merely want the employees.

But that’s not all. As vice chairman of JPMorgan Chase, Jimmy Lee has a front-row seat to the deal action. And he’s been increasingly pushing the firm into tech deals, most notably, the much-anticipated initial public offering of Chinese e-commerce giant Alibaba.

Speaking on stage at Fortune’s Brainstorm Tech conference in…

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Nat Gas Inventories 2014-15 Winter at their Lowest Level Since 2008

Growth in U.S. natural gas production and flat electric power sector consumption will contribute to a record Lower 48 net injection from April through October of 2,587 Bcf. However, even if these record net injections take place, inventories for the 2014-15 winter season would still be at their lowest level since 2008. This is because of low starting inventories, following a 2013-14 winter defined by record high natural gas consumption and storage withdrawals, as waves of bitterly cold weather repeatedly swept across the United States.figure_1

Natural Gas Issues and Trends – Energy Information Administration.

Four Phases of the Bull Market

Where are we now in the current bull market? In my opinion, we are moving from the third to the fourth phase for the S&P 500. The first phase started on March 9, 2009 and ended after the second and worst correction of the bull market, on October 3, 2011. The second phase included three minor corrections, with the last one ending on June 1, 2012. The third phase has had no corrections and is probably coming to an end now. It may be setting the stage for what can also be called the “melt-up” phase. The start of the fourth phase probably coincided with the bottom in the “internal correction” of the momentum stocks on May 8. A chart of the S&P 500’s forward P/E can also be used to identify these four phases.
FIG2
Today’s Morning Briefing: The Fourth Phase. (1) Vivaldi, Templeton, and Birinyi. (2) The four phases of a bull market. (3) Transitioning from the third to the fourth phase. (4) Exuberance fueled by buybacks, M&A, and Yellen. (5) Equity fund flows entering the fourth phase. (6) Industry analysts are exuberant about earnings. (7) Can the secular bull survive a melt-up/meltdown scenario? (8) Bear market triggers. (9) Sectors leading the earnings parade. (10) Global growth remains slow according to German data. (11) Focus on overweight-rated S&P 500 Transportation

Dr. Eds Blog.

Google is trying to drive loyalty to Android, not just Galaxy

Google seems keen to re-establish core Google services at the heart of Android going forward, both in emerging and mature markets. But another thing Google seems to be trying to do is give people a reason to choose Android itself across a range of devices, rather than a particular flavor of Android.

| Tech.pinions – Perspective, Insight, Analysis.

Where is the U.S. Housing Market Headed?

Sales of new homes, which have struggled to increase from relatively low levels of a year ago, posted gains in May sales to their highest levels in six years.
BN-DJ947_COMPOS_G_20140624122402 Sales have been soft, in part, because builders have been slow to ramp up production. While inventories are still very low, they are up 16% from last year.BN-DJ972_NEWINV_G_20140624123243 Caught last year with a surge of demand and a shortage of supplies, builders boosted prices. As sales have slowed and builders have increased production, they’ve cut back on those price increases. Several executives have conceded that prices probably went up too fast last year, especially after the unexpected jump in mortgage rates that pinched affordability last summer.
via Five Takeaways: Where is the U.S. Housing Market Headed? – Real Time Economics – WSJ.

The Economy vs Mr. Market

The 3rd revision to Q1:14 GDP came in at -2.9% making it the worst quarter since Q1:09. The question is should the market pay attention to the rear view mirror or is this an indication of a weaker economy? We think not.

There were multiple factors that conspired to pressure Q1:14 GDP: Two thirds of the revision is in consumption, cut to +1.0% from +3.1%. Healthcare services was revised from adding +1.0% to a drag on growth as a component, cut to -1.4% from +9.1%. Q1:14 GDP

But when we look at possibly leading indicators both manufacturing and service PMI, the underlying economy appears healthier than the GDP estimates.Combined, the two PMI surveys indicate that business activity is growing at the strongest rate seen since prior to the financial crisis.

The Service sector PMI for June cam in at 61.2, up from 58.1 in May.The latest reading indicated the strongest pace of U.S. private sector output growth since October 2009. Service sector output growth has now accelerated in three of the past four months, with a strong rise during June supported by marked improvements in new business inflows.screenshot 2

Indeed, the manufacturing PMI hit its highest for just over four years in June and best quarter for factories for four years. Manufacturing output growth picked up for the third month running to its strongest since April 2010.screenshot

Second quarter GDP data are therefore likely to show a stronger recovery. Importantly, this is not just a rebound from the weather-related disruptions, although the degree to which healthcare rebounds is a wildcard. Nevertheless, data is pointing to companies reporting strong demand for goods and services.

Where does that leave us in regard to our investment strategy? While the PMI data points to an underlying economy that may not be as weak as GDP suggests, we remain cautious in an elevated market supported by central banks. Indeed, the consumer is not in a healthy condition in real wage terms, the drag from energy, car loans and student loans. While investor have been served well by the buy the dip strategy, especially in 2014, we remain conservatively positioned in equities focused on select technology, Energy (MLP’s, multinationals), healthcare and materials. Fixed Income we have stayed on the curve looking at ABS, CMBS and Event Driven as a bond substitute and a high cash position.

Share Repurchases Rose 59% YoY

S&P 500 share repurchases increased 59.3% to $159.3 billion during Q1:14, up from the $100 billion year ago and up 23.1% versus Q4:13. BquxZUiCIAAwN5kFor the 12 months ending March 2014, S&P 500 companies increased buyback expenditures by 29.0% to $534.9 billion from the $414.6 billion posted during the corresponding 12-month period in 2013. The previous 12-month high mark was reached in 2007, when companies spent $589.1 billion. The 12-month recession low point was 2009 with $137.6 billion.

The lower share count pushed up earnings per share significantly (defined as a 4% impact) for 99 issues in the S&P 500. Buyback and dividend expenditures combined reached a new record high in the first quarter of $241.2 billion, replacing the fourth quarter of 2007 record when $233.2 billion was spent on buybacks and dividends. Of the 404 issues which reported buybacks over the past year, 346 companies paid a cash dividend, with 217 of them spending more on buybacks than dividends. Buyback program authorizations have continued to increase.

Technology increased its dominance of buybacks, accounting for 30.9% of all buybacks in Q1 (up from 26.7% in Q4). The top 10 companies that implemented the biggest buybacks hailed from the tech sector, including Cisco Systems (CSCO), Oracle (ORCL) and Corning (GLW).MW-CI343_q1buyb_NS_20140618105202Apple led the Index with its $18 billion record setting quarter and International Business Machines (IBM) was second at $8.2 billion in buybacks. The top five were rounded out by Exxon Mobil ($3.9 billion), FedEx ($2.8 billion), and Boeing Company ($2.5 billion).

Recent data from TrimTabs suggest a slowdown in buybacks in Q2:14 to $92.7 and to just $11.5 billion in June. If true, it would be the lowest monthly level since May of 2012, but reflects the current level of the S&P, rather than a reversal of the strong trends.

Intriguing Google acquisition hints at big wireless carrier ambitions

BGR

We’ve known for a while now that Google has been toying around with becoming a wireless service provider and a new acquisition spotted by GeekWire gives us some more evidence that the company is looking to get into this market in a big way. Apparently, Google recently acquired Alpental, a small startup that was founded by two former Clearwire engineers named Pete Gelbman and Mike Hart. The company was never exactly well known outside of tech circles but GeekWire says that before it got scooped up by Google, it “was developing technologies related to 5G, the next generation wireless network” that “could have applications in connecting fiber to the home and… Google’s municipal wi-fi offerings.”

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VIX Hits New Bull Market Low

The VIX Index hit a new bull market low of 10.73 last week. If it closes the month at this level, it would be the 3rd lowest monthly close in VIX history.

VIX Historical

VIX Historical

VIX is now at seven year low (Jan 07=10.42), and the chart shows the subsequent change in volatility.

The percentage of Bulls in the most recent survey came in at 62.2%, a 9-year high and above 96% of historical readings. There are more Bulls today than at the October 2007 peak. However despite the optimism and concomitant rise in the S&P, trading volumes continue to drop off. goldman vix-s&p Both volatility and volume are drastically lower than they have been in recent years. And as you see, volatility and volume undulate in tandem.

What tends to follow such extreme bullish sentiment readings is a more challenging market environment. Investors should not be surprised to see below average returns going forward as this is what you tend to see (on average) when everyone is already “all-in.”