October was a grim month in markets.
Are we heading for a Santa Claus rally now or a post-US mid-term elections rally? Or are things going to get worse?
The tone is certainly different. As I've said before, a lot of the technical analysis people I follow are taking a gloomier tone than they have during past turbulence.
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That said, while I think we're close now, I don't think we've quite seen the top yet.
And here's why.
Peak optimism goes hand-in-hand with market tops
I've got a pet theory that I've discussed here a few times.
There's an old market saying: "they don't ring a bell at the top". That's true in a literal sense. However, what we do see very, very close to the top of a market is chronic over-exuberance.
This is entirely understandable. It's the way the human mind works. We extrapolate, because assuming that today will be similar to yesterday is often an effective shortcut for understanding the world.
As the market continues higher, the fear of losing money by taking the risk of being in the market, turns into fear of losing money by staying out of the market.
At the same time, human beings need reasons for doing what they do. If you can't argue that stocks are cheap, then instead you argue that valuations don't matter any more, or you find some other reason why stocks can continue going up.
There's always a reason. Reasons are easy to find. Sometimes they're even pretty convincing, although towards the end of a bull market, they always become a stretch.
So at the top, even if some people are looking nervous, there's a sense that you have to be in the market, because what else are going to do?
Trouble is, this is all very well. But how do you measure something as slippery as sentiment? There are all sorts of "soft" measures investor surveys and the like, or one of my own favourites, the magazine cover indicator and sometimes they are useful. But they often give false signals, and they're open to interpretation.
It'd be nice if there was something a bit more concrete that you could point to, as a sign that things were really, really hitting a hysterical peak.
The good news is that I think there is.
The only time that the biggest deals get done
When markets are roaring ahead, the exuberance takes hold of everyone, not just the much-maligned retail investor.
What happens when people are exuberant? They become risk-hungry, rather than risk-averse. They look for opportunities to expand, to make money, to build empires. And the sorts of people who are particularly prone to this kind of thinking include entrepreneurs, executives, and anyone involved in making money from investment banking.
A booming market fuels an appetite for deals be they mergers or public listings. So a rising pace of M&A (mergers and acquisitions) or IPO (initial public offering) activity is a good sign that markets are getting excitable.
Again, though, that's all very well. But how can it help you get a better idea of whether the top is in or not?
Well, here's the thing. If you're an investor, and you buy an asset at the top of the market, you'll have to live with the consequences of the drop. So even at the top, you'll hear plenty of sceptical, nervous voices bears who feel forced into the market due to lack of choice, rather than raging optimists.
But if you're an investment banker lining up a big deal, or an ego-drunk executive looking at a big bonus and an "all this is mine" dopamine boost, (or, very occasionally, a canny operator looking to exit your business before the cycle turns), then all you care about is getting the deal away before the window of opportunity closes.
And once a deal reaches a certain point in the process, there's no stopping it. Getting the deal done becomes the goal. Whether it makes sense or not by that point, is usually entirely secondary (read the classic Barbarians at the Gate for a sense of how deal mania works on the participants also, for anyone reading the book for the first time today, you'll be astonished by how small the sums involved appear to our QE-doped eyes).
Therefore, logically speaking, the wackiest, most extravagant deals will always be done at the top of the market. Because there is literally no other point in the cycle at which they could get off the ground.
So again, logically speaking, when we see eye-catching, headline-grabbing deals being done, it should ring a warning bell in our heads as investors that the good times simply can't be far away from ending.
Will the bell be rung to mark the top in December?
Again, that's all very well, but what do these deals look like?
Well, the point is, they are pretty obvious. Prior to the 2008 crash, RBS was briefly the biggest bank in the world by assets. In mid-2007, it embarked on a complex deal to gatecrash Barclays' purchase of Dutch lender ABN Amro. So the world's biggest bank took on a hubristic, ego-driven deal at the top of the banking bubble. That's quite a big red flag, right there.
The AOL-Time Warner deal, announced in early 2000, was similarly perfect in both terms of theme and timing. An old media brand was consumed by a new media high-flyer with the goal of creating a technology, media and telecoms (TMT) giant at the height of the TMT bubble I mean, you'd struggle to write this as fiction, it's too obvious.
There are other examples (check out some of them here). So I've been looking for deals that could help to mark the top of this particular market. And so far, while there have been a few big ones, there's been nothing to quite hit the spot.
However, there is one very promising candidate on the horizon. Japanese group SoftBank is looking to list its Japanese telecoms business at the end of this year. Investment banks have cut their fees especially for the deal, says the FT.
Why would they do that? Because there's a good chance that it'll be the biggest share sale in history. So, tick one box: it's a huge deal. The sort of thing you can only get away with at or near the top.
It's a perfect thematic fit too. SoftBank is up to its neck in tech investment and venture capital, with its $100bn Vision Fund. (Part of the deal is that the banks involved will also lend money to the Vision Fund.) Tech and unlisted companies have been big outperformers in the current boom.
Meanwhile, there's a thematic fit on the corporate governance side too. The deal is structured in such a way as to allow SoftBank to maintain control of the business. Another big feature of this boom has been ordinary investors giving up ever more control simply to hitch a ride with tech titans, who get to have their cake and eat it when it comes to listing their companies.
In short, this is a big deal being done by one of the most hubristic companies of the current boom, and one that has its fingers in lots of the bubbliest sectors.
If the deal actually gets done, I'll be a lot more convinced that we've seen the top, which would set the scene for a very interesting 2019 indeed.
Watch this space.
