EDITOR'S LETTERMerryn Somerset Webb
Steer clear of US stocks
The most telling headline of the week came in Tuesday’s copy of the Financial Times. In May, the value of merger and acquisition (M&A) deals in America came to $243bn. That doesn’t sound like a very interesting number (a billion here, a billion there…), but it turns into one as soon as you note that it is the highest monthly value on record, and then compare it with similar numbers from the past.
In May 2007, for example, American M&A came to $226bn. And in January 2000, it came to $213bn. Yes – the Americans managed to do more deals last month than they did at the peak of the dotcom and credit bubbles.
I was on the receiving end of a not-particularly-polite lecture from the head of one of the UK’s big investment firms this week about reporting news in a positive, rather than a negative, light. So I have tried very hard to humour him this week by finding the good in this news.
I have failed. What this news tells me isn’t that the American economy is booming. It tells me that, despite the waves of cheap money being chucked at it (the average US firm can borrow in the bond market at about 3%), it isn’t booming. If it were, profits at American firms would be rising. They are not. Instead, US stocks have been pushed up and up again by the way in which firms are borrowing and spending – on buybacks and then on M&A.
Equity markets, says the head of M&A at JP Morgan, are “rewarding deal-driven expansion” at a time when organic growth is “subdued”. This is about weak demand, rubbish profitability and a huge build up in debt levels. I challenge anyone to find the good news in that.
• Read the full editor’s letter here: Steer clear of US stocks