Leave it to The Mavericks

Story Notes:

• While the media and economics tend to be fickle about the economy's future, business leaders are once again recognizing today's strong fundamentals—blazing a trail likely leading to a wave of new M&A activity

The mavericks are back. Mavericks are eccentrics, individualists, rebels, one-of-a-kind unconventionals who see the world differently. We like them. Those who don't follow the norm show us the way—for better or worse. Maverick action is as often a disastrous failure as an unbridled success, but either way we learn a great deal by observing them.

Conversely, economists and other prophesizing pundits are so fickle and trend-following, their opinions are near worthless:

Economists' Outlook Turns Rosy
By Phil Izzo, The Wall Street Journal (*site requires registration)
https://www.wsj.com/articles/SB119206965800055649

What a joke! Just one month ago the same survey proclaimed dire warnings of a recession and credit doldrums. It must be nice to be able to change your opinion almost daily without consequence—Investors have no such luxury. The tide has shifted—in a matter of weeks—from dominant headlines on recession to reemerging tech bubbles and other forms of asset-overheating. So fickle!

Ignore such surveys and look to the mavericks. With summer doldrums done and faux credit fears finished, the mavericks are back in the M&A game—and we think it's about time.

MarketMinder has repeatedly highlighted today's historically unique earnings yield to bond yield proposition. An aggregate market earnings yield higher than the average rate of borrowing allows companies to purchase one another cheaply and/or buy back their own shares. Both activities boost earnings and take stock supply off the market; both are highly bullish for stock prices.

We expect the M&A boom to resume—possibly with as much gusto as the first half of 2007. Now that the psychology (that's all it ever was) of illiquidity has faded, and folks wake up to the reality earnings are still surging (meaning high earnings yields) and bond yields are once again very low, the fundamentals for a big merger and stock buyback resumption are present.

But someone has to get the M&A juices flowing again—and those someones are the mavericks. Here are some examples from today's headlines:

(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of a broader M&A theme we wish to highlight.)

Larry Ellison, CEO of Oracle, was the guy buying up all sorts of firms years ago. Many said he was crazy for spending so much cash. In truth, he ended up displaying maverick behavior well ahead of the curve. Larry's at it again. Today Oracle offered $6.7 billion to acquire BEA Systems, a business-software maker.

Oracle Offers to Buy BEA Systems
By Reuters via The New York Times

Another classic maverick is media hound Richard Branson. His Virgin Group is reportedly building a consortium to buy Northern Rock (the embattled British lender) and rebrand it under the Virgin Money name. Branson getting into the subprime mortgage game!? Sheer insanity! (Or, perhaps he sees an opportunity others don't…)

Branson's Virgin Consortium in Talks to Take over Northern Rock
By Siobhan Kennedy and Steve Hawkes, The Times

Behind the scenes, share buybacks never really stopped, even during the correction. It's such an easy thing for CEOs to use cash to buy their own shares when today's cost of money is so low—automatically pushing earnings per share higher. We think most analysts fail to take into account the magnitude of share buybacks, making future earnings outperformance likely. Another great thing for share prices.

As the M&A and share buyback boom resumes, look for more bull market ahead. The mavericks are already taking the charge.