Need more evidence that the U.S. is in a late cycle slowdown?
Look no further than the proposed merger of Dow Chemical (DOW) and DuPont (DD). If the deal goes through, it would create a massive $130 billion behemoth. Management would ultimately divvy it up into three separate businesses.
Why does that matter? Here's our analysis from a note sent to subscribers this morning:
"... A multi-quarter acceleration into peak capital markets activity has historically been a harbinger of an economic downturn. Yesterday, multiple reports claimed DD and DOW are in advanced talks to merge, with the combination to then split into three separate companies; both stocks finished ~12% higher on the day.
The WSJ recently noted that worldwide M&A, excluding buyouts, has totaled $3.7T this year, beating the previous record set in 2007. This is exactly the kind of frothy, head-scratching headline you’d expect to see to confirm the forward outlook that global economic growth is as bad as we think it is.
M&A usually peaks when company insiders agree to sell and that’s exactly what you’re seeing in insider transaction reports. At $7.6B, November 2015 was the fourth-highest month of insider selling on record.
This comes amid record share buyback activity, which has averaged $3.9B/day since the beginning of earnings season in October. Data firm Trim Tabs observes that this is the highest pace since the bull market began in March 2009.
Companies are doing everything they can to arrest the gravity weighing on peak margins. It has become increasingly difficult to protect earnings amid #GlobalDeflation which has perpetuated the ongoing global industrial recession – including right here in the U.S. All told, there is a ton of risk to forward estimates for GDP and EPS growth if we’re right on the economic cycle."
We've been talking about the late cycle nature of M&A for a while now. This is a slide from our 73-page Q4 Macro Themes presentation released in October: