What Tesla Buying SolarCity Tells Us About The Economic Cycle

Takeaway: This is what always happens at the end of the economic cycle. Profits peak => M&A peaks

What Tesla Buying SolarCity Tells Us About The Economic Cycle - Peak cycle cartoon 04.15.2016

 

On The Macro Show today, Hedgeye CEO Keith McCullough was asked by a subscriber about how to interpret Tesla's (TSLA) purchase of SolarCity (SCTY) within the context of the economic cycle.

 

Below is McCullough's response:

 

"This is always what happens at the end of the cycle. First, the rate of change in corporate profits peaks. Those are the profits by which a company would fund or underwrite an M&A transaction, or issue dividends or buy back stock for that matter.

 

Then, when the rate of change in profits peaks, you get the final blast of M&A transactions because companies are trying to sell to the next greatest fool who is willing to pay the highest price. That’s how private equity and M&A works.

 

What Tesla Buying SolarCity Tells Us About The Economic Cycle - m a

 

Now that we’re past the peak, you’re seeing some of the most outlandish things. Microsoft buying LinkedIn, for instance. Why? Because Microsoft's business is slowing so they have to buy something with that high a multiple? Why is Elon buying SolarCity? Because SolarCity could go away?

 

These are the days of our lives. The M&A announcements that you see at the end of the cyle start sounding more and more ridiculous. Tesla and SolarCity should sound ridiculous. And that’s why Tesla shares are down on the news."


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