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What Lies Ahead For M&A ETF?

Merger and acquisition (M&A) activities across a number of sectors were on a tear last year, with a record level of such activities. But the momentum for M&A – one of the major drivers of the stock market ascent in recent times – seems to be fading this year. At least, the numbers are giving such cues. The volume of global deals is $US822.2 billion ($1.1 trillion) so far this year, which represents a decline of 17% year over year (read: Merger & Acquisition ETFs: Will 2016 Replicate 2015? ). In addition to this data, there has been a surge of failed M&A deals lately. As per data provided by Dealogic , “US targeted withdrawn M&A volume is up 64% on full year 2015 ($231.1bn) to $378.2bn in 2016 YTD (as of May 4, 2016).” This is because several mega deals have been called off lately which took the size of U.S. oriented withdrawn M&A to a record level. Drugmaker Pfizer’s (NYSE: PFE ) decision to abandon its $160 billion deal to unite with Botox maker Allergan plc (NYSE: AGN ) due to the new Treasury guidance related to tax inversion is the largest called-off deal on record. The $103 billion deal between Honeywell International (NYSE: HON ) and United Technologies (NYSE: UTX ) is also out of action. There was also a proposed $38.7 billion merger deal between Halliburton (NYSE: HAL ) and Baker Hughes (NYSE: BHI ), which finally fell apart in April. As per Dealogic, with the termination of these likely deals, investment bankers were hard hit as they lost about $1.2 billion in possible investment fees. What’s Next? It looks like that the removal of mammoth deals in the U.S. actually inflated the size of withdrawn M&A data ($357.8 billion); the data speaks less about the diminishing number of activities. As per financial review, though there was a plunge in global M&A deal size, the number of announced transactions is 8,025 so far in 2016 versus 8,085 last year, indicating that the number has just moderated, and is far from completely losing momentum. The stringency in the U.S. tax inversion rule is less likely to put an end to cross-border deals. Yes, it could slow the momentum, but cannot stop them altogether (read: New Tax Inversions Rules: Threats to Healthcare ETFs? ) Another reason for the M&A slowdown is the underperformance of hedge funds in recent times. Notably, activists’ hedge funds play a huge role in companies’ merger and acquisition decisions. If the climate improves in this area, maybe M&A sector will receive a fresh lease of life. Also, being an election year, activities may remain slightly subdued in the U.S. Plus, the banking sector is facing stringent regulation and is also caught in a trap following energy sector issues. This is because banks have considerable exposure in the energy sector, which may default on persistent low oil prices. This scenario made the banks unsure of “how much leverage they should supply to private equity transactions, which has caused them to shy away from lending to PE-backed deals .” If the banking sector recovers in the near term, mergers and acquisitions may also perk up and investors could easily take advantage of the merger arbitrage strategy. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stock of the target company. This is especially true given that investors should go long on the target or the acquired company and short on the acquiring company. When the deal is completed, shares of the target company will increase to the full deal price (in some cases slightly below the deal price), giving investors a nice profit. How to Play? Here are three merger arbitrage ETFs, any of which could make compelling options for investors seeking to play this area. These are the IQ Merger Arbitrage ETF (NYSEARCA: MNA ), the ProShares Merger ETF (BATS: MRGR ) and the Credit Suisse Merger Arbitrage Index ETN (NYSEARCA: CSMA ). Link to the original post on Zacks.com

Real Risk Taking Will Not Return Until The Fed Flip-Flops

In a strong bull market, higher volatility stocks tend to outperform lower volatility stocks. The PowerShares S&P 500 High Beta (NYSEARCA: SPHB ):iShares USA Minimum Volatility (NYSEARCA: USMV ) price ratio demonstrates how the bull market in equities has been giving way since the highs in the Dow and the S&P 500 one year ago (May 2015). Similarly, in a strong bull market, growth-oriented assets tend to outperform value-oriented holdings. Instead, the iShares Core Growth (NYSEARCA: IUSG ):Vanguard Value (NYSEARCA: VTV ) price ratio illustrates a shift in preference from higher-flying growth securities to “safer” value stocks. The hallmark of bullishness, indiscriminate risk taking, is no longer present in equities. It has been steadily eroding in bonds as well. Take a look at the SPDR High Yield Bond (NYSEARCA: JNK ):iShares 7-10 Year Treasury (NYSEARCA: IEF ) price ratio. The remarkable rally off of the February lows offered some “hopium” that the worst is over for junk debt. On the other hand, the long-term trend toward pursuing safety in treasuries as well as the likelihood of “sell in May” defensive posturing does not favor yield seeking speculation going forward. Perhaps risk taking will return in a meaningful manner soon. I doubt it. Valuation extremes would need to become valuation bargains or, at the very least, the Federal Reserve would need to expand its balance sheet (QE/QE-like activity) yet again. Low borrowing rates alone cannot do the trick when corporate earnings (EBITDA) are deteriorating, revenue is softening and the year-over-year percentage growth of net debt is exploding. Consider the following chart from the Financial Times. Non-financial corporations found themselves leveraged to the hilt in 2000 and again in 2007. Bear market retreats of 50%-plus in stocks occurred shortly thereafter. Why should investors believe that this time is different? The corporate debt balloon is going to be a problem even if central banks perpetually support asset prices through direct purchases and/or rate manipulating schemes. Ten years ago, companies carried $4.6 trillion in outstanding debt. Today? We’re looking at $8.2 trillion. The annualized growth rate of that debt far exceeds the growth rate of profitability or sales. Worse yet, HALF of the $8.2 trillion in corporate bonds is set to mature over the next five years. The implication? Any recession in the next five years will see the vast majority of corporations issuing new debt in an environment where their coupons will be at higher yields and their total total debts will be more difficult to service. Think the resilient U.S. consumer can magically make the problem go away? Fat chance. Since 2001, consumers have only maintained respective living standards by borrowing more in credit to make up for the shortfall in disposable personal income. Take a good hard look at the chart below and ask yourself, “Can this possibly end well? How long can households spend more than they take home before the caca hits the fan once again?” Click to enlarge Can catastrophe be averted? Anything’s possible. Heck, the U.S could experience a remarkable renaissance of high paying careers. It is more probable, unfortunately, that the working-aged population will grow at a faster clip than jobs themselves. There have been 14 million new jobs created (mostly low-paying) since the end of the Great Recession, yet 17 million people entered the labor force in the same period. Not enough jobs. Not enough high-paying employment. And too much household borrowing to make up the difference. Click to enlarge If corporations are getting closer to retrenchment — voluntary or involuntary deleveraging — there will be less money spent on stock buybacks . That would be a problem for the stock market. If households are getting closer to retrenchment — voluntary or involuntary deleveraging — the reduction in consumption would be problematic for equities as well. Brick-and-mortar retailer woe may largely be attributable to online retailer cheer, though some of the troubles are related to consumer spending. Bottom line? Riskier assets are unlikely to gain significant ground in the near-term. An investor would be wise to maintain a defensive posture until valuations improve dramatically or the Federal Reserve flip-flops, ultimately announcing plans to expand its balance sheet once more. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

A Star-Spangled April For Moats

Performance Overview Moat-rated companies continued their strong start to 2016 in April. U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) topped the S&P 500® Index (5.20% vs. 0.39%) in April and widened the gap in relative performance year-to-date (12.05% vs. 1.74%). On the international front, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagged the MSCI All Country World Index ex USA in April (1.43% vs. 2.63%), but maintained relative outperformance year-to-date (4.09% vs. 2.25%). U.S. Domestic Moats: Healthcare Rotation Pays Off St. Jude Medical, Inc. (NYSE: STJ ) was the big winner among domestic moat-rated companies in April. Late in the month Abbott Laboratories (NYSE: ABT ) announced its intent to buy STJ US in a deal that is expected to close in the coming fourth quarter. As part of its quarterly review, the MWMFTR Index rotated into several healthcare companies, including STJ. According to Morningstar, the healthcare sector offered a number of attractive valuation opportunities in March, some of which contributed to MWMFTR’s strong performance in April. Drug manufacturer Allergan plc (NYSE: AGN ), however, provided no such boost to results. A U.S. Department of Treasury tax ruling squashed any hope for its planned merger with Pfizer (NYSE: PFE ), pushing AGN lower for the month. International Moats: Oh, Canada MGEUMFUN’s exposure to financials companies, particularly Canadian banks, contributed to positive performance in April. Only three of the 24 financials companies in the Index posted negative returns last month. Additionally, Russian operator Mobile Telesystems (NYSE: MBT ) has been on a roll since announcing solid fourth quarter results in March. Strains on performance came largely from some of the Index’s consumer discretionary constituents, such as Macau gaming firm Sands China ( OTCPK:SCHYY ) and Chinese car manufacturer Dongfeng Motor Group Co. ( OTCPK:DNFGY ). Monthly Index Total Returns Top/Bottom Index Performers Index Reconstitution Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.