There is an old Wall Street saying that, "They don't ring a bell at the top." So when our phone rang this morning for our six a.m. wake up call, we refrained from shouting "Sell!" into the receiver.
No, "they" don't ring a bell at the top. But who are "they" anyway? And what are "they" doing right now?
Since we are again hitting the humid pavement today in search of the next great solar company, we'll keep this short. The only "they" that matters when trying to figure out if the market has topped are the insiders. The people who have access to the real balance sheet, income statement, and statement of cash flows are the people who really know what a company is worth, and usually sell when the public is buying (conversely, insider buying is generally bullish.)
"They" could also be hedge funds or private equity. The borrowing of both groups is what's driving the merger and acquisition frenzy, the 1929-like performance of the Dow, the ASX/200, and everything under the sun.
That leaves you with one useful signal to watch for: insider selling. When corporate insiders are selling stock in a rising market and not buying, it means they don't see any more value. It means they are taking profits and heading for the hills until there is something better to do with their cash.
This all feels like the Nasdaq in 1999-a headlong rush into bad investment decisions driven by too much money and too few brain cells. But it is global in scope this time. And it is also underpinned by a much larger equity and asset base. The whole world is in play. And there is one important difference this time.
Even though we know the valuations are out of control, as is credit growth, there is also the fact that some assets are worth more than others. Some assets will generate more cash flow in the coming years. Some assets are scarce and have real economic value. If the bidding war for those assets is on now, you're either in, or you're out of luck.
For example, the proposed $53 billion merger between Alcan (NYSE:AL) and Alcoa (NYSE:AA). Both companies are looking for a way to compete with Russian and Chinese producers. Russian and China, through explicit state policy, have been huge acquirers of natural resources as strategic national assets.
It is better to hunt than be hunted. A deal will probably get done even though Alcan viewed Alcoa's bid as "hostile." This hoarding or consolidation of base metals assets (and alternatives to paper assets) is picking up pace, too.
Bloomberg reports this morning that, "Rising demand for metals has sparked 473 deals or bids in the industry this year, valued at $55.4 billion, including Hindalco Industries Ltd.'s $5.7 billion offer for Novelis Inc., data compiled by Bloomberg show. For all of 2006, there were 1,145 deals valued at $176.5 billion, including Freeport-McMoRan Copper & Gold Corp.'s $23 billion takeover of Phelps Dodge Corp."
The not-dead-yet Qantas (ASX:QAN) bid continues to fascinate the media. But it can't be long before BHP and Rio are in the mix. What should you do? There's not much you can do really. And if you are a long-term owner of quality assets, there's not much you should do.
The tangible-asset rush currently taking place is going to drive valuations higher before they eventually correct and/or crash. At the end of the day, firms like BHP will still have the assets on the balance sheet. And you might even be able to scoop up more shares at a lower price.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
