Dallas, TX
June 24, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Sitting On Billions Private Equity Scrambles To Make Any Deal At Any Cost
What's Hot Today:

U.S. stock index futures were pointing to a lower opening on Thursday. The focus remains on the interaction between the S & P 500 and its 50 and 200-day moving averages. And the action is not very encouraging.

Today's Economic Calendar


News For Thought

More bad polls for White House. According to The Wall Street Journal: "Americans are more pessimistic about the state of the country and less confident in President Barack Obama's leadership than at any point since Mr. Obama entered the White House, according to a new Wall Street Journal/NBC News poll." According to the report: "The survey also shows grave and growing concerns about the Gulf oil spill, with overwhelming majorities of adults favoring stronger regulation of the oil industry and believing that the spill will affect the nation's economy and environment. Sixty-two percent of adults in the survey feel the country is on the wrong track, the highest level since before the 2008 election. Just one-third think the economy will get better over the next year, a 7-point drop from a month ago and the low point of Mr. Obama's tenure. Amid anxiety over the nation's course, support for Mr. Obama and other incumbents is eroding. For the first time, more people disapprove of Mr. Obama's job performance than approve. And 57% of voters would prefer to elect a new person to Congress than re-elect their local representatives, the highest share in 18 years."

Respect erodes abroad also. According to Stratfor.com: 'Venezuelan state oil company Petroleos de Venezuela SA is seeking the nationalization of 11 oil drilling rigs owned by U.S. company Helmerich & Payne, which is accused of trying to slow oil production, Bloomberg reported June 24. PDVSA will seek National Assembly approval to seize the 11 rigs in Anzoategui state, Rafael Ramirez, oil minister and president of PDVSA, said. The rig owner refused to discuss payment rates for services and preferred to hide the rigs for a year, Ramirez said, adding that Venezuela will not allow the company to “sabotage operations.”'

German leader rebuffs Obama on spending increases. According to The Wall Street Journal: "In an interview, the German chancellor rebuffed Obama's call for Germans to aid the global recovery by spending more and relying less on exports, even as she warned that Europe's own financial crisis is far from over."

America needs a win right now. Go, John Isner!

Sitting On Billions Private Equity Scrambles To Make Any Deal At Any Cost
So Much Money So Little Time Left To Milk It
Private equity groups are sitting on a multibillion dollar cash horde. Yet, the times and the general state of things are making the sector wait for better times.

According to The Wall Street Journal: "Private equity firms, where corporate takeovers are planned and plotted, today sit atop an estimated $500 billion. But the deal makers are desperate to find deals worth doing, and the clock is ticking."

The problem, you see, is that the billions are not all owned by the private equity groups. Much of the cash horde belongs to investors who have given the money to the firms in order to participate in the presumed profits from the deals that the private equity investors would make. And the danger is that time is running out on some of that money and it may have to be returned to investors.

The implications are significant, and will be widely felt. According to The Journal private equity groups "typically must invest all the money within the first three to five years of the funds’ life. For giant buyout funds raised in 2006 and 2007, at the height of the bubble, time is short. They must invest their money soon or return it to clients — presumably along with some of the management fees the firms have already collected." In fact, two things are happening. Private equity groups are asking for more time, while others are making any deal that they can make in order to use up the cash.

And it's the quality of the deals that are being made that could backfire. According to The Journal: "Many in the industry are getting caught in bidding wars. Firms are assigning surprisingly high valuations to companies they are acquiring, even though the lofty prices will in all likelihood reduce profits for their investors. A big drop in returns would be particularly vexing for pension funds, which are counting on private equity, hedge funds and other so-called alternative investments to help them meet their mounting liabilities."

So, in effect, pension funds and other investors are going to receive singificantly reduced returns from private equity deals, especially when the fees are factored in. Private equity firms usually charge 2% management fees and take 20% of the profits from any deal.

But the pressure to put the money to work seems to be overwhelming the rationality of the moment.

Conclusion

Unless we' remissing something, private equity groups are scrambling to buy companies at any price. They are looking for return on their money, and in the process may be losing interest in the return of their money.

By scrambling for deals, they are likely to be overpaying for companies, and in the process may be under-delivering to their investors, who may decide to walk away from further deals in the future.

More important is the effect of a buyout on employees, local economies, and tax rolls. Private equity companies often trim payrolls and change the focus of the business of the companies they buy. They often choose to move the location of company headquarters or key plants. And they almost always change managers and management teams.

It's clearly a sign of the times when big money managers, such as the ones who run private equity firms are scrambling around to make any deal happen, and it suggests that times are increasingly hard at the top of the food chain.

We'll be on Twitter some time today before the market closes with some updated comments.

Know when to sell and how to make money when the market falls. Get a detailed trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 

Market Moves - Stock Of The Day
S & P SPDR ETF (NYSE: SPY) Faces Failure Of Rally
The S & P SPDR ETF (NYSE: SPY) looks set to return to a down trend after fariling to complete a bear trend to bull trend transition.



Chart Courtesy of StockCharts.com


If things don't change in the next couple of days, the rally in the S & P 500 that started on June 8 and brought the index above its 200-day moving average for a few days will be a thing of the past.

In the last three days, the market has failed to make any significant headway as prices have run into a significant amount of selling pressure in a clustered area of resistance where the 20, 50, and 200-day moving averages have congealed roughly around the 1100 are on the S & P 500 Index.

The failure of the rally is significant as it comes when several major developments in the political arena have occurred. The BP oil spill remains unresolved. The president and the incumbent party are losing support in poll after poll. White House staffers are starting to bail out. And the housing sector is rolling over now that the home owners credit program has faded.

The lack of any visible sign of a lasting recovery, and the continuation of backward policy from the White House is starting to erode whatever was left of investor confidence. Especially when they are looking at higher taxes in six months, including capital gain taxes.

The bottom line is that it is becoming increasingly clear that reviewing individual positions, raising some cash, and considering the addition of ETFs that sell the market short is now a viable posture.

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