Very unexpectedly a chart that I created and tweeted yesterday went viral. It looked at the correlation of Rupert Murdoch's recent media purchases with major market corrections. Since then Barry Ritholtz and Phil Pearlman, two professionals for whom I have an enormous amount of respect, have taken significant exception to my chart. (Their thoughts are here
As long time Minyanville readers know, I study how changes in our level of confidence alter our preferences, decisions and actions. People with significant confidence behave one way; people without another. What doesn't change, though, is how our level of confidence gets translated into what we do. There is consistency. People with extreme confidence do the same kinds of things over and over and over. It is why history rhymes. While the means may change thanks to technology and social development, the underlying actions really never do. I wrote a lot about this in "Moods and Markets" and I am at work on a second book on why history truly does rhyme, in which I look at parallel moments in history and the remarkable similarity in behaviors that I see.
I offer these thoughts, because my chart was not meant to be flip nor inflammatory. I posted it because I see not only similarities between Mr. Rupert's prior actions with his actions today, but many, many other behaviors which suggest a significant peak in confidence is upon us.
I don't normally share what I write to my clients each week in real time, but in light of the social media interest in my chart this week, I thought the context to the chart might help.
Please read Barry and Phil's posts if you haven't already and then read what I wrote and my thinking behind the chart. Seeing all sides of an issue is the best thing investors can do. The note below is a letter I sent to my clients.
July 18, 2014
Big is back - and if history holds - there is going to be trouble. From M&A to tax inversions to airplane orders out of the Farnsborough airshow, overconfidence and extrapolation are on broad display.
Go Big or Go Home - The media pundits have had to pull out all of their adjectival stops this week: landmark, transformational, landscape changing, previously unthinkable, bold, industry reshaping and those are just the ones that quickly come to mind.
Big and audacious is the new black whether you are talking about the Apple/IBM partnership, Rupert Murdoch's bid for Time Warner, Reynolds American acquisition of Lorillard, the 780 (near-$120+ billion worth) commercial aircraft orders from the Farnsborough airshow or AbbVie's $56.3 billion tax inversion-driven deal for Dublin-based Shire.
But please appreciate the historical parallels to all of these transactions. Two weeks ago I noted that just like the July 2000 creation of EADS marked the top, the proposed merger of Germany's Krauss-Maffei Wegmann GmbH, builder of the Leopard 2 tank, and France's Nexter Systems SA is signaling an enormous peak in confidence. At the very top, long-time enemies come together believing that this time is different. This week we are seeing that peak-in-the-confidence-cycle phenomenon in technology as Apple and IBM form what would have been seen as an impossible partnership twenty years ago.
Then there is the Reynolds American deal with Lorillard. While the pundits focused on how it will transform the cigarette and e-cig world, it was these words in the Wall Street Journal that caught my eye: "The deal-ultimately involving four different cigarette makers-is so complex that it isn't expected to close before the first half of next year. It must win approval from antitrust authorities and shareholders not just of Reynolds and Lorillard, both based in North Carolina, but also of Imperial Tobacco Group PLC of the U.K."
Talk about another statement on peak confidence. At the very top, complexity squared if not cubed becomes the norm. Any and all obstacles can be overcome. Intricacy - bring it on!
Then there are the commercial aircraft orders coming out of the Farnsborough airshow. Last week Emirates finalized a $56 billion order to buy 150 Boeing 777X jets and earlier this week Qatar Airways signed a deal to buy 50 new generation 777-9Xs worth $18.9 billion.
Even more significant, aviation leasing firms agreed to buy an additional $44bn worth of aircraft so far this week. The orders for over 360 aircraft included a record-breaking order for 115 Airbus aircraft worth $11.8bn from SMBC Aviation Capital - the largest ever order for a single-aisle aircraft type by a leasing firm.
I thought last year's Dubai airshow orders reflected extreme confidence, but the aggressiveness of leasing companies this spring at Farnsborough suggests an unprecedented extrapolation into the future of global air travel. The aircraft leasing company model requires that both debt and equity investors believe that there will be a deep market for planes from airlines TBD in the future. The Farnsborough order book suggests historically so.
And then there is Rupert Murdoch. As the chart below shows, few CEO's have the uncanny ability to buy at the top like Mr. Murdoch - and, yes I could have thrown Mr. Murdoch even further under the bus by adding his 2005 $500 million MySpace acquisition, which Newscorp sold for just $35 million six years later.
But please appreciate, though, that Mr. Murdoch's current buying spree goes well beyond Time Warner.
Earlier this spring, the media reported that Mr. Murdoch had purchased the top four floors of One Madison, a new Manhattan condominium tower, for $57.25 million.
Our level of confidence impacts all aspects of our lives and Mr. Murdoch is all but oozing overconfidence today.
Finally, AbbVie's $56.3 billion tax inversion-driven deal for Dublin-based Shire certainly says it all about how far companies are willing to stretch at the very top.
Still on the tax inversion front, I would note the already changing tone from the media. When the strategy first came to light, it was characterized as "tax efficiency" and/or "tax optimization." This week I repeatedly saw the phrase "tax evasion." Not only is that a warning sign for the AbbieVie/Shire deal and future deals to come, I'd also offer that the change in tone is yet another ding to the omnipotent transnational business model overall. With Treasury Secretary Lew using the phrase "economic patriotism" at CNBC's Delivering Alpha conference on Wednesday, I expect that not only will the inversion loophole be closed, but further pressure will be placed on the world's largest nomadic global corporations. As I have written for years, weak mood will eventually require global corporations to hold a single national passport.
Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world." -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation
The author holds a position in SH, and is a creditor of JPMorgan
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