Light My Fire

In my outlook for 2013 I wrote:
The level of cash M&A, LBOs and share repurchases have been on the low side considering where rates are. A buyout boom fueled by low rates is a real possibility. The fuel is there. Somebody just needs to light a match.

In the past two weeks there has been $97.5 billion in cash M&A and share repurchase announcements. TrimTabs has done extensive studies on what they call float shrink. This extreme level of float shrink is very bullish in the short term. It is intuitive that less supply of stocks should lead to higher prices.

Unfortunately, other factors are not as rosy for the market. Sentiment is excessively bullish and valuations are full. At the same time we are about to see the effects of the payroll tax hike. Many Americans live paycheck to paycheck and a broad tax hike is likely to effect the economy. There are also likely to be spending cuts even if we don't see a sequester.

It seems that the market is setting up for a third bubble. In the same way that artificially low rates have driven up real estate prices it seems the same is now happening to stock prices. This will likely not end well but being early to try and fight this is the same as being wrong.  The facts have changed with the massive amount of M&A and share buybacks announced in the past 2 weeks. I have bitten the bullet and removed some of my hedges, accepting a very low level of market risk.

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