Wednesday, February 23, 2011


Positive Early Signs From Toll Brothers

There are some good early signs in Toll Brothers' (TOL) conference call that residential real estate is in a modest recovery and that inventory is being slowly cleared.

This input is consistent with this morning's national housing sales report.

Specifically, orders (though only at 60% of the average over the last decade) are back to 2007 levels. Importantly cancellation rates, which peaked at around 36% at the cycle bottom, are now back to 6%-7%, which is the company's historic norm.

The spring selling season has started off well, with sales deposits up 15% year over year (up 9% on same-store basis).

The company reports that the Washington, D.C., to Boston corridor is very strong, especially Hoboken, N.J., Brooklyn and Manhattan.

It appears that the national housing picture is a bifurcated one, with the aforementioned regions doing well and the very weak areas (e.g., Arizona, Nevada and California) still sluggish.

Overall, pricing power is still broadly lackluster.

Large Yahoo! Share Accumulation?

I'm hearing that there is a rumor in Europe of a large accumulation of YHOO shares in the last month.

I should be so lucky.

For Whom the Barrel Tolls

Crude's outsized price advance is the death knell to the market's advance.

The further rise in the price of oil, up $3.50 a barrel after yesterday's outsized advance of nearly $8 a barrel is the death knell to the market's advance.

According to Boy Genius' website, AAPL has sent out invites for a March 2 media event to unveil iPad2.

"History does not repeat itself; it rhymes."

-- Mark Twain

It is argued by bullish investors and strategists that the increased level of M&A activity highlights a greater appetite for risk assets, improving business confidence, a better lending climate and underscores the large cash hoards at the some of the world's largest companies.

These arguments have merit. But so does the observation that takeovers are often done at or near the top of market and of the general economy.

History also shows that the popularity of companies and industries often peaks (and goes to the extreme) coincident with takeover activity in those areas.

Last week, in an case of impeccable timing after a doubling in the S&P 500 since March 2009, NYX announced an agreement to be acquired by the Deutsche Boerse.

Equally amusing was the previous week's AOL acquisition of The Huffington Post for a large multiple of sales, cash flow and earnings, and this happened after we had already seen an explosion in Internet (again!) and social network valuations -- namely, Facebook's recent GS funding at a $50 billion capitalization.

If history is a guide, both deals could mark that the end is near, in general, for the rise in the U.S. stock market and, in particular, for the outsized increases in Internet and technology sector valuations

I got to thinking about the large takeovers littered over the last decade, and I suspect the NYSE transaction and the AOL deal will end up as miserably as many other high-profile deals, most of which occurred at the end of a cycle and resulted in large writedowns or unprofitable transactions.

Time Warner/AOL Merger

"This is a historic moment in which new media has truly come of age."

-- Steve Case, Chairman of AOL

"The Internet has begun to create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression."

-- Gerald Levin, Chairman of Time Warner

In early 2000 AOL acquired TWX for $180 billion in stock and debt in one of the largest media takeovers in history. That transaction, which ultimately resulted in the largest corporate writedown in history, marked the end of the Internet bubble. The Nasdaq subsequently fell by over 70%.

There have been many other huge takeover goofs since 2000 at cycle highs -- for example, Sprint/Nextel, HBC/Household Finance, RBS/Fortis, STD/ABN Amro and the list goes on and on.

The message for Deutsch Boerse, AOL and all the others?

Approach the euphoria surrounding increased takeover activity with some skepticism, as it often, in the fullness of time, ends up badly.


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