March 4, 2010We were told at a dinner last night with some clients and prospects that yours truly is far too bearish and that whatever good news there is out there goes under-reported. That was the view by a few. Then there were others who said that they get confused in those precious few times when I do report something positive over whether I am changing my forecast. Yesterday’s pledge to turn optimistic at the earliest opportunity is a case in point on that last point. You can’t win. So I am going to say something positive right here and the answer is no, I am not changing my macro or market view, but merely providing some colour on why it is that the equity market refuses to go down even in the face of what has been a slate of disappointing economic news over the course of the past month. First, dividend payouts are back on the rise. In fact, February was the best month on this score in two years with 47 companies in the S&P 500 boosting dividends or initiating a program; only one company cut. There is more on this file in the USA Today’s business section. Second, stock buybacks are increasing — up 37% YoY in Q4 according to S&P. Third, M&A activity is expanding — another sign of business confidence. According to Dealogic, the number of deals in the U.S.A. is up 13% so far this year, to 1,579 (and the dollar value has soared 46% to $144 billion). And the M&A boomlet has gone global with China and India playing a critical role (see Asia Setting Torrid Pace For Mergers on page B1 of the NYT). Half of the deals this year have been of the all-cash variety versus a year ago — and keep in mind that the S&P 500 nonfinancial sector is still sitting on a cash hoard of $932 billion (up 31% from a year ago — see page C1 of the WSJ for more: With Fistfuls of Cash, Firms on Hunt). If there was an impediment, in addition to a murky economic outlook, it is valuation. There were revisions to the Shiller valuation data and the latest reading on the normalized real P/E multiple is at 20.64x, up from the 20.0x in February and 20.5x in January. The long-run trend is at 16.36x, suggesting that the S&P is currently overvalued by 26%. (c) Gluskin Sheff
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