Week of February 24, 2014
Markets Spin Sideways
Although the S&P 500 being down a mere 0.1 percent might lead some to interpret last week as uneventful, the shortened week was actually ripe with interest on Wall Street. For starters, there was a massive acquisition out of Silicon Valley that put icing on the cake for what has been a furious start to the year for technology-related merger and acquisition activity. Furthermore, conflicting economic data and the release of Federal Reserve meeting minutes added fuel to the fire on the debate of where our economy stands and, more importantly, what to expect throughout the remainder of the year.
Source: Yahoo! Finance
The Fed funds rate is the interest rate on loans by the Fed to banks to meet reserve requirements.
Massive Deal Maintains M&A Momentum
Last Wednesday, it was announced Facebook would acquire a small start-up company named WhatsApp for a not so small price tag of $19 billion, helping the overall technology-related merger and acquisition, or M&A, year-to-date total reach a point that is 41 percent above the same level as this time last year, according to Dealogic. While overall global M&A activity actually declined by 6 percent in 2013, according to Thomson Reuters, the value of deals made by companies in the technology sector soared 65 percent higher to $188.2 billion last year, according to Ernst & Young. While business deals are gathering steam, it’s up to investors to interpret whether or not companies unleashing their record amounts of cash (i.e., the 25 largest tech companies have a combined $832 billion sitting on balance sheets) is the key takeaway, which would be positive, or if we should be concerned companies are potentially overpaying for companies in a desperate effort to find sales growth in a still struggling economy.
Mixed Bag of Economic Readings
Household borrowing increased 2.1 percent in the fourth quarter of 2013 making it the biggest surge in more than six years, according to a survey by the Federal Reserve Bank of New York. Throughout and immediately following the most recent recession, American’s were paying off debt, or deleveraging their personal balance sheets. For now, it would appear consumers are now feeling comfortable enough to continue moving in the opposite direction by taking on more debt in order to fund purchasing activity. Interestingly, despite the recent reversal, total household debt remains 9.1 percent below the 2008 peak of $12.68 trillion. While investors cheered this news, some feared the trend will not prove to be sustainable as data showed new housing starts plummeted by approximately 15 percent in January, the largest monthly dip in about three years. Considering 70 percent of all household debt is comprised of mortgages, it would be difficult for total debt to continue rising without a strong housing market.
Is the Fed Already Considering Rate Hikes?
Deep within the latest release of Federal Reserve meeting minutes, there lies a rather big surprise that slightly agitated investors last week indicating “a few raised the possibility that it might be appropriate to increase the federal funds rate relatively soon.” While it’s been widely understood the Federal Reserve fully intends to continue ratcheting down its monthly asset purchasing program, most believed it would be quite some time before interest rate increases would become a real possibility. While the rest of the meeting minutes would still confirm most of the Federal Reserve sees an economy that still presently needs record low interest rates, the brief passage indicating some members are already starting the conversation on raising rates leaves us wondering how much longer we really have before interest rates begin their inevitable ascension.
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