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Stocks Flat Despite Buyout Activity

Market Digest – Week Ending 2/21

Stocks were mostly flat this week despite Fed minutes showing some members favor raising short term rates later this year, as opposed to the second half of 2015 as was previously mentioned. Separately, two large acquisitions were announced, likely inspiring investors to believe current valuations can be supported. Bond prices were little changed.

Weekly Returns:

S&P 500: 1,836 (-0.2%)
FTSE All-World ex-US: (+0.5%)
US 10 Year Treasury Yield: 2.73% (-0.01%)
Gold: $1,323 (+0.4%)
USD/EUR: $1.374 (+0.3%)

Major Events:   

  • Tuesday – Actavis agreed to buy Forest labs for $25 billion.
  • Tuesday – King Digital, maker of Candy Crush Saga, filed for an IPO, and is expected to look for an $8 to $10 billion valuation.
  • Tuesday – The Federal Reserve created new rules requiring large foreign banks with US operations to maintain higher capital than their own countries may require.
  • Wednesday – Minutes from the Fed meeting showed some members favor raising short term interest rates sooner than previously discussed.
  • Thursday – Facebook agreed to acquire WhatsApp for $19 billion.
  • Friday – Ukraine’s President and opposition leaders signed a deal aimed at ending Ukraine’s deadly political crisis by reducing the president’s powers, forming a new coalition government and holding early presidential elections.

Our Take:

Facebook’s $19 billion acquisition of WhatsApp raised a lot of eyebrows. The $355 million per employee price tag may be a record, but from a cost per user perspective it is not completely out of line with several other internet companies. Which raises the question – are we in dotcom bubble 2.0?

San Francisco sure feels a lot like 1999. In those days, unheard of valuations were justified by impressions. These days it is users – which is only slightly more reassuring. But there are some meaningful differences. The biggest players now (Google and Facebook) are huge companies with huge revenues. And the small players (meaning the $1-$3 billion range) are also real companies with real revenues. This time around you don’t get a billion dollar valuation just for putting a .com on the end of your name.

In 1999, the Technology sector hit a peak of 34% of the S&P 500 by weight. Today, it is close to 19%, but is once again clearly the largest sector. Tech performed well last year, but wasn’t radically different than the rest of the stock market. Maybe that makes this more like 1998 than 1999. It’s probably too soon to worry much about crazy valuations or another tech collapse. And if there is no euphoric rush into tech stocks in 2014 or 2015 there likely won’t be any kind of collapse. Either way, it will be interesting to watch.

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