Wall Street's Elite Players Are Back, Time To Be Extra Vigilant

Well, it was a real lackluster session, save for the part that the barbarians are back and that means we need to be extra vigilant.

I’m talking about Wall Street’s elite players, looking to make big deals with big debt and bigger leverage for paydays that rival Gross Domestic Products (GDPs) of many nations. The term is from the title of the book Barbarians at the Gate that chronicles the battle for RJR Nabisco using leveraged bond offerings, also known as (LBOs).

The book is supposed to be a cautionary tale of Wall Street excess; but for some, it’s a blueprint on how to become the master of the universe.

For others, it’s the ultimate tome on Wall Street’s greed and skullduggery in pursuits of winning the biggest paydays. While the victors enjoyed the spoils, the roads are littered with the carnage of broken companies, broken employees, and eventually a broken stock market.

Don’t get me wrong. There have been several LBOs that worked perfectly, and many saved companies that were otherwise doomed. Still, through two waves of LBOs (the 1980s & 2006/2007), the disasters can’t be ignored.

The Carnage

Texas Utilities is the largest LBO on record at $48 billion and the biggest bust, having filed for bankruptcy protection several years ago. The key players are the who’s who of the most powerful forces on Wall Street.

The consortium was led by Kohlberg Kravis Roberts & Co. (KKR); Texas Pacific Group (TPG Capital), and Goldman Sachs (GS). Other well-known names in the industry include Blackstone (BX), Drexel & Milken, and Bain & Romney.

Other LBO disasters include, but not limited to, Clear Channel ($27 billion), Freescale Semiconductor ($18.0 billion), and Harrah’s Entertainment ($31.0 billion).

Cash Burning Holes

Private equity funds are sitting on a record $2.5 trillion dollars, and with the market making new records each day, that cash is burning a hole in their pockets.

Private equity groups have a record level of dry powder

The Texas Utilities (Electric and Gas Company) (TXU) deal was done at 8.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA) cash flow, well above the red flag marker of 7.0 times.  This year, LBOs have picked up, including the $13.5 billion deal for the financial data firm Refinitiv. However, it’s the official announcement that KKR is ready to swallow Walgreen Boots Alliance (WBA) for $76.0 billion, shattering the record books, and awaking dormant memories of barbarians running amok.

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In the first nine months of the year, 13% of LBOs were at seven times EBITDA back in 2007- it was 24%.

Band Together Again

The CEO of Walgreens was at the helm when he incorporated KKR to help him acquire Walgreens Alliance Boots. That $15.3 billion deal made the participants fabulously wealthy.

KKR saw its $2.1 billion investment grow to $7.0 billion over the next nine years.

Unfortunately, shareholders of the stock since 2015 haven’t fared as well. It remains to be seen what happens from here, but if this deal is done, it will be one for the record books.

• $56.0 billion market value
• $16.8 billion debt

I’ll be watching this and other deals for subscribers. Also, I’m spying the political consequences of this news, as there is no doubt socialist candidates - and even a few capitalists - might complain about Wall Street’s greed and arrogance.

It’s a gamble on many fronts.

Portfolio Approach

No new ideas yesterday, after the last several weeks.

Trump to NY Economic Club Promise Made, Promises Kept

Love him or hate him President Trump went to the New Your Economic Club in 2016 and outlined his trade strategy.  He promised to use “every tool” under American and international law to end trade abuses by foreign countries.  He promised to stay out of the Trans-Pacific Partnership and rip up and replace NAFTA.

President Trump has done all of those things and while the experts continue to speak in generalities about the harm of tariffs in theory, in practice the biggest hit has been large American corporations withholding investments ostensibly out of confusion but perhaps to trigger enough economic pressure to stop any additional assaults on their profit margins.

To be fair a lot of businesses are doing what businesses do and have adjusted.   

It’s premature for President Trump to take a victory lap but the finish line is within sight and at this point I think most Americans would like to see American businesses cheer him to the finish line understanding that fair trade should be the true foundation of free trade.

Charles V. Payne

Trump Addresses the Economic Club of New York 2016

"I’m going to direct the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers. I will use every tool under American and international law to end these abuses, and I will use our greatest business leaders and finest negotiators...

 We are going to start with NAFTA, which is causing so much damage to our country. We will entirely renegotiate NAFTA into a deal that will either be good for us or will be terminated until a brand new and productive deal can be signed.

We are also going to keep America out of the Trans-Pacific Partnership.

Next, I am going to instruct my Treasury Secretary to label China a currency manipulator, and to apply tariffs to any country that devalues its currency to gain an unfair advantage over the United States.

I am going to instruct the U.S. Trade Representative to bring trade cases against China. China’s unfair subsidy behavior is prohibited by the terms of its entrance to the WTO, and I intend to enforce those rules.

If China does not stop its illegal activities, including its theft of American trade secrets and intellectual property, I will apply countervailing duties until China ceases and desists.”

Housing Revival

DR Horton (DHI)

• Closed 16,024 homes = $4.8 billion +9%
• New Orders 13,130 homes +14%
• Orders value $4.0 billion +16%