Pfizer and Allergan have announced a “merger” where Pfizer is essentially acquiring Allergan so it can perform a tax inversion to relocate to Ireland (where Allergan is based). This is the second time Allergan has been acquired since we purchased it back in June, 2013, with the first being the takeover by Actavis last fall. Then Actavis changed the corporate name back to Allergan so it’s really the Actavis-Allergan combined company which Pfizer is buying. Shareholders of Allergan will receive 11.3 shares of Pfizer stock for each share of Allergan they own.
Interestingly, both companies are trading lower today which says there’s some serious skepticism about whether or not this deal will go through successfully. The US Treasury just issued some new updates on their tax inversion rules so Pfizer structured the deal so it should pass, but obviously there are some concerns. At Pfizer’s current price of approximately $31.30, Allergan should be trading closer to $350/share – but it’s currently trading at only $302.
I don’t want to own Pfizer, not at this valuation at least, so I’ll be looking to eventually exit Allergan, but hopefully much closer to the takeover value.
Other Updates
- All is not as it appears in the stock market. I touched on some warning signs that breadth is waning and only the largest companies are holding up the indexes a few weeks ago here. Here’s an interesting stat I saw over the weekend to go with that: As of last Friday, the average year-to-date return of the top 10 stocks (by index weight) in the S&P 500 is 20.2%. The other 490… are down 5.9%. Alphabet (formerly Google) at #11 just missed the list or else that number would have been skewed even more.
- The divergences between the credit markets and stocks continue to grow. Stocks can sometimes ignore bad news for a while, especially during strong trending periods, but the credit markets are almost always right. I’ll be discussing this in much greater detail in my upcoming letter to clients in a few weeks.
- After the Fed’s October meeting, interest rates across the entire yield curve rose, with shorter term rates experiencing the worst of it. I’ve happily accepted Janet Yellen’s gift of higher yields and have been buying intermediate and long-term Treasury bonds to couple with our US dollar position. All you pretty much hear in the mainstream media is that if the Fed is going to start lifting rates, you don’t want to own longer-term bonds. This is wrong and anyone that says this doesn’t understand the dynamics of the bond market. The Fed controls short-term rates, not long-term. I’m very happy to buy 30-year Treasury bonds above 3% and 10-years above 2.25%, and I’m hoping yields continue to drift higher to buy more. This might sound crazy but with the deterioration in global trade, credit markets (especially leveraged loans) and commodity prices, I think Treasury bonds are quickly becoming the most appealing asset class to own.
I hope everyone has a very happy Thanksgiving!
-Nick