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Buffy Trade Doesn’t Move Markets
Yesterday prior to the market open we learned that Heinz and Kraft Foods are merging into one entity. At first we thought “strategic alliance” which is nothing new for firms that are liken in nature. We saw this in the long ago 1980’s when such firms as Dresser-Rand existed. Dresser-Rand was a strategic combine between Dresser Industries and Ingersoll-Rand. In this case it was an actual merger between the two firms.
This was orchestrated between Warren Buffett’s Berkshire Hathaway and Brazil’s 3G Capital which will own 51% of the new enterprise. Heinz up to this point has been privately held and Kraft sales have been sluggish as of late. Kraft shareholders will receive a premium of $16.50 above and beyond Kraft shares held as of Tuesday’s close.
At first glance and on paper all of this makes perfect sense. After all if you eat a hamburger or French fries what better condiment is there than Heinz ketchup? Kraft at one time was held by Phillip Morris (now Altria) who divested itself of Kraft some years ago but has suffered from sluggish sales in 2014. As Warren Buffett stated this is his kind of transaction. It might be his kind of transaction but it did absolutely nothing for the markets’ yesterday. The Dow dropped by 292 points and the other indices dropped as well. Even the tech heavy Nasdaq which recently cracked the 5,000 mark for the first time in 15 years lost 118 points.
Whereas this may be Warren Buffett’s “kind of transaction” it doesn’t bode well for the future when you see food companies start to merge. Food, of course is considered a necessity that everyone must have and is a defensive play because everyone has to eat, right? Yes, but they don’t have to eat Kraft products, do they? Mr. Buffett is banking on the fact that even if someone doesn’t like Kraft food products; they will love Heinz ketchup.
What’s happening right now is fear. Fear is ruling this market as everyone knows the Fed will hike rates sooner or later but no one knows when. So until the time comes that the Fed either raises rates to provide a bit more certainty or backs off the notion of hiking the FFR (Federal Funds Rate); we will have constant swings in the markets.
Now to some this is great news, efter all traders love volatility, don’t they? Yes but too much volatility is never ideal as it can create constant swings and confusion with no real sense of direction. This can create a whipsaw market whereby we witness constant scalping for a few ticks here or a few ticks there. This is not ideal. Tomorrow, Friday March 27th Final GDP for the 4th Quarter, 2014 will be released and this will provide some insight as to what the Fed’s next move will be. We personally don’t think the Fed will raise rates prematurely regardless of what the hawks at the Federal Reserve think. Janet Yellen, to her credit is very pragmatic. She knows that if rates are raised too prematurely it could slow down an already fragile recovery.
