We are currently in a challenging macro environment with 30 year fixed mortgage rates nearly doubling in just the span of a few months to 6%, the nationwide average for gas has eclipsed $5 per gallon and cryptocurrencies are imploding at a rapid pace. Buyer’s remorse, potential financing issues or liquidations of certain institutional portfolios is also impacting merger arbitrage spreads, which have widened significantly over the last week. There are 15 active all cash deals with annualized spreads above 30%. I will be writing more about these wide spreads and a three part plan of action to tackle this bear market in our mid-month update tomorrow.
This environment reminded me of a debate I have often seen between investors that either prefer top down or bottoms up analysis. Bottoms Up is a Nickelback song, the name of a bar in San Francisco and an approach investors use to focus on the specifics of a company they are analyzing. Investors favoring this approach are on the lookout for companies that meet their investment criteria, which can include everything from calculating the intrinsic value of the company, analyzing management’s capital allocation track record (were they buying back stock and issuing stock at the right times), understanding potential future growth opportunities and reviewing how the company is positioned compared to peers.