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Tuesday, 21 February 2017 00:00

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Simple, but not easy

If there was ever a major championship, in a major sport, that could be contested largely unnoticed in our country, it would be the Australian Open in tennis. For starters, there is the time zone challenge, and it’s played toward the end of January when most American sports fans are rooting for their favorite team to make it to the Super Bowl.

So, if you missed this past Australian Open, I understand, but this was one for the ages. First, Serena Williams won her record 23rd major singles title, surpassing Steffi Graf who won 22. Then came the men’s final, an epic battle between two of the greatest players of all time, with Roger Federer winning his 18th major, also a record on the men’s side. During the trophy presentation ceremony, Federer made a simple remark about his opponent, Rafael Nadal, but to me it was an amazing message and a challenge to all of us to take to heart.

He basically said that he would have been just as happy for Nadal to have won as he was for himself. Maybe more amazing is that everyone who knows Federer believes he meant it. In my entire life I have never heard a champion, at that level, express such a sentiment about an opponent. Have you? 

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Think about applying that sentiment in daily life... We are just as glad when a co-worker gets the promotion we were both striving for. We call the salesman from the competitor to congratulate him when he wins the deal we were hoping to win. Should I even mention politics? And when we express these remarkable conciliatory sentiments, WE MEAN IT! How much would that change our world?

Donald Trump has been president for about a month. By just about any measure it hasn’t been a smooth transition. Trump seems to be battling with everyone, especially the media, but also within his own team and political party. Meanwhile, stock prices continue to soar, with the major averages hitting new highs seemingly on a daily basis. Since the stock market reflects future expectations, I’m wondering what positive changes it might be anticipating?

Trump’s game plan to “Make America Great Again” rests on two critical objectives – lowering taxes and rolling back burdensome regulation. Neither of these are going to be easy to accomplish, certainly not in the first month. So, while his critics will be relentless in their pressure and protest, the market will be a bit more patient, recognizing lower taxes and less regulation as powerful catalysts for the overall economy and markets.

But there is a feeling of uneasiness lurking below the surface... In just the past few days, Kraft-Heinz announced a bid to acquire Unilever in a $143 billion deal that would have been the largest ever in the Consumer Staples sector, and the third largest corporate acquisition on record. Then, suddenly, only a couple days later, Kraft-Heinz pulled its offer. This kind of about- face reflects the heightened level of anxiety that exists today. Corporate executives are feeling the pressure. Meanwhile, as evidenced by the populist movement globally, the level of confidence in political leaders remains woeful. Given this situation, I expect Merger & Acquisition activity to accelerate as the year unfolds for multiple reasons. First, corporations have about $2.5 trillion in cash held in overseas operations, and it is likely that tax reform will include some repatriation of this cash. Once this occurs, we can expect higher dividends and share repurchases, more M&A activity, and an increase in overall capital investment. All of these initiatives should be positive for stock prices. Second, corporate executives are eager to accelerate earnings and shareholder value after a decade of very slow economic growth. Low interest rates, strong cash flow, and a more business-friendly administration all suggest we may be on the cusp of a powerful wave of M&A activity. Importantly, some of these deals will create value and some will not. It’s never easy, is it?

Federer’s message was simple, but not easy - To compete in such a way, over a long period of time, to produce not only the highest level of mutual respect with your most formidable rival, but to understand the virtue and deeper meaning beyond the final score. As Grantland Rice famously wrote in his poem “Alumnus Football” –

"When the one Great Scorer comes to mark against your name, he writes not whether you won or lost, but how you played the game."

A good thought for us all.

Michael Kayes, CFA

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