April 2007

You may have heard that Intercontinental Exchange (ICE) is making a $9.6 billion bid for the Chicago Board of Trade (CBOT). One of the more interesting factors is that the ICE “only” has a market-cap of $8.8 billion, which makes the acquisition price a very curious event.

How can ICE do that? They’re making the offering with new stock, which means they’d issue new stock worth over 100% of their current market cap. Most people can’t do things like that, but basically the management at ICE have managed to secure the equivalent of a line of credit with their investment banks. They’ve talked to the brokers that would help them issue the new stock, and convinced them to help them sell such a large chunk of shares. (In a deal like this, the investment bankers will make a ton of money in fees, so I doubt it took much convincing.)

So, the yield curve inverted back at the beginning of August 2006… a full 8 months ago. As we talked about a few times, the typical response to an inverted yield curve is a recession in 6 to 12 months…

Well folks, we’re smack dab in the middle of that timeframe now… and several of the yield spreads worth watching are closing in on the zero line.? Some would say the uptrend in the yield curve is the real harbinger of ill fates, rather than the inversion itself.

Anyone want to take a bet on whether or not we’re heading into a recession?

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