David Fry's Daily Market Outlook

David Fry (ETF Digest) submits:

Equity markets were pushed higher with action heavily dominated by program trading which as of the latest readings accounts for 34% of all NYSE volume. So the computers are still dominant players.

While Halliburton Co. (HAL) was busy, there was some encouraging fundamental economic news as the dollar rallied on lower trade deficit data driven by lower imported energy prices.

Below is the active crude oil contract from the NYMEX. StockCharts is showing something completely different so it's misleading to post their chart.

There's also still a strong taste for M&A activity with airlines in play. While airlines are heavily weighted in the iShares Dow Jones Transportation Index ETF (IYT), one must remember that shipping tonnage data has been weak. So there's an offset that's holding IYT back.

The "emerging" 2007 theme has been: "Out of energy and into tech." Thus far with only a handful of trading days that theme is working. The month is young, but Apple Computer Inc.'s (AAPL) positive news has spilled over to the rest of the sector.

We'll post the index rather than the ETN [INP] since the latter has little data; however, it should reasonably track the index.

In addition to the "ChIndia" theme, many investors are interested in Latin America. I queried Tim Cooper at Emerging Markets Monitor in London for their opinion about the goings-on in Venezuela for example [a market which we cover in our World Indexes program.] His answer follows:

"... We have been very cautious regarding Venezuela for some time, due to a mix of political risk and haphazard macroeconomic policy. The events of the last few days are a pretty stark manifestation of what we've been talking about. The run-up in the stock market (before yesterday's big drop) has been mostly, in our view, on the back of massive levels of liquidity in the domestic economy, which the government has been inept at dealing with. Basically, the country has a lot of oil money coming in, but due to strict capital regulations, investors can't easily take their money out, and for the most part require government permission to convert bolivars into U.S. dollars. So they're putting their money in any domestic investment they can find -- this has driven stocks higher, and driven local bond yields way down. To put the magnitude of this liquidity trap and desperation for returns into perspective, the 91-day T-bill yields something like 3.9%, but inflation is running at 17%. (Also, if memory serves, local pension funds recently had their investment rules liberalised, putting even more money into local stocks.) While economic growth has been pretty stellar over the past few years, fuelling corporate profit growth, this has to do mostly with massive levels of spending by the Chavez government -- and not sustainable private-sector growth -- and this leaves the economy very vulnerable to a drop in oil prices, in our view."

Does this mean anything to the rest of the continent? The drift to the left is continuing unabated with Ecuador announcing a default similar to Argentina's in 2001. However, Chile, Colombia and Argentina for example are still moderate and doing well.

According to the Economist, global money supply growth has increased at a whopping 18% annually over the past three years. That's unsustainable. It's the force behind HAL, M&A activity, Emerging Markets, housing bubbles and so forth. Will or how will central banks start sopping-up this excess is unknown. But at some point, something has to give. If the central banks are true to their words as "inflation fighters," they will have to act. The longer the imbalances continue the uglier the result.

Have a pleasant evening.

Disclaimer: Among other issues, the ETF Digest maintains positions in: S&P 500 Index (SPY), Rydex S&P 500 Equal Weight (RSP), Claymore Macroshares Oil Down (DCR), iShares Dow Jones Transportation Index ETF (IYT), NASDAQ 100 Trust Shares ETF (QQQQ), First Trust DJ Internet Index ETF (FDN), streetTRACKS Gold Trust ETF (GLD), iShares S&P Europe 350 (IEV) and iShares S&P Latin America 40 Index Fund (ILF).

Comments

[Greg Calder...:]

Hal came out with 2 outperforms today. Any idea how much of a bump they will get from this?

2007 Jan 30 07:27 PM