David Fry's Market Outlook for Friday

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Includes: EFA, IEF, IGM, RCD, SPY
by: David Fry

D Fry Market Outlook 13 07 2007

All bad news (the subprime debacle, rising energy prices, the weak dollar and poor earnings from some companies like Motorola Inc. (MOT)) has been set aside, as buyers focus on more deals and Wal-Mart Stores Inc.'s (NYSE:WMT) better than expected sales data.

Buying panic has ensued!

I can't remember markets behaving like this except perhaps in 1987 and early 2000. Why is this occurring? A lot of liquidity courtesy of the "yen carry trade" coupled with takeovers and buybacks. The supply/demand imbalance has become acute.

Rio Tinto's (RTP) bid for Alcan (NYSE:AL) was roughly $30 over Alcoa's bid. Why so much more? Fear that they couldn't get it done otherwise, one must assume.

Stock buybacks serve no purpose other than to bolster a stock's price. A more nefarious explanation is that a stock buyback is the easiest way for a management heavily vested in cheap options to reward themselves without appearing to do so. With fewer shares outstanding, even flat revenue growth can increase earnings per share and theoretically share prices.

Here's a list of buybacks done lately and the impact on market capitalization:

  • The Home Depot Inc. (NYSE:HD): $22.5B: 28.3%
  • Caterpillar Inc. (NYSE:CAT): $7.5B: 14.7%
  • 3M Company (NYSE:MMM): $7B: 11%
  • International Business Machines Corp. (NYSE:IBM): $15B: 9.3%
  • ConocoPhillips (NYSE:COP): $13B: 9.5%

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Overseas markets still are both more consistent and producing stronger returns overall.

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So where's all this money coming from to buy stock? From retail investors thru mutual funds? Hardly. Check the flow of funds and note that most money went to ETFs and specifically SPY which is used by institutions for program trading purposes.

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You'll note that program trading, as we've noted recently, has been pushing 40% of volume. The usual suspects are below and, in case you didn't know, most are also Fed primary dealers.

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Some bears will describe Thursday as a blow-off top. But the dead bear "pic" I posted here Wednesday may in fact represent a really dead bear. Should we put a fork in him? It sure seems so at least from today's perspective.

No amount of bad news seems to shake Wall Street. With so much money about and deals being done hand over fist there's no reason to deny bulls. Stock buybacks aren't long-term beneficial in my opinion, since I'd rather see money spent on research and perhaps even increased dividends. But that's not our business to call.

With the Street dominated by trading desks and hedge funds, things could change in a hurry -- since they'll trade-out of their positions in a heartbeat.

The market does remind me of 1987 at around the time when the last leg was being added. What will change this? Any number of things, but the primary ingredient in this rally is money and lots of it. Despite other potentially negative factors, you should probably just watch the yen/pound cross rate to note when a change is coming.

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Have a pleasant weekend.

Disclaimer: iShares Goldman Sachs Technology Index Fund (NYSEARCA:IGM), First Trust DJ Internet Index ETF (NYSEARCA:FDN), PowerShares Dynamic Semiconductor (NYSEARCA:PSI), iShares Goldman Sachs Network Index Fund (NYSEARCA:IGN), PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), United States Oil Fund ETF (NYSEARCA:USO), PowerShares DB Energy Fund (NYSEARCA:DBE), PowerShares DB Agriculture Fund (NYSEARCA:DBA), streetTRACKS KBW Bank (NYSEARCA:KBE), iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), iShares MSCI Brazil Index ETF (NYSEARCA:EWZ), Market Vector Russia ETF Trust (NYSEARCA:RSX), iPath MSCI India ETN (NYSEARCA:INP), iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), iShares MSCI Hong Kong (NYSEARCA:EWH), iShares MSCI South Korea Index Fund ETF (NYSEARCA:EWY), iShares MSCI Australia Index Fund (NYSEARCA:EWA), iShares MSCI United Kingdom (NYSEARCA:EWU) and Turkish Investment Fund Inc. (NYSE:TKF).