What a Week: Bears Bloodied
Aaron Task
05/18/07 - 04:50 PM EDT
It's hard out here for a pimp, according to Three 6 Mafia. They should try short-selling.
This week provided another reminder of why it's tough to be a bear. Deal activity, share buybacks and benign economic news sent the
Dow Jones Industrial Average deeper into record territory, while the
S&P 500 came within a hair of its March 2000 peak.
For the week, the Dow rose 1.6% and the S&P 500 gained 1.1%, the seventh straight weekly gain for each. The
Nasdaq Composite dipped 0.2% for the week, its second straight weekly decline.
The Comp suffered from
Applied Materials' (AMAT) weak guidance and setbacks for biotechs
Amgen (AMGN),
ImClone (IMCL) and
Sepracor(SEPR). Strength in energy stocks such as
Exxon Mobil (XOM), amid a surge in crude and another round of deal-making, helped the blue-chip averages push ahead.
On Friday, the Dow was up 0.6% to 13,556.53, its 24th record high of 2007, while the S&P gained 0.7% to 1522.75, less than 5 points below its all-time closing high of 1527.46. The Nasdaq rose 0.75% to 2558.45.
Friday's gains came after
Microsoft (MSFT) set plans to buy Internet marketer
aQuantive (AQNT) for $6 billion in cash. In addition,
General Electric (GE) is close to selling its plastics division to Saudi Basic Industries, according to
The Wall Street Journal.
The reported $11 billion price tag for GE's plastics division was well above the range that analysts had expected and, along with Microsoft paying a whopping 83% premium for aQuantive, was further evidence of the quite ample global liquidity searching for a home.
"There's absurd amounts of cash on corporate balance sheets, and private equity has become a huge force in this marketplace," says Noah Blackstein, portfolio manager at Dynamic Funds in Toronto. "That can provide liquidity for the stock market. Plus, because of Sarbanes-Oxley, the U.S. has had no real IPOs of any magnitude."
The combination of M&A and limited new offers has shrunk the supply of stock available to trade and is very bullish, says Blackstein -- although this week did see big secondary offerings from
Micron Technology (MU) and
Goodyear Tire (GT).
The latest week of M&A madness kicked off with Monday's blockbuster private equity deal for the Chrysler division of
DaimlerChrysler (DCX), which generated optimism about
GM (GM) and
Ford (F).
There were other highlights:
- Merck KGaA agreed to sell its generic-drug business to Mylan Laboratories (MYL) for 4.9 billion euros ($6.63 billion), and Cardinal Health (CAH) agreed to buy Viasys Healthcare (VAS) for about $1.42 billion.
- Bausch & Lomb (BOL) agreed to a private-equity deal with Warburg Pincus valued at $3.7 billion, and Agile Software (AGIL) agreed to be bought by Oracle(ORCL) for $495 million, both on Wednesday.
- Thursday brought private-equity takeovers of Alliance Data Systems (ADS) and Acxiom (ACXM), while 24/7 Real Media (TFSM) agreed to a takeover by the advertising firm WPP Group (WPPGY).
When even companies with questionable fundamentals like Bausch & Lomb are acquired -- at hefty premiums -- it's hard to be a bear, as I discussed on
"The Real Story" podcast Wednesday.
In a similar vein, Alliance Data and Acxiom "are basically humdrum, not-really-interesting stocks that just got very big bids," Jim Cramer commented this week. "The kinds of bids that, if you [short] a lot of other companies, you run the risk of looking stupid when they too get bids."
Further potential shrinkage of stock available to trade came in the form of buyback announcements, which gave a boost to a number of firms this week, including
Intuit (INTU),
Ingersoll-Rand (IR) and
Sun Microsystems (SUNW).
Beyond the deals, stock proxies were aided by revelations in
SEC filings of the latest holdings of famed investors such as Warren Buffett and Carl Icahn. Their positions in rail stocks helped the Dow Utility Average join the DJIA in record territory this week. Meanwhile, Eddie Lampert revealed a large stake in
Citigroup (C), which boosted shares of the financial giant and raised further speculation about the fate of embattled CEO Chuck Prince.
"Almost every day there's incremental news that puts pressure on Chuck Prince," Joe Capone, managing member of SMaRT Financial Partners and
RealMoney.com contributor, said in an
interview on TheStreet.com TV. "It's rare in my experience where situations like this aren't alleviated by either removal of the executive, a major change in strategic direction or the company turning around. In all three scenarios, the stock can go higher."
Riding the Divergences
Also helping stocks Friday was a stronger-than-expected University of Michigan consumer sentiment report, which buttressed solid results this week from retailers
Kohl's (KSS),
Nordstrom (JWN) and
J.C. Penney(JCP), which in turn helped offset weak results from
Home Depot (HD),
Wal-Mart (WMT) and
Federated (FD).
Mixed results in the retail sector were a good representation of the broader market. In addition to the Nasdaq's slippage, the Russell 2000 shed 1.7% for the week, as buying interest continued to focus on a narrower number of stocks and those with larger capitalization.
Recent strength in big-caps has been aided by their relatively greater exposure to international economies and weakness in the dollar. Threats to both trends emerged this week: Japan reported a weaker-than-expected first-quarter GDP report, and China's central bank raised rates and widened the trading band in which its currency trades against the greenback.
The dollar was further bolstered this week by stronger-than-expected reports on housing starts, industrial production, jobless claims and the Philadelphia Fed manufacturing index. Yes, the government's index of leading economic indicators was weaker than expected, but the Economic Cycle Research Institute's weekly leading index -- the more accurate of the two - rose again for the week ended May 11, its growth rate rising to 6.1% from 5.2% the prior week, the ECRI said Friday.
The data, plus Ben Bernanke's comment that "we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," significantly undermined odds of a near-term rate cut from the
Fed.
The Fed may not ease anytime soon, but the market has fared pretty well with the central bank on hold for nearly a year.
Furthermore, the People's Bank of China's action to slow economic growth and restrain speculation -- even if done for political reasons ahead of the G8 meetings this weekend and next week's confab with Treasury Secretary Paulson -- only put in sharper focus the fact the Fed stands alone as the one major central bank
not in overt tightening mode.
And, yet, international-based funds and ETFs continue to take in the lion's share of the flows, while many observers doubt the U.S. big-caps can continue to outperform. From a contrarian perspective, that's a recipe for more of the type of action seen again this week.
