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Dos Hombres: Is the Party Over?

Fin - Breakout - US

Matt Nesto and I hit the Breakout set with a head of steam this morning, fueled by Monday mergers and market tops.

I led off with a brief summary of this morning's deals. To whit:

* China's Minmetals paid $6b U.S. for Canadian copper play Equinox (EQN.TO).
* BP (BP) stripped out another of its non-core operations by selling an aluminum division to another Chinese concern for $68m.
* Pfizer (PFE) sold its Capsugel division to KKR (KKR).
* Vivendi (VIV.PA) bought out Vodafone's (VOD) stake in a French telco for $11.3b U.S.

What's more, according to AP, since the beginning of 2011 U.S. companies have announced over $150b in stock buybacks, the fastest pace since 2007 (and a 38% jump from last year). That number will certainly grow as Pfizer and both sides of the Vivendi / Vodofone deal all announced plans to increase buybacks and dividends with the proceeds of their deals.

The problem is that buybacks and dividends seldom, if ever, lead to higher stock prices. Corporations are notoriously bad at timing their buybacks, paying dearly for their stocks at the top and getting austere at the market lows. Thus, when companies such as Home Depot (HD) start borrowing money to buy their own equity, it's not the bullish sign it would seem. The cost of borrowing may be low, but the cost of going into debt to buy a stock that drops is high.

If an individual went on margin to get long one specific stock, it would be considered wildly reckless, yet it's bullish when a corporation does the same? Not in my house it's not.

For Nesto's part, he's eyeballing an S&P500 that's moved thisclose to the highs of February (1,330 give or take today vs. 1,343 on February 18th), coming off the best quarterly performance in years and moving into an earnings season where results are much in question. Old highs tend to be market resistant, in part due to valuation and in part owing to the "Prayer of the Bad Trade," as those who bought at the top look to get back to even.

Nesto also observes how thin leadership has gotten in the rally, with materials and energy leaving other sectors well behind, another traditional sign that equities are nearer a short-term top than a breakout.

Is all of the above a harbinger of market weakness or just another brick in the fabled "Wall of Worry"? Your guess is as good as ours, but we'll be following the tape closely here at Breakout.

Let us know what you think. Email us at Breakoutcrew.com.