Jeffrey Saut: Hedging Positions in Unprecedented Times

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (November 10th):

...[B]y far the most unprecedented event of last week was President-elect Barack Obama’s victory. I had actually thought there would be a celebratory equity market rally Wednesday morning on this unprecedented election, but alas it was not to be. Evidently, “the Street” was worried about an Obama regime that will increase long-term capital gains taxes, raise taxes on dividends, increase the size of government, increase the size of entitlement programs, well you get the idea.

...If the Obama administration moves toward larger government, like Franklin D. Roosevelt [FDR] did following the Great Depression, then we are in trouble, for after the Depression there was a huge backlash against business, and business leaders, amid calls for the government to fix ALL of life’s inequities. And if you don’t believe me, Google FDR’s 1933 and 1937 inaugural addresses, which read like they could have been written yesterday.

Indeed, if Barack moves toward the 1930s model that focuses on the “right to healthcare, the right to own a home, the right to everything,” he replaces the “rights” of the individual (that founded this country) with the government’s “granting” of said “rights” in true socialistic fashion, leaving our country in trouble (in my opinion).

If, however, he moves to the center, providing a stimulus package not designed to give “checks” to EVERYBODY, which historically has provided only a short-term shot of heroin to the economy, but rather injects funds into infrastructure projects like bridges, roads, etc., the multiplier effect for the economy would be significant. Combine this with a thoughtfully conceived plan to stabilize housing prices and the economic impact could be significant. More importantly, as the astute GaveKal organization opines:

Probably most important economic transformation which is about to occur is the transformation in personal leadership. Suppose you believe, as I do, that the financial meltdown triggered by the bankruptcy of Lehman Brothers was not a divinely ordained retribution for decades of greed and profligacy, but simply a bizarre accident, caused by the incompetence of the Bush Administration, particularly of Mr. Paulson. In that case, the arrival of a credible new economic team in Washington, led by respected figures such as Messrs Volcker, Summers and Geithner, could transform psychology in global financial markets. With house prices stabilizing and an inspiring new leader replacing the doltish President Bush, American consumer and business confidence could enjoy a similar resurgence.

The call for this week: We are hopeful that President-elect Barack Obama will move to the “center” and take the aforementioned path. If so, the October 10th “lows” should hold. Moreover, our studies of past elections show that the first “move” by the equity markets following Presidential elections have typically been a wrong-way move. We are hopeful that is the case this time.

It is also interesting that many of the indices have traced out in the charts what could be a reverse head-and-shoulders bottom. However, the path is not certain, which is why we have recommended downside “hedges” on most trading, as well as investment, positions.

As recommended last week, those trading positions include: ProShares Ultra S&P 500 (SSO); ProShares Ultra Financial (UYG); ProShares Ultra Real Estate (URE); and ProShares Ultra Basic Materials (UYM), the first three of which were recommended with a hedge. As for many of the convertible preferreds recommended for investment accounts, given the rally in some of these shares the idea of hedging partial positions hereto makes some sense.

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Comments

[Delojozafado:]

This guy has called the market bottom three or 4 times now in the last month. His observations about horseshoes and hand grenades being analogous to buying near the bottom is a strategy, as calling a bottom is
really not possible has blown up. His call to be the second mouse to visit the mouse trap gets the cheese was followed by a "third mouse" call. Now we see that GM is most likely the next shoe to drop and the sky may actually be falling. "Don't fight the Fed, buy and hold, P/E ratios"' are all out the window. No one trusts any numbers reported by companies as they can just go back at some point and re-state the actual numbers of the last 2-3 quarters. HP ends up being owed over $100 million by Circuit City. How many more of these land mines are out there, where the manufacturer is so desperate to unload inventory they extend credit beyond what is sensible? No one wants to understand that the new paradigm for a job in America is $10/hr no matter how over qualified you are. With the advent of online computer generated resume/job applications if a worker can not supply information for each and every line of a four or five page job application the application is rejected before anyone making a hire even gets to look at it. Unemployment, under employment , and selling the desperate more debt to finance more education for jobs that only seem to exist will not revive our economy. $10/hr will not support home ownership. The article as published is useless with out some insight as to what hedges were employed in conjunction with the very risky double long picks. The last rally ending on election day failed to even make or hold the 30 day moving average of the S&P 500. No one even knows what a corporate bond is really worth these days.

2008 Nov 11 06:27 AM

[gca1:]

I am tired of hearing that we are in a "bottoming process." That's Wall Street speak for I have no idea what is going on or when it will end. Frankly, I am really angry that we have been screwed by the rating agencies like Moody's and S&P who rated mortgages triple A when they knew they were junk, left unprotected by the bill that Clinton and Greenspan passed that allowed this rape of America to go on, failed by a government that has wasted three years addressing the housing market, concerned about bailout programs that will keep our children and grandchildren in debt for years to come, and a Senate that adds "pork" to the bail out bill and then call it their finest hour. Saving the automobile companies is crazy. If they don't know how to run a business, they should go away. It's called the law of survival of the fittest, not survival of the incompetents. We are in a "humpty dumpty" type disaster and I question whether all of the king's horses and men can put America back together again. Hopefully, Barrack can get things on track because Bush can't even spell recession. We live in a great country, but we have been led by idiots and incompetents posing as geniuses.

2008 Nov 11 07:13 AM

[enigmaman:]

If things seem splendid, they will get worse, Success inpires over confidence & excess.
If things seem dismal, they will get better, Crisis spawns opportunity & progress.
Our triumphs & follies follow a rhythm that, can be influenced but not repealed.
As day follows night, night follows day. Go with the flow because nothing ever changes, thats all you can count on and if you get it it wont get you.

2008 Nov 11 11:00 AM

[Kaushal:]

Anybody considering sueing MOODY`s and S&P`s of that ..world the legal system in US willallow huge damages to the people.!!!! try to use opportunity in the abyss,,

2008 Nov 11 12:37 PM

[Phil Dewey:]

@gca1 - It was actually Phil Grahmm the Republican from Texas that drove the stake through the heart of the Glass-Stegall act.

2008 Nov 11 04:23 PM

[Joe Simonton:]

Mr. Saut, I respect your background and experience, however the attendant volume on the chart pattern you mentioned does not conform to the classic Edwards and Magee model for a reverse head and shoulders. In addition, we have broken a number of long-term trendlines, the point-and-figure chart target for the Dow is 7600, and if we are to put any faith in Elliot wave analysis, gravity is pulling us toward 7200 on the Dow as a minimum target, not to mention the short-term rate of change trendline we just broke through.

2008 Nov 11 05:31 PM

[dcb:]

the positions he suggests aren't hedges. To hedge you'd use the inverse positions. it's Ok to do a buy and hold in this market, but you have to be ready to bail if the lowest lows are breached. Just to let you know the bond market is pricing in fair value of the dow at 700. In truth unless you have a macroeconomic background it is very difficult to understand what's going on. Take the cues from the bond market, commodities, currencies and go from there. Crude dropping to new lows tells you what other markets that act in a more logical manner. Stocks always go up until slapped very hard in the face with reality otherwise you never could have had the dot com bubble. There's no logical way a company with no cash flows can be worth more than texaco

2008 Nov 12 01:50 PM