Sensing a Market Turning Point 18 comments
Jeffrey Saut
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Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (December 22nd):
...[O]ur sense is that the economy, and the various markets, are near / at a turning point.
That “turning point” sense is driven by last week’s decision from the Federal Reserve to change its approach to interest rate targeting by allowing the Fed Funds rate to “float” between zero and a quarter of one percent. The operative word here is ZERO as the Fed is effectively offering the banks “free money.” With the Fed Funds target rate now down to the 0-25 basis point level, the Fed is “out of bullets” with regards to conventional monetary policy.
Consequently, the Fed felt compelled to announce that, “The Federal Reserve will employ all available tools to . . . preserve price stability.” As Bloomberg Television put it, “The Fed is All In!” “All In” indeed, for it now appears the Fed is moving to influence other interest rates. As MaroStrategy’s Bob Parenteau notes:
“The prime monetary policy operation becomes the Fed’s ability to use its infinitely expandable balance sheet to purchase longer maturity Treasuries, GSE debt, mortgage backed securities, and in the extreme, even equities and corporate bonds with the objective of getting private market interest rates down and asset prices up.”
To be sure, this Fed is being much more aggressive than the Bank of Japan following Japan’s “bubble bust,” as well as more aggressive than the Fed of this country’s Depression years; and, we think the Fed will be successful in getting private market interest rates down and asset prices up.
Accordingly, we think last week’s Fed action will mark a “turning point” for the real economy and would argue the equity markets tend to lead economic turning-points by roughly six months. Since the typical recession lasts 18 months, a six-month economic “turn” from now would “foot” with the NBER’s recent revelation that the current downturn began in December 2007 (12 months ago, even though we still have not experienced two negative quarters of GDP).
Moreover, in addition to our often mentioned metrics for a better equity market since the October 10th capitulation “low,” the ensuing downside devastation recently left the S&P 500 (at its nadir) a massive 34% below its 200-day moving average [DMA]. Ladies and gentlemen, the last two occasions that the S&P 500 exceeded the gap of 25% below its 200-DMA was in October 1974 and October 1987, both of those readings were at major market lows for the indices. Their subsequent advance was more than 50%!
Given all the previous mentioned reasons for our “call” to gradually re-accumulate stocks, in some cases using hedge strategies, we now add Kiplinger’s “Six Reasons to Buy Stocks Now”:
1) Stocks are battered and cheap.
2) Stocks are overdue for a rally.
3) The low risk alternatives are pathetic.
4) It’s not the 1930s.
5) The market shows signs that the worst is over.
6) If not now, when?Plainly we agree, and would note that even though the flow of news has become materially worse over the past few months, the DJIA is not much changed from mid-October. Basically, the major market indices have gone sideways despite the news, including news of fraud and manipulation. Such pricing action suggests participants have capitulated, and that much of the “selling” has already been done.
In past missives we have opined that just like investors were conditioned to believe that any decline would not gather much traction back in 1999 and 2000, they are now being conditioned to believe that any rally will not sustain. Meanwhile, last week the Volatility Index (VIX/44.93) closed below its November closing low of 47.73 and the Russell 2000 (RUT/486.26) tracked-out above its 50-DMA (at 481.45). If the DJIA (8579.11) can likewise break out above its 50-DMA at 8702, the Dow’s November 4th reaction “high” becomes the next upside target. Bettering that high, with a like move from the D-J Transports, would register a Dow Theory “buy signal;” the first such signal that would come from “cheap” valuation levels in more than a decade.
In conclusion, Dire Straits was playing on the Street of Dreams last week as the Fed lowered interest rates to zero. Indeed, “your money for nothing and your chicks for free!” Unsurprisingly, given interest rates, the Dollar Index lost 2.8% on the week; yet we think the worst of the Dollar’s recent decline is over since the ECB will likely have to lower rates as the European economies sink deeper into recession.
Surprisingly, given the Dollar’s weakness, crude oil fell a shocking 26.8% last week. Hereto, we are of the view that oil is bottoming as these prices should cause China to increase its strategic reserves. Still, Asian asset classes are the real beneficiary of a falling U.S. Dollar and low oil prices, which is why we are long the iShares MSCI Japan (EWJ) in the ETF portfolio. And, this morning we are adding iShares FTSE China (FXI).
The call for this week: ...[A]s our friends at Bespoke note, “The S&P 500 remains in a short-term uptrend that formed off of its 11/20/08 lows, although it’s walking a tightrope to maintain it.” Obviously, we agree; and conclude with this quip from the Stock Trader’s Almanac – “Santa Claus comes to Wall Street nearly every year and brings a short, sweet, respectable rally. The rally occurs within the last five days of the year and the first two in January.” Merry Christmas everybody.
Disclosure: None
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This article has 18 comments:
2) Stocks are overdue for a rally- overdue, based on what, you're hopes and dreams?
3) The low risk alternatives are pathetic. Really? Cash is just fine in a continuing deflation, and the market still represents high risk in the views of many.
4) It’s not the 1930s.No, it's worse in many ways. Just sayin...
5) The market shows signs that the worst is over.Really? Does the "market" speak to you at night. Maybe thats just Oral Roberts.
6) If not now, when? Oh, maybe when capital preservation is not the numbers 1,2, and 3 priorities.
Personally I'd rather jump in 10% late than too early.
On Dec 23 08:05 AM patio wrote:
> Oh, and bookies don't care which way you bet, they just need you
> to bet. Kind of like brokerage houses.
Unless he credit markets start moving, home prices settle, and unemployment begins to ease, I wouldn't bet on a turning point just yet. More likely we'll see continued volatility well into 2009.
Another bottom caller.. well the tide's going out and your trusting flock will be looking for you soon Jeff..
quote:"the last two occasions that the S&P 500 exceeded the gap of 25% below its 200-DMA was in October 1974 and October 1987,
Their subsequent advance was more than 50%!"
.. yup this looks like will repeat .. going all in now.
Rather than advising everyone to take on stocks generally, I would prefer to say:
1. Look for companies that offer good quality products-including "basic," products that will appeal to cost conscious shoppers, in market sectors that have taken a significant beating.
2. Generics, private-label, "Dollar Store," brands.
3. Don't be surprised if those anti-Walmart commercials start sticking in people's minds and we see a resurgence of the "Buy American," movement from the eighties. And the inverse, try to stay away from those companies that have a "Made in China," sticker on everything they sell.
This one has my head spinning a bit.... personally if a bank is going to give me a loan and never call it, then isn't that as good as cash?
I have written a bit of "good news" on that topic at
mast-economy.blogspot....
Seems there are some legal implications on issuing debt for cash (and I'm sure the politicians are scratching their head too.)
And if the banks will issue me notes (or cash) with no call on the loan. Why not buy some stocks? I will be getting no return anywhere else?!
Someone please enlighten me here.
Thanks,
The Good News Economist
mast-economy.blogspot....
Lets look at PE ratios and data I accessed from S&P.
Current 10 yr High 10 yr Low
Coke (KO) 14 76 18
Lets look at PE ratios and data I accessed from S&P.
Current 10 yr High 10 yr Low
Coke (KO) 14 76 18
IBM 9.5 41 12
T 9.8 42 9
JNJ 13 40 15
INTC 12.6 80 16
We are at historic lows in valuation. The A rated companies I measured including the above are trading at 80% of their 10 year low PEs.
I think it is presumptuous to call a bottom. However where was the fear at Dow 14000 and where is the bullishness of Dow 8000.
I added 20% to these stocks at 7800 in late November. If and as it looks likely the market goes back I will put another 20% in. It may not be the best time to invest at Dow 8400 but it is a very good time.
Sorry I published this as I was writing it. I guess I got excited by huge bearish angry responses. I must also say that whoever bought these stocks at 40 - 80 PEs were fools. Perhaps not bigger fools than those in Treasuries when PEs are 20% below 10 year lows.
Does this sound like a recipe for success? In fact, it's a recipe for disaster and protectionism. If it gets too bad it can plummet a global downturn into a depression.
Well anyway, let's not dwell on it too much and enjoy our roasted marshmallows and holiday festivities now.
TAKE NOTE: THIS IS NOT A TYPICAL BEAR MARKET - THIS IS A 1 IN 100 YEAR BEAR MARKET.
DO NOT EXPECT THE TYPICAL OR AVERAGE MARKET REACTION!