Saut: The Slow Return of Risk Appetite

Includes: EWJ, FXI, MUE, NVG, PFF
by: Jeffrey Saut

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (December 29th):

In past missives we have suggested that the equity markets have been in a bottoming process since the October 10th capitulation “low.” We have given numerous metrics for that view, but in this week’s Barron’s the always insightful Stephanie Pomboy makes our prose pale in comparison when she states:

In the very near-term, there are a variety of reasons to anticipate a rally in risk. First is the massive destruction witnessed to date. Our dogmatic [insistence] that markets needed to give back all the gains built on the housing-bubble lie have largely come to pass. Virtually every market is at or near pre-bubble lows, from stocks to bonds to commodities . . . [so] the financial deleveraging may largely be complete (see the nearby crude oil chart). Most notably, yields on corporate credits have climbed to multidecade (and in the case of junk, record) extremes. At the same time, cash [must be] burning a hole in investors’ pockets with 0% yields before inflation and dollar debasement.

Obviously we agree with our friend Stephanie, which is why we have been recommending the scale buying of distressed debt situations like BlackRock MuniHoldings Insured (NYSE:MUE) and Nuveen Insured Dividend Advantage (NYSEMKT:NVG), both of which sell at discounts to their net asset value and have over 6% tax free yields. We also have been recommending Lord Abbett Bond Debenture Fund [LBNDX] with a near 9% yield.

Moreover, even though we have avoided the financial complex for years, for those wanting exposure to said complex our vehicle of choice remains the iShares S&P U.S. Preferred Shares (NYSEARCA:PFF), which is yielding over 10% and has a 78% exposure to the financial complex’s preferred shares (see the attendant chart). Additionally, during the past few weeks we have added the iShares MSCI Japan (NYSEARCA:EWJ) and iShares FTSE China (NYSEARCA:FXI) to the ETF portfolio.

The call for this week: ...[W]hile there will likely be more negative news, we think the worst of the economic news is at hand. Meanwhile, the world’s stock markets are well off their “lows,” risk appetites are slowly returning, and the central banks are aggressively easing. Indeed, 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.

We continue to think the Fed will be successful. Happy New Year everybody.

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