Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (January 5th):
...I was still shocked at how bad last year turned out to be, even though I was somewhat prepared for it. What we got right was raising a lot of cash in November / December of 2007 and entering 2008 in a very defensive mode. What we got wrong was not raising enough cash and not being defensive enough.
Going into 2009, however, we actually have a more positive spin than most. Indeed, we continue to think the capitulation, and/or psychological “low,” was recorded on October 10, 2008 when roughly 93% of the stocks traded on the NYSE made new yearly “lows.” Meanwhile, at least so far, it appears the “price low” was recorded on November 20, 2008.
Accordingly, we have positioned accounts, using a “scale in” and “hedged” approach, for a short / intermediate-term rally into mid-January. From there, we believe the major averages should be due for a pause / pullback as they contemplate the new administration and when the recession will end. Our sense remains that the GDP numbers will have seen their nadir in the 4Q08, but that GDP will not turn positive until the 4Q09. If correct, and if past is prelude, the equity markets will have bottomed the perfunctory six months prior to the end of the recession.
As history shows – when a recession becomes a fact acknowledged by all, the worst of its effects have already pretty much run their course.
...[J]ust like participants were conditioned in 1999 / 2000 that declines would not gain much traction, participants have now become conditioned to believe rallies will not gain much traction. We don’t believe it and would ask investors to consider what could actually go right in 2009. To be sure, the equity markets are now well off of their respective November “lows.” Risk appetites are returning. Policy “easings” have accelerated almost everywhere. The U.S. dollar rally has abated. And, China has taken measures to keep its economy from slipping further into the abyss.
Clearly, our equity markets have responded favorably to these events since November. And, last week that response continued with the DJIA (9034.69) and the D-J Transportation Average [DJTA] (TRAN/3651.00) closing above their respective December 2008 closing “highs.” While this is NOT a Dow Theory “Buy Signal,” by our method of interpreting Dow Theory, it is a step in the right direction.
If, however, the DJIA and the DJTA can close above their respective November 4, 2008 closing “highs” of 9625.28 and 4071.81, it would render the first Dow Theory “buy signal” from inexpensive valuations in decades. While we are hopeful, we remain worried about the trillions of dollars of CDOs / CLOs / etc. coming due this year. Yet, for the past few months the equity market has shown an amazing resilience to bad news, a trait we hope extends in the new year. Ladies and gentlemen, when markets turn a deaf ear to bad news that’s good news!
As for the “here and now,” our hedged “long” positions in the major market exchange-traded funds (ETFs) are now showing decent gains and we are raising stop-loss points appropriately. Meanwhile, our unhedged long positions in the iShares MSCI Japan (EWJ) and the iShares MSCI China (FXI) have not only broken out above their respective December closing “highs,” but their November closing “highs” as well, and here too we are raising stop-loss points.
As for the closed-end municipal bond funds recommended three weeks ago, both BlackRock MuniHoldings Insured (MUE) and Nuveen Insured Dividend Advantage (NVG) have experienced rallies that have reduced their discounts to net asset value by nearly 50%. While we continue to like the strategy of buying distressed debt, we would now be more price sensitive given the fact that the Treasury Bond complex broke down last week, implying higher interest rates.
Interestingly, while we don’t own it, the Market Vectors Agribusiness ETF (MOO) has closed above its November / December closing “high,” which should help our recommendation on 8%-yielding Archer-Daniels convertible preferred “A” shares (ADM). We continue to like the agriculture theme and in addition to Archer-Daniels offer for your consideration Bunge’s 7%-yielding convertible preferred (BGEPF/$68.00); both issues are followed by our correspondent research affiliate.
The call for this week: It has been said that, “So goes the first week of the new year, so goes the month and then so goes the year.” While there is statistically some truth to this old stock market “saw,” we prefer combining it with the December Low Indicator, which we will write about next week. Our strategy remains to favor the upside into mid-January where a pause/pullback should be in order. What happens to the stock market’s “internals” (advance/decline, selling pressure, etc.) in that pause/pullback should tell us a lot about the market’s future direction.
Our official stance for the year is that it will be a “stock pickers” year where companies with lots of cash on their balance sheets (so they don’t need to go to the credit markets), decent fundamentals, and dividends will provide outperformance. A company like Strong Buy-rated Intel (INTC) is just such a company.