Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Tuesday (February 17th):
...Whether it was the opacity of the Geithner plan, the worsening economic statistics, the continued erosion in corporate profits, more pork barrel legislation, or politics as usual inside the D.C. Beltway, the stock market certainly didn’t like the sequence of events, leaving the DJIA (INDU/7850.41) lower by 5.2% for the week. Even worse, the economically sensitive D-J Transportation Average (TRAN/2957.28) lost 7.7%, which was particularly disturbing given crude oil’s 6.6% weekly wilt.
Interestingly, the spread between West Texas Intermediate crude [WTI] and Brent crude has again widened to $10/bbl and oil's contango (near-term oil prices trading at a discount to future crude oil prices) continues to steepen. Why? Bulging inventories and a futures contract expiring this Friday. Cushing storage is now up to 34.9 MMBbls and will likely test its maximum capacity threshold that is estimated at 37-39 MMBbls. Crude oil prices fell 5.5% last Thursday to settle at their lowest level in two months, while Brent crude (a truer reflection of the world's price of oil) actually rose 1%.
We continue to think crude oil prices are in the process of bottoming, and oil’s contango configuration reinforced that view, as does another article in Monday’s Financial Times titled “Total says oil output near peak.” Consistent with these views, the strategy of “tranching into” favored energy names over the coming months makes sense to us.
As for the overall equity markets, after turning pretty cautious on stocks as we entered the ides of January, two weeks ago we recommended purchasing the major market index of your choice. Our reasons were highlighted in previous strategy reports and ranged from oversold conditions to consecutive sessions of 2% declines in the S&P 500 futures contract followed by a 1% downside “gap opening” the next day. In the entire history of the S&P 500 futures that sequence has always been a precursor of an immediate rally. As stated, we thought the set-up was right for at least a trading rally, and maybe more, with the carrot in front of the horse being last week’s twin announcements that we thought would be Wall Street friendly. Regrettably, we were fooled again by politics as usual.
That said, our vehicle of choice for the envisioned rally was the ProShares Ultra S&P 500 ETF (SSO). And after an 11% rise from the recommended price, last week’s unfriendly events now leaves us with a small loss in this trading position. Not so, however, with last week’s recommendation on platinum using the iPath Dow Jones AIG Platinum ETF (PGM), which has rallied 7.8% from last Monday’s (2/9/09) opening price. Obviously, the ETF’s price rise was driven by platinum’s 6.7% weekly gain (to $1,069/ounce), breaking the “metal of Kings” out above its January price highs, thus activating upside targets approaching platinum’s 200-day moving average at $1,344.
As for our SSO position, clearly we were disappointed with Geithner’s Gotcha, as well as politics as usual, but we still have not given up on some kind of rally from here. But, the markets had better gather themselves together quickly and re-rally or we will be right back in the soup, for as the Lowry’s service wrote last Friday:
“Since November 20th, Buying Power shows a net increase of just 7 points. It takes strong Demand to push prices higher and, thus far, Demand appears insufficient to fuel a new bull market.” . . . (While) “selling did contract during the November 2008 – January 2009 rally, (it) was met with weak Demand. (Moreover) since early January 2009 the Supply of stocks available for sale has been expanding again.”
We agree with Lowry’s and until Dow Theory renders a “buy signal,” with both the DJIA and the D-J Transports bettering their respective January 6, 2009 closing reaction “highs,” caution is advised. Still, while we are pretty disappointed with last week’s events we have not totally given up on a trading rally provided the Dow doesn’t confirm the downside by following the Transports decisively below its November closing low of 7552.29.
The call for this week: The Who will be playing on the Street of Dreams this week, and the song will be, “Won’t Get Fooled Again.” Speaking of “fooled,” over the weekend the “cry” went up that the current economy is as bad as the Great Depression. While we don’t want to sugar-coat the current environment, this is NOT the Great Depression. As our friends at GaveKal opine:
This is not the 1930’s all over again. The government and the central banks are not sitting idly by as banks fail this time around. We have automatic stabilizers in place like welfare and unemployment insurance. Back in the 30’s, GDP plunged 27%, real private investment collapsed 87%, consumer spending contracted by 41%, industrial production plunged 54%, personal income fell 25%, the unemployment rate soared to 30%, and half the nation’s homeowners defaulted (not 10%), and 10,000 banks failed; and as over-saturated as we may be today, we don’t have that degree of excess capacity in the financial sector.
