Jeffrey Saut: Aggressively Cautious

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (April 13th):

...[W]e have been... suggesting portfolios consist of at least a 20% weighting in more proactive trading positions; and, that those trading positions be shuffled frequently. The other 80% of the portfolio should be for investments. Hereto, however, investments should not be allowed to go more than 15% - 20% against investors before some kind of action is taken (selling and/or hedging them).

Additionally, while we think inflation is a second half of 2010 event, we continue tilting portfolios in the “reflation trade” direction. In past missives we have mentioned mutual funds like Ivy Global Natural Resource Fund (IGNAX/$12.43), as well as Exchange Traded Funds [ETFs] like PowerShares DB Agricultural (DBA) and iPath Livestock (COW). Today we mention another ETF named GreenHaven Continuous Commodity Index Fund (GCC). And yes, we still like the ING Risk Managed Natural Resource Fund (IRR).

As for BCA’s international focus, we believe 70% of the world’s growth going forward will come from frontier and emerging countries. Currently, however, such countries constitute only about a 20% weighting in the World Indexes. If we are correct in our assumptions, that weighting should increase over time. Therefore, we think portfolios should be over-weighted in international exposure.

To accomplish this we are using the MFS International New Discovery Fund (MIDAX/$12.05) and the MFS International Diversification Fund (MDIDX/$8.50). As a sidebar, we will be on a speaking tour in Michigan next month with MDIDX’s portfolio manager, Thomas Melendez. Finally, we too believe distressed debt will provide equity-like returns over the next few years and to capture this theme we are using Lord Abbet Bond Debenture fund (LBNDX/$5.95) and the MainStay High Yield Corporate Bond Fund (MHCAX/$4.52).

The call for this week: Michael Santoli notes in this week’s Barron’s, “All this said, the market’s run has, by now, gotten ahead of every storied, momentous, bear-killing liftoff rally from history, according to Brown Brothers Harriman’s Andrew Burkly, including those of 2002, 1982, 1974, 1932 and even 1937 – ’38 being that now-familiar analog this market period still closely resembles.” Gotten ahead of itself indeed, for the 24-session, 28.6% rally has left 84.8% of the stocks in the S&P 500 above their respective 50-day moving averages and consequently very overbought. Therefore, just as we were aggressively bullish five weeks ago on CNBC, we are now aggressively cautious, thinking the envisioned “buying stampede” is long of tooth.

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Comments

[kelm:]

Aggressively cautious is better than prudently reckless but neither means much. I agree with their overall thrust of Asian growth, aural resources/commodity space and foreign companies. I disagree with DBA as a long term hold though. Leveraged ETNs require periodic adjustment to ensure they track the underlying index. The ones that are designed to track over a one month time span as I believe DBA is are better than the ones that only track daily but in either case the potential exists to see your capital gradually erode away over time even with no change in the underlying index. I use them in my trading and have made good money with them but no one should plan on buying DBA or BDD and sitting on it for 6 months to a year. I will also add they work best in trending markets. Volatility exacerbates the reset erosion of capital.

Apr 14 10:09 AM

[Larry House:]

Useful insights. The market is over-bought, the trend is higher now, and one must be very nimble unless putting money away for years, which has its own risks. It is a time for cash and broad diversification, including corporate bonds. On the other hand, the market is ripe for traders--with all the usual disclaimers about the dangers of that.

Apr 14 10:23 AM