Expecting Another Leg Up Heading into End of Quarter?

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (June 1):

Greetings from Geneva, where I am clearly NOT on spring vacation! Moreover, there certainly doesn’t appear to be much of a recession here. Indeed, the restaurants are full and real estate prices are still rising. Granted, Switzerland is unique because there is no land left; yet, I saw the same thing in Lugano and Milano last week. London, however, was a different story. This week finds us in Frankfort, Paris, Brussels, Luxembourg, and Amsterdam, where I will again be seeing institutional accounts and giving breakfast, lunch, and dinner presentations, as well as numerous one-on-ones. Consequently, while many folks think all I do is “play” on these sojourns, it is worth noting that I had five presentations a week ago today in Milano; and, then had to catch a train to Lugano to speak to twenty-some hedge fund managers at 7:00 p.m. The next morning I spoke at a breakfast and then had two more meetings before being driven back to Milano to speak at a lunch. From there, I had two more meetings before flying to the Channel Islands, where I arrived at 9:30 p.m., only to get up the next morning and start all over again. That said, while this is an abbreviated missive, I think the following email exchange pretty much expresses my current thoughts on the equity markets from my perch “across the pond.”

The portfolio manager (PM) wrote:

“I was a heavy profit-takertoday (5-29-09). Here are ten reasons:

- June is likely to be a month with a negative geopolitical surprise. There are several possibilities.

- VIX closed at 28.92 today versus over 56 when I advocated buying and bought heavily.

- Window dressing was apparent at the end of this month. It is like polishing a broken glass.

- A lot of shorts have covered because of speculators buying with the ‘hope’ of making a fast buck. Much internal market power has been dissipated.

- I talked with people who now feel their IRAs are safe. I don't think so! Stocks are not bargains considering the projected EPS and high PEs.

From here on, the price of oil going up will hurt the economy like a hidden, extra tax. The increased price is supported by questionable fundamentals.

- There never has been a successful test of the early March low. History shows this has to happen sometime relatively soon.

- The one thing you can count on is that the market is unaccommodating. Fools jump in when experienced investors are cautious.

- I don't think the economy is really getting better; there is a lot of bullish talk, but people are still losing their jobs, and the national debt is accelerating.

- My intuition tells me to be careful now. Higher interest rates are not that far away; the debt has to be financed.”

... The call for this week: Well, I am still traveling in Europe, but if stocks don’t correct I would anticipate another leg “up” into quarter’s end. Our upside target, if the indices re-energize, is 1050 on the S&P 500 (SPX/919.14). To play such a move, if it develops, is the idea of buying the index of your choice, with a concurrent downside hedge (read: options), which makes all the sense in the world. I’ll be back next Monday.

Comments

[Gyoza Mimi:]

Good points, thanks.

Jun 02 01:05 PM

[Larry House:]

The article expresses a much more questionable possibility for the leg up than the title implies--to say nothing of the correction mentioned. Each reader can see what he/she wants. I see caution.

Jun 02 01:54 PM

[mrmillergd:]

Jeff's great at getting the fund manager POV.

Jun 02 03:06 PM

[David White:]

I agree caution is warranted. The chart formations allow for either a retracement or a cup with a handle formation. The cup with a handle, which looks more and more like its forming, would likely lead the SPY sharply upward.

The fundamentals argue much more strongly for a retracement. Barron's recently estimated the PE of the S&P500 after Q1 to be 123x. Ockham REsearch estimated the PE to be a more modest 46x. A PE in the 50x to 125x range is much too high for an economy which is still contracting. The latest GDP estimate was -5.7%. The unemployment rate is near 9%, and it is supposed to go to 10.5% by year end. The commercial real estate market is imploding. The residential real estate market is still reeling from foreclosures. The credit card business charge off rates are already high (and rising quickly). Inflation is rearing its head in commodities, which is likely to hurt a recovery. There is now question of the US losing its AAA credit rating. I coudl go on. However, you get the general idea. This is a market emotion driven rally at this point. Emotion could carry it still further. Consumer confidence is up. In the longer term reality is likely to set in. We will have wait to see how quickly that happens. The ADP jobs number due out tomorrow is worth watching (and the markets' reaction to it).

Jun 02 07:40 PM

[Alan Young:]

Emotion? I don't see emotion; volume is still rather low. More like insider (GS) manipulation.
Wait until all the banks have issued all the new stock required of them by the Fed; then Da Boyz will drop the cement shoes (to mix a metaphor).

On Jun 02 07:40 PM David White wrote:

> This is
> a market emotion driven rally at this point. Emotion could carry
> it still further. Consumer confidence is up. In the longer term reality
> is likely to set in.

Jun 02 10:38 PM