Time to Develop Strategic Investment Game Plan

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (July 6th):

...[T]he equity markets have begun to “feel” like they have lost their hope and security over the past three weeks. To be sure, we have now had a 90% Downside Day (90% of total cumulative points and volume are skewed to the downside) in each of the past three weeks (7/2; 6/22; 6/15). History suggests that multiple 90% Downside Days increase the odds that a downtrend pattern has begun.

Additionally, in past missives I have written, “So far any downside correction, since the early March lows, has been contained to between 5% and 6.4%. That suggests any correction greater than 6.4% could imply more of a correction than any we have seen since the demonic S&P 500 low of 666.”

Regrettably, measuring from the June 11th intra-day “high” to the intra-day “low” of June 23rd yields roughly a 7% loss, which also increases the odds that a downtrend has begun. Further, last week’s “wilt” left the S&P 500 (SPX/896.42) below its 10-day moving average (DMA) at 911.58, as well as its 50-DMA at 908.39. Consequently, if the SPX closes below its 200-DMA (currently at 887.91), we would take it as another sign that the support level between 870 and 880 is going to “fall,” bringing into view downside targets between 820 and 830.

That said, I still think it is a mistake to become too bearish here. Again, harkening back to the Citizen Kane era when FDR occupied the White House, over the holiday I read the current issue of Time magazine with the cover story “What Barack Obama Can Learn From FDR.” Consider this quote from said article, “Franklin D. Roosevelt led the U.S. through a Depression and a world war. By the time he died, the nation was profoundly changed -- and we owe much of the change to his bold presidency." As the astute Richard Russell, of the Dow Theory Letters, writes:

“It’s obvious to me that Barack Obama is following precisely in the footsteps of FDR. One item that Time magazine left out of their special issue is that through a series of gold-related actions, which culminated in the Gold Reserve Act of 1934, the US realized a dollar devaluation of 41%, when the government officially raised the price of gold from $20.67 to $35 an ounce. This occurred during the depth of the Great Depression, and during a bull market that started in 1932 and ended in 1937. During the devaluation, the price of debt remained the same, but dollars were cheaper. This allowed the US to handle debt more easily with debt being paid off with cheaper dollars. At the time of the devaluation (January 1934), the Dow was 110. By March 1937, the Dow had risen to 194. During this period, Roosevelt instituted his ‘New Deal’ with all its new alphabet agencies such as the WPA, the PWA, and the CCC. The Time article continues, ‘But the crisis of the 1930s also provided an object lesson in the relationship between economic danger and political opportunities – a lesson Barack Obama is now trying to follow. Obama took care to persuade Americans in the midst of an economic crisis, and in the solutions he has offered, it appears that Obama has often looked to the example of FDR, whose presidency – and the very idea of activist government that it represents – is very much back in the public mind this year. Roosevelt pushed through policies that aimed not just to deal with the immediate challenge of the Great Depression, but also to benefit generations of Americans to come. Pulling off a similar feat will require Obama to persuade Americans to see opportunities in the present crisis as well’.”

“Russell Comment – There, in the above, you can see and understand what Barack Obama is thinking and what he’s all about. On the economics, Obama can’t pull off an official devaluation of the dollar, but by spending trillions of dollars in his plan to defeat the bear market recession, he is de facto devaluing the dollar against other leading world currencies. For political (international) reasons, Obama is ‘talking’ a strong dollar, but the world knows that his ‘strong dollar’ spiel is pure BS. Obama wants the dollar to decline (which means it will automatically be devalued). A cheaper dollar, turned out in the quantity of trillions, will make all US debts easier to finance. And it will be a way of ‘handling’ the mind-blowing amount of debt that the Obama administration is creating as the US continues its fantastic spending program.”

Since “perceptions” are two-thirds of the stock market’s trend, it would not surprise me to see the equity markets continue to loosely follow the 2003 pattern whereby the S&P 500 bottomed in March around 800 and rallied to slightly over 1000 into late June. From there it flopped / chopped around until early September of 2003, but never gave back much ground. Stocks then reenergized, adding another 150 points to the S&P. The first leg of that rally was fueled by liquidity. The second leg was driven by improving fundamentals. Of course, for this scenario to play it requires participants to “perceive” that President Obama’s agenda is going to work.

While “perceptions” are more of a tactical approach to the markets, strategically we think Dick Russell has it right. So, while I am constructive on the dollar in the short run, longer term the U.S. dollar is likely to decline. This gives investors a “window” in which to develop a strategic “game plan” for preserving wealth and enhancing capital. The question then becomes how do you deploy capital? Should we buy gold on last week’s dive, or buy growth stocks, whose growth should offset the anticipated long-term dollar demise? If you follow the strategic-thinking Chinese, they are buying less U.S. Treasuries and buying more corporations, commodities, base-metals, mines, rare earth elements, gold, and yes – crude oil. In fact China just announced it is increasing its strategic oil reserves by 50% over the next five years.

As economist Ed Yardeni said to me at a recent conference, where both of us were speaking, “America is trying to figure out how to provide free everything for its citizens, while China is trying to figure out how to get its next million barrels of oil!” Indeed, while America is playing Texas Hold ‘Em (a.k.a., play one hand at a time), the Chinese are playing the game GO. In the strategic game of GO, a player sacrifices numerous “pieces” in the short-run to “win” in the long-run.

We urge investors to adopt the Chinese strategy used in the game of GO. Conveniently, there are numerous mutual funds, closed-end funds, ETFs, and individual stocks available to accomplish this. Two such stocks from the Raymond James research universe (two of many), which play to our emerging and frontier markets theme, are Harsco (HSC) and NII Holdings (NIHD). We will be watching such stocks closely if the S&P’s three-week decline extends into the summer for opportunities to scale-buy such companies; and, we continue to invest and trade accordingly.

The call for this week: We think the world is changing; and, changing VERY rapidly. Ergo, we suggest thinking more strategically, which would be in accord with the aforementioned points. That said, we also believe there will be tactical opportunities for the well prepared investor in the months ahead. Tactically, we are currently cautious, but not bearish, as we await opportunistic points to enhance our capital. Overall, we are optimistic, believing the worst is in the rearview mirror as we anticipate a better future. Indeed, the future is coming, but only you can decide where it is going ...

Comments

[Old Trader:]

Given that picking "the" bottom is more a matter of luck than skill, it would seem that a cautious approach is called for, slowly deploying capital according to a strategic allocation plan, as this article seems to suggest.

Jul 07 10:38 AM

[jimp:]

What would you say is the best investment vehicle for rare earths? Lynas Corp.? Avalon rare earth metals?

Jul 07 04:31 PM