Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, November 29th):
...[I]nvestors got whipsawed last week. To be sure, Tuesday’s Tumble (-142 DJIA) caused many participants to sell, worried about the potential for another crashette. Regrettably, they sold into a vacuum because a lot of Wall Street’s pros took the week off, leaving their “juniors” on the trading desk with instructions not to be heroes. To wit, if sell orders arrive, just let the markets take stocks to where the selling abates. The quid pro quo is that if buyers show up, let the markets seek their natural upside “clearing price.”
Plainly, both sellers and buyers showed up last week since Tuesday’s Dow Dump was followed by a Wednesday Win of some 150 points (or +1.49%). Of course, that “win” was consistent with history since there have been seven occasions when on the Tuesday before Thanksgiving the S&P 500 saw a decline of more than 1.0%. Six out of those seven times the S&P gained on the very next day for an average rally of 1.4%. However, the sellers returned on Black Friday, leaving the senior index down 95 points for the holiday-shortened session -- and off 1% for the four-session week.
The reasons for the weekly wilt ranged from Chinese monetary tightening, North Korea, insider trading investigations, Ireland, to Spain, etc. España is particularly concerning because Spain’s GDP in 2009 was $1.468 trillion. That’s roughly twice the combined GDPs of Greece, Ireland, and Portugal. Moreover, Spain’s fiscal deficit, at ~7.9% of GDP, is double the legal limit prescribed by the EU.
Accordingly, it is estimated that to “paper over” Spain’s fiscal fiascos would require some $600 billion. That number is twice the size of Ireland’s GDP, making Spain clearly the elephant in the proverbial room. Nevertheless, I still think the approximate cause for last week’s stock slide was Ireland because unlike a sovereign debt crisis, where there are only two players (the sovereign state and its creditors), in a banking crisis there are numerous players. As the brainy folks at GaveKal write:
“In a sovereign crisis, there are in essence only two key players: the state and its creditors. In a banking crisis, there are many more 'stakeholders,' including the government, the banks' shareholders and management (whose interests are supposed to be aligned though recent years have shown that this seems to be more the exception than the rule), the banks' depositors, and the banks' lenders (including, most notably, other banks). It is thus more challenging to ensure that everyone's interests are aligned. In a sovereign crisis, it is relatively simple to figure out how much debt is due for repayment, when that debt is due, etc. In a banking crisis, such type of analysis goes out of the window, not only because figuring out the balance sheet of a bank is monk's work in the first place; but most importantly because key psychological factors, such as the willingness of customers to keep deposits at a given bank, or the desire of other banks to lend to one another, simply cannot be modeled. Figuring out who owes what to whom is much more challenging in a banking crisis than in a sovereign crisis.”
So yeah, I think Ireland was the cause of last week’s weakness, which brings us to this week.
Looking at the charts suggests the “buying stampede” ended during the first week of November. However, the markets have still not experienced more than three consecutive sessions on the downside; hence, the upside should continue to be favored. That is the strategy I have embraced since July, often scribing that I think it is a mistake to become too bearish.
Further, I have opined that even if we get a correction, I think it will be contained in the 5% to 8% range. As stated, that targets the 1130 to 1170 zone on the S&P 500 (SPX/1189.40). Coincidentally, the SPX’s 200-day moving average (DMA) currently resides at 1132, while its 50-DMA hovers around 1176. Also of interest is that despite the DJIA’s decline, the S&P MidCap (+1.07%), S&P SmallCap (+1.48%), Nasdaq (+0.65%), ValueLine (+0.45%), and the Russell 2000 (+1.16%) all closed higher last week. Then too, the Supply / Demand metrics, Advance-Decline Lines, New High / New Low readings, and Dow Theory all indicate the stock market’s primary trend remains bullish.
With the aforementioned “headline news” capturing the attention, there were some other items that escaped investors’ attention. First was Ben Bernanke’s unusually blunt plea for fiscal help from Congress and the Administration, which as of this writing has gone unanswered. I think the Fed will increasingly trumpet this plea after putting itself in the position to state – we’ve (the Fed) done everything we can do; now it’s up to you! Second was the environmental disaster that recently hit Syria, whereby water shortages are forcing farmers off their land and into cities. Obviously this plays to my water, agriculture, and weather themes.
Then there was Thailand’s PTTEP purchase of a $2.3 billion stake in Statoil’s (STO/$20.35) Canadian oil sands project. Given the Joint Chief’s recent Joint Operating Environment report warning, “By 2012, surplus oil production capacity could entirely disappear,” I was surprised Canadian oil sands stocks didn’t leap on that news. I like Alberta’s tar sand players and continue to urge investors to consider: Cenovus (CVE/$28.86), Canadian Oil Sands Trust (COSWF.PK/$26.59) and North American Energy Partners (NOA/$9.29), all of which are followed by our Canadian research affiliate, Raymond James Ltd., with favorable ratings.
Finally, in Barron’s there is an excellent article titled “Going With the Flow.” The byline reads, “Generating a rich stream of post-retirement income these days requires investments that retirees once might have shunned.” In that article are a number quips discussing emerging market debt, high yield bonds, master limited partnerships, dividend paying stocks, senior bank loans, municipal bonds, etc. Readers will recall over the years I have favored all of these investments. Also recall that I think interest rates will rise in 2012. Therefore, for fixed income investors, I believe you have to be very selective going forward.
In past missives I have stated that I think Putnam Diversified Income Trust (PDINX/$8.11) has the ability to navigate my envisioned interest rate environment. I have also written about senior bank loans. As Barron’s writes, “These are loans made to non-investment grade commercial bowers. Their yields reset every 90 days, so they will be able to keep pace if interest rates start rising.” I would add that the country’s best balance sheets are likely found in corporations due to burgeoning cash flows and record cash on their balance sheets. To this point, I recently had lunch with Pioneer Fund’s Ken Traubes, reinforcing my conviction on Pioneer Floating Rate Fund (FLARX/$6.87).
The call for this week: ...[O]ver the weekend the European Union (EU) put together a bailout plan committing €85 billion for Ireland, which should give Ireland and Greece some more “wiggle room.” Additionally, the hawkish tone out of Germany appears to have been toned down. However, my initial reading of the news is that Ireland’s and Greece’s problems will resurface in the first quarter of 2011. Still, most participants’ time horizons are short, given that portfolio managers focus on the performance derby as we approach “report cards” (year-end); so, this news should be viewed as constructive, leading to higher stock prices.