Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, April 25th):
“Crude is still the near-term key. Although it looks like it peaked, the Mideast is still a wild card that is not going away. Our company surveys have lost momentum, suggesting the US economy is cooling a touch. [A] Significant fiscal drag could lie ahead for the US given last week’s Ryan and Obama deficit reduction proposals and the emergence of the Gang of Six in the Senate. Peripheral problems intensified last week with a downgrade for Ireland – Eurozone cooling is likely. Japan supply chain disruptions are hitting auto production. China’s nominal GDP in 1Q at +18.1% YoY is still too hot, which means more tightening is coming, and then China cooling is likely. If oil is indeed the key, then cooling in global growth would be positive, if it doesn’t rekindle double-dip fears. We’re not trying to send out a bearish signal about the economy, unless oil spikes higher.”
. . . Ed Hyman & Nancy Lazar, ISI Group
...Rude Crude still “feels” a bit stretched in the short-term given that West Texas Intermediate (WTI) is ~30% above its 200-day moving average. Indeed, over the past few weeks oil has become almost as extended above its 200-DMA as it was in July 2008, and we all know how that ended. Not that I am predicting a similar collapse in the price of Texas Tea, but rather that a consolidation / pullback period is likely, which could provide the backdrop for another “leg up” in stocks (even the energy stocks).
Speaking of Texas, Bruce Zimmerman, President, CEO, and CIO of the University of Texas’ endowment fund, was on CNBC last week. His appearance was prompted by the fund’s $1 billion investment in gold bullion. However, while everyone was focused on the gold topic, I was struck by the attendant pie chart of the fund’s asset allocation. As he spoke, CNBC displayed said chart that showed only a 21.8% exposure to equities. Perhaps the fund’s 30% exposure to hedge funds could qualify as an equity exposure, but I doubt it. Think about that, if Bruce Zimmerman’s asset allocation is anywhere close to being representative of other endowment funds, what happens if “they” collectively decide to increase their exposure to equities? To quote Jackie Gleason, “To the moon, Alice, to the moon!”
To be sure I am bullish, and while I didn’t think the 7% decline from February into mid-March was “it” at the time, I was indeed buying stocks and conceded two weeks after the March 16th “low” that the intra-day “print” of the S&P 500 (SPX/1337.38) at 1249 was likely “the low.” Moreover, for the past few weeks I have suggested all the equity markets were doing was rebuilding their internal energy for another upside “leg” that would break the SPX out above its February intra-day high of 1344. And while last week’s action failed to accomplish that, we did see the SPX close above its April “highs,” which is obviously a step in the right direction. So what now?
Well, the bad news is that the SPX’s 3.2% rally from last Monday’s sovereign debt drubbing has used up some of the stock market’s short-term energy, implying another pause/pullback may be due. The good news is the market’s intermediate and long-term internal energy readings remain almost fully charged and hence any pullback should be contained in the 1315 – 1320 zone. Recall, I scribed similar words about the 1280 – 1300 zone containing any pullback two weeks ago, with the SPX at 1340, right before its six-session slide into last Monday’s low of 1294.70.
Speaking to S&P’s putting U.S. sovereign debt on “negative” watch, my friend Barry Ritholtz, of Fusion IQ, writes:
“If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P. Consider what Nobel Laureate Joseph Stiglitz, economics professor at Columbia University observed:
‘I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.’
Hence, the ‘negative outlook’ of US debt has come about because the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities. Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political (debate) over the debt ceiling. Of course there is a negative future outlook. It’s in large part the work product of S&P and Moody’s. Why we even have Nationally Recognized Statistical Rating Organizations any longer following their payola driven corruption, their gross incompetency, and their inability to discharge their basic duties is beyond my understanding.”
Obviously, the equity markets “listened” to Barry’s sage words as following last Monday’s initial “sovereign shock” stocks gathered themselves together, lifting the DJIA (INDU/12506.06) 412 points into Thursday’s close. So, to borrow a phrase from Adam Smith’s book The Money Game, “What do we do about it on Monday morning?”
My answer to that question is to keep accumulating stocks with favorable risk versus reward metrics.
The call for this week: As I said in last Tuesday morning’s verbal comments “Buy ‘em!” Or, as Jackie Gleason opined, “To the moon, Alice, to the moon,” which I think is going to happen by the end of June! For those timid souls afraid to buy stocks, I spent hours with the good folks at Goldman Sachs a week ago and became extremely comfortable with Goldman Sachs’ Dynamic Allocation Fund (GDAFX/$11.10). The fund tends to smooth out the stock market’s volatility (by about half), yet delivers almost the same returns as its more volatile competitors. I will have more extensive details on this fund in future reports, but for further information in the interim, please contact our Mutual Fund Department.