Underweight The Financials, Tranche Into Big Cap Pharma

Excerpt from Raymond James strategist Jeffrey Saut's latest essay:

Surprisingly, at least to me, the real star of last week was the financial complex, which jumped to the fore emboldened by remarks from Countrywide Financial (CFC)'s CEO that the worst is over. To wit, "In no way did I expect what happened in August, where it was a complete collapse, a seizing up," Chief Executive Angelo Mozilo said on a conference call, "There has been, in my opinion, a significant structural change in the market, a permanent structural change." And with those comments the “financials” took off.

Alas, we are underweight the financials, save some special situations like Flagstar Bancorp (FBC), where hereto we have been just plain w-r-o-n-g. Still, we think FBC is an investable idea and are considering taking one, or two, more tranches (read: purchases) in this nearly 5%-yielding Michigan-based bank as we approach tax loss selling season.

To this tax loss point, it is worth considering that many institutional accounts will sell their “losers” into this week’s fiscal year-end (October 2007) to offset their “winners.” Following that will come retail investors’ tax loss selling season, where for similar reasons select investable ideas will be sold to offset gains taken in this year’s big “winners.”

Even we are considering “banking” partial positions in some of our capital gainers like Vistaprint (VPRT), which leapt more than six points on Friday and is up nearly 40% for the year, just to rebalance our portfolios. The implication is that many “good” stocks will be sold for tax reasons in the next few months and not because something is wrong with the fundamentals.

This is one of the reasons we keep scaling into (read: tranching into) high-yielding big cap pharma names like Strong Buy-rated Johnson & Johnson (JNJ) and Pfizer (PFE). Verily, big cap pharma is cheap unto itself, cheap relative to the overall stock market, and cheap relative to the risk-free rate of return (T-bill). We continue to invest accordingly.