Excerpt from Raymond James strategist Jeffrey Saut's latest essay:
...[H]igher interest rates have profound implications for various asset classes. And that, ladies and gentlemen, is another reason we have, after seven years of steadfast bullishness, recommended reducing/rebalancing stuff-stock positions (read: energy, timber, cement, etc.). While longer-term we remain bullish on “stuff,” with rising interest rates the “cost of carry” to own commodities increases. That linkage was potentially reflected in crude oil’s downside reversal during our travels. While we remain long-term energy bulls, if crude breaks below $120/bbl., professional money will view the recent parabolic price high of $135/bbl. as a near-term peak. As stated, despite these concerns we remain bullish on select energy companies.
Asset allocation, and sector selection, continue to be the drivers of overall portfolio performance. To this point, we remain under-weighted technology, consumer discretionary, and financials. While many pundits are screaming that financials are “cheap,” we just don’t see it that way. For previously stated reasons, we think the financial sector will remain under pressure for years; and would note, the KBW Bank Index [BKX] “tagged” a new five-year closing low last week. At its peak the financial sector contributed 31% of the S&P 500’s earnings.
For comparison, in the 1980 energy bubble, energy-related companies contributed 26% to earnings, while at the tech bubble’s peak tech accounted for 16% of earnings. With re-regulation of financial institutions coming, the result should be lower earnings with and attendant P/E multiple compression for the financials. On a market capitalization preference, mid-caps seem to have held up better during the recent stock market decline. And, we continue to invest accordingly.
The call for this week:...[W]e are currently “out” of trading positions and focusing on investment positions, preferably ones with a yield. Previously mentioned names for your consideration include: 6.6%-yielding Alaska Communication (NASDAQ:ALSK); 11%-yielding LINN Energy (LINE); Schering Plough’s 7.6%-yielding convertible preferred “B” shares (SGP+B), whose terms and details should be checked before purchase; and, 5.8%-yielding Embarq (EQ).