Excerpt from Raymond James strategist Jeffrey Saut's latest essay:
For months we have counseled accounts to reduce exposure to our beloved “stuff stocks” (energy, materials, base / precious metals, cement, timber, etc.) even though we continue to think “stuff” remains in a secular bull market. We began recommending rebalancing (read: selling partial positions) said holdings on fears that the politicos were going to do everything in their power to drive the price of crude oil lower into the elections, for obvious reasons. Our long-standing target for the price of crude has been its 200-day moving average [DMA], which now stands at $110. With rude crude changing hands in mid-July at $147/bbl that strategy looked pretty foolish. Last week, however, oil tagged $111/bbl and our strategy doesn’t look nearly as wrong-footed. While crude oil’s recent 25% price decline looks bad in the charts, the price declines of many energy-related equities now exceeds 40% over that same timeframe.
We believe the “selling stampede” in the energy complex is overdone and is therefore nearing an end. Moreover, with the recent decline in crude prices, numerous members of OPEC have been calling for production cuts. While we are not expecting production cuts in the near-term, we continue to believe that if prices fall further, OPEC will step in and defend a price near $100/bbl. Obviously, we've found a price that slows oil demand, but in our view, long-term oil fundamentals remain strong.
Consistent with these thoughts, we recommend the gradual re-accumulation of the energy stocks, particularly ones with outsized dividend yields. For fund investors there are a plethora of closed-end funds and ETFs like ProShares Ultra Oil & Gas (DIG), which is leveraged two-to-one on the upside. Additionally, in past missives we have mentioned a number of higher yielding names recommended by our fundamental energy analysts, like 12%-yielding, Outperform-rated Linn Energy (LINE). Today we offer for your consideration Strong Buy-rated Delta Petroleum (DPTR) using its convertible bond, as well as Strong Buy-rated Chesapeake Energy (CHK) using its convertible preferred “D” shares. As always, terms for these convertibles should be checked before purchase.
As with oil, we have been cautious on precious metals this year despite our belief that the yellow metal also remains in a secular bull market. We think the decline from $990/ounce on July 15, 2008 into last Friday’s close of $792 is overdone. The gold stocks have fared even worse, as can be seen in the charts below. While many pundits are blaming gold's, and oil’s, decline on the stronger dollar, we don’t see it that way.
Plainly, we have been bullish on the dollar since late last year when we recommended closing down all of our anti-dollar “bets” that had been in place since 4Q01. And, at the margin the dollar’s recent strength is responsible for a modicum of the slide in “stuff stocks.” However, we think there is more afoot than just that. Indeed, the recent accelerating rotation out of “stuff” we think is largely being driven by a gathering sense that not only is the U.S. economy slowing noticeably, but so is the rest of the world. While true, we continue to believe the U.S. economy will avoid a recession and continue to muddle through (read: 0.0% – 2% GDP growth), although the odds of a recession in 2009 have clearly risen.
Nevertheless, we like gold stocks at these price points, but are again turning cautious on the U.S. dollar (see charts); and, as with energy stocks, are recommending gradual re-accumulation. Here too there are numerous closed-end funds and ETFs, but one for your consideration is the Deutsche Bank Gold Double Long Note (DGP).
The call for this week: Regrettably, for most of this year it has been more of a trader’s market than an investor’s market. While we are a much better investor than trader, we have attempted to navigate the volatile environment using the trading side of the portfolio. Recall that we advise using 80% of your equity portfolio for investment ideas and 20% for trading. And when we say “trading,” we DON’T mean day trading! Rather, we try to wait for a trading “set up” whereby the odds are tipped so far in our favor that if we are wrong we are going to get stopped-out quickly with hopefully small losses and live to play another day.
Disclosure: RJ&A or its officers, employees, or affiliates may 1) currently own shares, options, rights or warrants and/or 2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report’s conclusions.