JEFF SAUT REMAINS FIRMLY IN THE BULL CAMP
Jeff Saut has played the downturn and the upturn about as well as anyone. The Chief Strategist at Raymond James has been bullish since April and is unwavering in his bullishness despite the huge move in stocks. He sees the continued skepticism in the market has a primary driver of equity prices:
the negative nabobs continue to call this a bear market “sucker’s rally!” While it’s true that markets can do anything, the real “suckers” have been the bears who didn’t employ adaptive asset allocation and consequently have “sat” out the seven-month rally. Clearly, we disagree with the bears’ assessment, having maintained the view that this is a new bull market since April.
That doesn’t mean there won’t be corrections. But as he has said before, Saut believes money managers will be forced to buy the dips as they play catch up into year end:
“Occasional corrections?!”… well so far said corrections have been brief and shallow. We have often opined this is because many portfolio managers have too much cash and have therefore underplayed the “bull run.”
He thinks any substantial pullback will be contained within support levels at the 50DMA and the 200DMA:
Certainly, there will eventually be a healthy pullback, but our sense is it will be contained to somewhere between the 50-day moving average (DMA) and the 200-DMA. In the SPX’s case that currently targets the zone between 1038 (50-DMA) and 910 (200-DMA).
A primary reason for his bullishness into year-end is the strong seasonal strength of the fourth quarter:
As ISI’s Francois Trahan writes, “the fourth quarter is seasonally the strongest of the year with average gains of 3.5%, a full 100 bp higher than the second seasonally friendly period: Q1… Indeed, since 1960, Q4 has finished in the black nearly 75% of the time.”
Does Saut believe the recovery is sustainable? He certainly seems to have bought into the idea that this is in fact a new bull market:
As for the all the “doubters” we encountered last week, who keep pointing to the rising unemployment numbers, we reminded them that employment is at the back-end of the cycle. Nevertheless, their chant goes like this, “how can we have a durable economic recovery when consumers account for roughly 70% of the economy; and, unemployment continues to rise while consumers continue to leave their “billfolds on their hips?” Ladies and gentlemen, the typical economic recovery is driven by corporate profits, not consumption! Those profits turn into the “investments” that foster a capital expenditure cycle, which eventually spurs corporate hiring. That’s the typical sequence and we think it plays that way this time. Verily, corporate profits are surging, which should stimulate more than just the “inventory rebuild” the naysayers suggest will quickly peter out. Accordingly, we think there will be a more durable capex cycle followed by the envisioned improvement in employment, which will indeed drive consumption.
His favorite way to play the continued rally? The leaders will continue to lead. In other words, the reflation trade and the high beta trade are still fully intact:
Should the various markets continue to trade higher in the months ahead, our sense is the sectors/stocks that have been the best performers off the lows will continue to be the best performers into year-end. Therefore, we would avoid playing the “laggards” in favor of the “leaders,” believing they will continue to “lead” if the equity markets trade higher. In addition to the aforementioned sectors, we would re-emphasize technology.
How high can the markets go? Saut thinks the markets could rally as high as S&P 1300:
The call for this week: Since the March “lows” we have repeatedly argued that the equity markets were three to four standard deviations below “normalized” valuation levels. Since then, they have merely rallied back to “normalized valuations.” Indeed, the DJIA only trades at a P/E ratio of 16 times earnings (according to Barron’s) and the gap between companies’ free cash flow yields and bond yields is at the widest since the early 1990s. As the prescient QB Asset Management folks write, “As the Fed and other central banks have been inflating their respective monetary bases dramatically over the last year, it is logical that gold has appreciated in dollar terms. It is also logical that stock markets have risen. In monetary base terms, the S&P 500 would have to rise to 1300 just to match the real/March ’08 lows.”
You can find the entire commentary here.
“Ladies and gentlemen, the typical economic recovery is driven by corporate profits, not consumption! Those profits turn into the “investments” that foster a capital expenditure cycle, which eventually spurs corporate hiring. That’s the typical sequence and we think it plays that way this time.”
Sounds like circular reasoning to me. Coporate profits are being driven by cost-cutting so if rehiring restarts with no underlying demand supporting it, then your profits evaporate quickly. Profits may be available and ready to fund hiring and CAPEX, but profits won’t be deployed unless companies see demand pick up first to support it. However, demand won’t pick up unless folks get back to work and that’s clearly not happening.
I think everyone’s hoping that all this Keynsian govt stimulus and easy money can break the stalemate, but I really don’t think it’s working and it’s only doing more harm. So far, the only thing that massive government intervention and deficits have bought us are dangerous moral hazard, higher oil prices and a battered dollar.
Because of the Fed’s mismanagement of the economy, we’ve had over a decade of boom/bust cycles. Capital was misallocated into nonproductive assets and boom industries created all the job growth. With housing, construction, banking, and real estate in shambles, we don’t have any sector or industry that can lead a sustainable recovery and produce lots of jobs. The only thing that comes close is health care, but that’s not even close to being a productive industry and really is just an extension of the public sector. Getting back to real prosperity will take savings and investment in new industries and a reduction of the public/private debt overhang. Both endeavors will take years.
Those calling for the next sustainable bull market are seriously deluded, I think. Not only that, but these Kudlows, Kramers, etc are taking advantage of the masses of unsophisticated investors out there who have an ingrained belief in buy-and-hold and the belief that the markets always come back, you just have to be patient. After two devasting bubbles, if these people are led to slaughter again, it could be the end of the savings and investment culture in the US.
jeff Reply:
October 22nd, 2009 at 4:58 PM
dow theory has made the “call” of a new bull market, not me. whether it turns out to a tactical bull within a broader trading range market is unimportant. we have made our “year” on my “all in” call of March 2nd . . .
TPC
You make the comment that Jeff Saut has played the downturn / upturn as well as anyone. I went back and looked at what Jeff Saut said BEFORE the crash.
I found an article published by Minyanville on Sept 22, 2008. At that point the DOW had dropped to 11,000 from 14,000. Here is a quote from Jeff Saut, the prescient analyst:
“I think the stock market “lows” are “in” for the year! Following the initial 2 and a half to 5 session lift-off, look for the prerequisite pullback, followed by an extension of the rally as risk premiums contract.”
As we all know, the market continued to fall precipitously just a month later.
I also went back to 2007 and found a similar position that Saut took immediately following a sell-off of about 1,000 points. Basically, his point was that the credit crunch was not a as severe.
From a fact based perspective, Mr. Saut is a perma-bull. If you had listened to his advice, you would have been down 60% from the highs. Now you would be up 60% from the lows…big deal. You are still down 30%.
It would seem to me, that Mr. Saut, like the mutual funds he chides, is trying to make up for lost ground. He wants and needs the S&P500 to go back to 1300; not that he has any facts to back that up. He just points out that 75% of the time the 4th quarter goes up. No facts. Just charts. Basically, a superficial assessment of what might happen, so that he can help the rally along.
“Me”, I prefer to listen to people who have called it right at the start and the middle, like Jeremy Grantham.
Mr. Saut is a talking head, who throws out biased factoids with little thought that the small investor may take his advice. It’s just more of the same from people who get paid by the investment community. “Hey, I’ll just predict it will always go up, and if it does, then I’m a genius. If it doesn’t, we’ll just conveniently forget I was MASSIVELY wrong. And, oh by the way, if you don’t agree with me, then you’re a moron.” I think Saut should get a job on CNBC.
TPC Reply:
October 21st, 2009 at 8:01 AM
Nice catch Mike. I must not have seen that. I stand corrected. Thanks.
salman Reply:
October 21st, 2009 at 11:14 AM
It takes a big man to admit he stands corrected in print. Good for you!!
Mike Reply:
October 21st, 2009 at 11:09 PM
TPC
I agree with salman. I like your blog even more.
Emotionless, relentless, objectivity is the key to successful investing.
I also apologize for coming on so strong. It genuinely bothers me that ‘professionals’ are so flip in providing their opinion. Through the school of hard knocks I have learned to take my own counsel, and look at others’ using a jaded perspective.
TPC_NLI Reply:
October 21st, 2009 at 11:22 PM
Thanks Mike and no worries. I always resepect and expect some criticism. I am not going to always be right….
jeff Reply:
October 22nd, 2009 at 4:54 PM
you obviously didn’t see my “dow theory” sell-call of 11-26-07 . . .
TPC Reply:
October 22nd, 2009 at 6:15 PM
Jeff,
If that’s actually you – thanks for the clarification. Big fan of your work.
Best,
TPC
TPC Reply:
October 22nd, 2009 at 6:47 PM
I should add – I certainly did see your Dow Theory sell signal which is why I originally referred to you having played this entire move down and back up with extraordinary precisions. Well done.
While I would have to give Mr. Saut credit for catching the March lows pretty much on the button I generally find his opinions about the market to be useless. I think the previous writer Mile hit the nail on the head. Mr. Saut is pretty much a perma-bull. He completely missed the recession which turned out to be the worst in my 61 year life and on numerous occasions, just prior to the recession starting, commented that he considered a recession as a low probability event and didn’t believe we would have one.
If his economic forecasting isn’t to good, his stock picks are even worse. Some of the ones I can recall him recommending on CNBC or Bloomberg include Motorola, Sprint, Edge Petroleum, Closed end funds just prior to their meltdown and the Canadian energy trusts just prior to their meltdown.
Granted, predicting the market can be tough and we’ve all made our share of mistakes but if you listen to Jeff Saut you might as well put Ned Reilly and Abby Cohn in you go to list too.
Then again I think it’s safe to say that if you have been listening to Mr Saut for any extended period of time you wouldn’t really care about the market since you wouldn’t have any money left to invest anyway.
Mike Reply:
October 21st, 2009 at 6:11 AM
Right on, John !!
with the USD falling, real interest rates below zero, where else can they park your hard earned cash, except in tax paying corprates. Step 2 we need a war for further stimulus.
I pretty much agree with him in a sense. I do believe we are encroaching upon a correction that will bring us below 1000, but I also believe we will see 1200 and maybe a little higher as well. Though I can’t fathom this being a new bull market just based on liquidity…that is where he and I differ…
It takes a big man to admit he stands corrected in print. Good for you!!
OH! You’re my new favorite blogger fyi
I predict that if the market rises it will fall again, whereas if the market falls it will rise again. I also predict that no one can accurately predict the market moves even 90% of the time.
Furthermore, I maintain that the media puts on the talking heads which predict what the market is doing at the moment, rather than those that are any good at predicting what it will do in the future. When the market is going up almost all the talking heads are bulls, but when the markets are going down most of the talking heads seem to be bears.
Mike Reply:
October 21st, 2009 at 11:54 PM
Rob,
While I don’t disagree with your overall point, since from experience I have been burned by flip advice on multiple occasions, there are analysts out there with a better than 60% record. The nice thing about the web is you can go back in time and measure their accuracy.
The best example out there I have observed is Jeremy Grantham. While he missed the rally off the Tech Crash lows in 2003, he properly called the mortgage crash; he also called this most recent rally; and is now bearish due to high valuations. There are others.
A small investor can make money in any market. You must be balanced in your approach and rigidly objective – which is what I think TPC strives to do. The biggest key is risk tolerance and controlling your emotion. While all this is easily said, it is extremely difficult to implement.
From my perspective, I think we are headed for a pullback of 500 to 1000 points (DOW). The current rally from a fundamentalist standpoint is a false one: GDP is up from equation flukes; earnings are up because MTM is dead; final demand from the consumer is weakening as evidenced by sales. (As David Rosenberg suggests, the stimulus is driving the market, which gives the appearance of a recovery.) Recently, China began issuing cautionary statements about their stimulus, which will fuel the uneasiness of recent days; and cause on over emphasis on poor earnings results for the remainder of earnings season. Finally, we won’t go much below 9,000, because the emotion of the perma-bulls will see this as a great buying opportunity and bid the market back up.
But, ultimately probably by Q4 earnings, the stimulus will be on the downslope, which will lead to a miss in earnings (just like Japan in 1989) and you will see the beginning of the retest of the lows in 2010. The key to all of this is the timing of the stimulus. As spending wanes, so will earnings, which will lead to a dramatic retest of the lows.
Bottomline is that just like 1937 after 5 years of ever increasing government spending, the market pulled back 50%, because FDR never addressed the central issue – organic demand. He had the key to it back then, too — electrification of the United States (this was the time during which the infrastructure for electricity was built). But, he dropped the ball and killed the incipient entrepeneurial spirit, which ultimately would have reignited organic demand. Fortunately for the United States’ economy (not the millions of people who passed away) Germany wiped out the competitions’ industrial base, leaving the US as the only developed nation who could provide to the world.
I am not suggesting that we are headed for a world war; just pointing out, my belief that FDR only did half the job — spend money. He failed to create a self-reinforcing, positive economic cycle fueled by final demand (the consumer) even though the key was electrification, which he squandored. Since the recovery occurred so close to the start of WWII, many people blur the results of FDR’s policies with the conditions of created by WWII.
We just need to find our golden goose on top of the stimulus. I was hoping Obama might be a creative thinker. Unfortunately, it appears that he is being held hostage by the halfway policies of FDR as personified by Larry Summers and Timmy “the Tax Cheat” Geithner; who (Summers and Geithner) by the way, counseled the Japanese through the first part of their 20 year industrial decline.
Stay focussed on the fundamentals, and realize that humans’ emotions cause the ebbs and flows. If you do that, then you can create the internal confidence to make the ‘right’ moves, which will lead to capital growth over time.
This is in reply to the comment made above to a posting I made on Oct 21:
jeff
Reply:
October 22nd, 2009 at 4:54 PM
you obviously didn’t see my “dow theory” sell-call of 11-26-07 . . .
After reading your dow theory sell-call, I’m glad I did miss it. Is this the one ?
“Due to the aforementioned observations, we find ourselves asking the question, ‘Has the leadership baton been passed to the 4Q07 leaders of utilities, techs, consumer staples, and healthcare?’ If so, the daily list of ‘new lows’ might be a fertile universe for ideas now that we are entering the ‘teeth’ of tax selling season. While only time will tell, the recent decline ‘feels’ different than the one we anticipated, and bought at the lows, last summer. Moreover, when interest rates cuts are met by sinking stocks, and a Dow Theory ‘Sell Signal,’ it always makes us nervous! Nevertheless, ‘they’ are going to try and talk-up last week’s action as a successful ‘retest’ of the August lows and may just be able to get things going on the upside, which is why we are trading some ‘long’ indexes like the S&P 500 Geared Fund (GRE/$17.04) with a close trading stop-loss point.”
. . . Jeffrey Saut, written Strategy comment, 11-26-07
So, it would seem that your “call” was to go long on 11/26 with XGREX, which consequently dropped from $16 to $8 a share. Great call, Jeff !!
I saw your other comment with another reader where you “made your year” with your March “all call”. Did you make up that drop from XGREX ? I am sure you were smart enough to have pulled out in time. You’re a smart guy.
Dude — YOU MISSED THE CALL !!! The goal in my opinion is to dispense advice to the private investor in such a way they can increase their capital overtime in a reasonable way. It’s not to rewrite history.
I agree with John. You are too focussed on the upside, and fail to give enough credence to genuine structural issues, and as a result, your advice must be taken in that context.
I’ll make a prediction. We will retest the March lows in 2010. Let’s see if you call that one in time, too.
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