Jeff Saut of Raymond James has proven quite prescient during the last few years as he remained bearish during the downturn and turned bullish in April. In recent comments, Saut had been expecting a downturn, but maintained that the market rally was likely to continue into year-end and that any downside should be bought. Heading into the end of the year Saut hasn’t changed his tune. In fact, he says we’re entering a remarkably bullish short-term period of the year. Not only is the market seasonally strong over the coming 6 months, but the market has some very short-term wind at its back as well:
In addition to the aforementioned seasonality, there are some equally compelling shorter-term metrics. To wit, over the past 12 years the DJIA has always shown a profit between November 11th and December 5th. Additionally, since 1976 the DJIA has posted a positive return between October 26th and January 1st every year except 2007.
On a more macro level Saut is now leaning more towards the side of a new secular bull market. He believes the recovering fundamentals will continue to force underinvested investors into stocks (something we’ve been hearing from JP Morgan as well):
Plainly, we agree with the astute GaveKal organization in that the normal economic cycle is for corporate profits to increase, which drives an inventory rebuild and subsequently capital expenditure cycle, and then comes employment expansion that revives consumption. Currently, corporate profits are surging at their largest ramp rate since mid-1975. According to ISI, “profits have increased sequentially for the past three quarters at an estimated +34.8% annual rate – a record for a recessionary environment.” As of yet, however, the inventory rebuild has been muted. But with inventories plumbing record lows, we think the inventory cycle is about to begin. If correct, the aforementioned sequence should play. Importantly, consumption comes at the back-end of the cycle, not the front-end. Consequently, those arguing we cannot have a normal recovery until unemployment declines are like skiers skiing downhill looking at the tails of their skis.
We think the normal economic cycle will play once again. If so, economic reports, fundamentals, and earnings should continue to improve, putting even more pressure on underinvested participants (according to the latest surveys, hedge funds are only ~52% net long). And, that pressure should buoy stocks into the first part of 2010. It is the back half of 2010 that begins to worry us due to harder earnings comparisons, loss of the “sugar high” stimulus funds, higher taxes, an election year, increased government regulation, etc. In fact, it is the probability of further government regulation of corporate America that worries us the most, and we are not alone.
This is a pretty bullish report from an investor who has been pretty spot-on over the course of the last few years. Ignore Saut at your own peril.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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