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The System will Hold Together...
by Jeffrey Saut of Raymond James,
The implications are that things are likely going to get a little less fun for investors for a while with the major averages transitioning from a steep price rise to more of a sideways to downward pricing structure. This does not mean you cant make money. On the upside, my algorithms show that our fundamental analysts Strong Buy ratings on 7.6%-yielding CenturyLink (CTL/$38.02) and non-yielding Whiting Petroleum (WLL/$50.89) are setting up for a potential upside breakout. Meanwhile, our analysts Underperform rating on ViaSat (VSAT/$45.22)is being confirmed by my algorithms to the downside.
Compelling Valuation, or Value Trap?
by Jeffrey Saut of Raymond James,
Remember all those Negative Nabobs that caused you to panic and sell-out at the August lows? Or, the Bear Boos who told you the undercut low of October 4, 2011 was the start of a whole new leg to the downside? Then there was the Cowering Crowd that insisted the first half of 2012 was going to be terrible. Such rants have left the world profoundly underinvested in U.S. equities. Revenues and earnings are at all-time highs, yet the SPX is ~13.5% below its October 2007 high; indeed, Strange brew trying to get through to you (Cream 1967; Eric Clapton at his finest).
The January Jobs Report
by Scott Brown of Raymond James,
Make no mistake. The labor market is improving and theres hope for strong job growth this spring. Moreover, average weekly hours have been trending higher, consistent with an expected increase in new hiring in the months ahead. However, not to harsh your mellow, the January employment data were not as rosy as the headline figures would seem to suggest. These data should not change the picture for the Fed. We still have a lot of ground to make up in the labor market.
Precisely Watson?
by Jeffrey Saut of Raymond James,
I have repeatedly commented that earnings comparisons were going to get more difficult because the trailing four quarters earnings reports have been so strong; and, thats precisely what is happening. For example, with 180 of the S&P 500 companies reporting, there has been 1.81 upside earnings surprises for each disappointment versus a more normal ratio of 3:1. Accordingly, it makes sense to screen for companies producing Triple Plays that would be companies beating earnings and revenue estimates and also raising forward earnings guidance.
The Fed: Dual Targets Or Dueling Targets?
by Scott Brown of Raymond James,
The Fed has adopted an inflation target, as many other central banks have done long ago. However, the Fed retained its dual mandate, with a soft employment target. How will the two goals be achieved and what happens when they conflict? The Fed says is will use a balanced approach. The Fed lengthened the period for which it expects to keep short-term interest rates at exceptionally low levels. However, the five Fed governors and 12 district bank presidents have differing opinions on when the Fed should start raising short-term interest rates and what the rate target will be at the end of 2014.
The Inflation Outlook
by Scott Brown of Raymond James,
When the Fed embarked on its second round of asset purchases in 2010, officials were worried about the threat of deflation. The 2011 inflation results suggest that the Fed was successful in warding off deflation, but inflation did not surge as some had feared. Despite the moderate inflation results for 2011, some still believe the Feds accommodative policy will lead to a substantial increase in inflation sooner or later. However, were still a long way from a full economic recovery, and there will be plenty of time to unwind the Feds accommodation when appropriate.
Everybodys Unhappy!?
by Jeffrey Saut of Raymond James,
On January 3 I stated that session felt like an emotional peak and that January 10 felt like the price peak. Subsequently I wrote, The only question in my mind is if the markets are going to have a pullback into the 1230 1240 support zone, or go sideways to correct their overbought condition and allow the internal energy to be rebuilt. So far, it has been a sideways consolidation until last weeks upside breakout causing one old Wall Street wag to exclaim, Breakout or fake-out?! On a short-term basis I think it is a fake-out believing a trading top is due this week ...
The Turtle?
by Jeffrey Saut of Raymond James,
The turtle makes no progress until it sticks its neck out; I have been sticking my neck out since Thanksgiving, believing the Santa rally was beginning. I stuck with that strategy until the first day of trading this year, which felt like a short-term emotional trading peak. A short-term price peak occurred on 1/10/12 at 1296.46 basis the SPX. The only question in my mind was whether we were going to get a pullback into the 1230 1240 support zone, or if we would experience a sideways correction as the overbought condition was worked off and the markets internal energy was rebuilt.
Fed Policy Outlook More Communication Is Good
by Scott Brown of Raymond James,
The Federal Open Market meets next week to set monetary policy. Its widely expected that short-term interest rates will remain unchanged and that (for the time being) there wont be another round of asset purchases (QE3). The Fed will begin publishing the range of senior Fed officials projections of the appropriate federal funds rate target (for the fourth quarter of this year and the next few years). There are more benefits than risks in making these projections public.
Steady As She Goes Into Early 2012
by Scott Brown of Raymond James,
Much like the situation last year, the economy appears to be poised for improvement. Again, there are still some headwinds and a number of downside risks to the growth outlook and much will depend on developments in Europe and in the oil market over the next few months. Theres still some prospect for further accommodation from the Federal Reserve we may see another round of asset purchases announced later this month.
The January Barometer
by Jeffrey Saut of Raymond James,
Its amazing that equity markets have rallied in light of the strong U.S. dollar. That action suggests that stocks are not ready for the pullback I have been expecting following last Tuesdays upside blow off. Still, while the Dow Industrials and Dow Transports have tagged new reaction highs, the SPX and NDX have not. Such divergences always leave me cautious, especially since we are past the seasonally sweet spot for stocks. At some point we are going to get a profit-taking event, whether it is from last Tuesdays intraday high or the 1300-1320 overhead resistance zone remains to be seen.
The Year of the Dragon
by Jeffrey Saut of Raymond James,
Since the day after Thanksgiving I have stuck with the strategy that the Santa Claus rally had begun. On November 25th the SPX was changing hands around 1158. We are now 100 points higher. Consequently, I would not chase the dragon right here since I anticipate that an upside blow off is due ...
Bear Trap
by Jeffrey Saut of Raymond James,
StockCharts.com defines a bear trap as a situation that occurs when stock prices break below a significant level and generate a sell signal, but then reverse course and negate the sell signal. While that's the formal definition, I have often referred to bear traps as undercut lows. The biggest one in recent history occurred on October 4, 2011. I revisit the undercut low thesis today because it appears that is precisely what happened last Monday afternoon when the S&P 500 (SPX/1265.35) knifed through its previous reaction low of 1209.47.
Some Questions For 2012 And Beyond
by Scott Brown of Raymond James,
The U.S. economy is expected to advance at a moderate rate in 2012, but Europe presents a key downside risk to the outlook. That aside, there are longer-term uncertainties about potential growth over the next several years. Next year will be an election year and income inequality could be an issue. Like any good horror movie, the European crisis has carried an ongoing feeling of dread. The potential for a catastrophic collapse is palpable. For the U.S., a meltdown would hit exports, but the bigger fear is possible financial market disruptions.
By The Side Of The Road
by Jeffrey Saut of Raymond James,
For months I have stated, While I guess we could talk ourselves into a recession, like the aforementioned hot dog folks, most of the finger-to-wallet ratios I monitor are not pointing towards a recession. To be sure, railcar loadings (especially intermodal) have been pretty strong for the past few months. State tax receipts are up year-over-year. East Coast port traffic, both inbound and outbound, remains perky. And, one of the best walk around indicators, namely foot traffic at the casual dining restaurants because it is the most discretionary of all consumer purchases, is still positive.
Fed Policy Outlook Changes On The Way?
by Scott Brown of Raymond James,
The Federal Open Market Committee will meet on Tuesday to set monetary policy. The Fed is widely expected to leave short-term interest rates unchanged and the wording of the economic assessment should be largely the same as in the previous statement. However, we could see another round of asset purchases or some changes to the Feds communications. The inflation outlook is moderate. It doesnt look like well see substantially higher inflation in 2012, but (barring a large negative shock to growth) were unlikely to see a threat of deflation.
Self Sustaining
by Jeffrey Saut of Raymond James,
Last week the ECBs interest rate cut took center stage, but that cut should be viewed within the context of the 40 world wide interest rate cuts that preceded it. Clearly, there is a global easing cycle underway; and, we think you will see more such news this week when the FOMC announces it policy statement Tuesday. Stocks will continue to grind irregularly higher driven by portfolio managers trying to play catch-up, the upside seasonal bias, low valuations, still depressed sentiment readings, and the knowledge that we have now entered the best performing six months of the year for stocks.
Sauta Clause
by Jeffrey Saut of Raymond James,
December has been the best performing month of the year over the past 100 years with positive returns 73% of the time. And while last weeks 7.39% romp will likely not be duplicated quickly, the path of least resistance remains up according to our work. That said, while the DJIA bettered its 200-day moving average last week, the SPX and D-J Transportation Index did not. Consequently, a divergence currently exists that could lead to some sort of pause and/or pullback. Therefore, look for opening strength this morning followed by attempts to sell stocks back down.
Treading Water
by Scott Brown of Raymond James,
The good news is that the economy does not appear to be contracting. The bad news is that its still not growing fast enough to make up much of the ground lost during the downturn. The unemployment rate fell to 8.6% in November, from 9.0% in October and 9.8% a year ago. However, more than half of that drop was due to a decrease in labor force participation. The data suggest an economy that is growing just enough to absorb the growth in the working-age population.
The Oath
by Jeffrey Saut of Raymond James,
The week before Thanksgiving has been up eight of the past nine years...that is up until last week. While many pundits cited the failed German Bund auction, Chinas slowing PMI Index, another bank stress test, a downwardly revised GDP report, Euroquake, etc.; my hunch is the real reason for the recent swoon is our own government. The breakdown of the Super Committee has clarified the differences between the two parties. Americans must now decide to accept either serious reductions in their healthcare and pension programs, or substantially higher taxes, and probably both.
The Joy of Cooking
by Jeffrey Saut of Raymond James,
Last Friday CNBCs Maria Bartiromo asked me what was going to happen with this weeks Super Committee decision? After jokingly responding that if past is prelude if the Super Committee doesnt arrive at a decision they will appoint a SuperDuper Committee, I then stated, I dont think the Super Committee will reach a consensus.I also opined, I believe there is a wink and a nod between President Obama and Speaker John Boehner to not implement the mandatory cuts and let the 2012 Presidential election resolve the debate between increased taxes and spending cuts.
Debt Story
by Scott Brown of Raymond James,
Loan growth plays a key role in economic expansion. Simply put: no loan growth, no economic growth. However, theres a downside. Debt doesnt matter until it does. Debt has played a key part in the economic downturn and in the gradual recovery. Europes sovereign debt crisis has continued to escalate, with no easy way out. In the U.S., the government has borrowed more, but the markets have not punished it for doing so. Theres no sign that that is going to change anytime soon.
Italian Job Redux
by Jeffrey Saut of Raymond James,
On Wednesday, Enel, the major Italian oil company, said, Its time to tell the truth to Italians. Number 1: The party is over. The party referenced is the welfare state that has careened so many Mediterranean countries down the entitlement road. Recently, driven by the sovereign debt markets, reality has arrived at the crossroads along with the realization that the welfare-state needs major austerity reforms. Ignoring lessons our union leaders steered us down the same road as Ohio voted to reverse a law designed to curb the bargaining power of unions representing public employees.
Super Committee To The Rescue?
by Scott Brown of Raymond James,
Hows it going? Not good. The nonpartisan Congressional Budget Office has to score the super committees recommendations and return its analysis to the committee by November 21, which would allow the committee two days to make changes before its final recommendations. The CBO was supposed to receive the bulk of the recommendations by late October or early November. Things are a little behind schedule. The committee seemed doomed to fail from its inception
Ich bin ein Berliner
by Jeffrey Saut of Raymond James,
Last week at the G20, like John Kennedy, President Obama tried to emphasize support for a German bailout plan to prevent a Greek tragedy. The tragedys trajectory rose sharply on Tuesday when Papandreou announced there would be a referendum to decide if the new austerity measures for a second bailout would be acceptable to the Greek people. That news shocked the worlds equity markets, which was reflected by the Dows Dive of some 297 points. I was seeing portfolio managers at the time and told them that in my opinion Papandreous prose was telegraphing a Greek withdrawal from the EU.
Crescendo?
by Jeffrey Saut of Raymond James,
Websters defines the word crescendo as, The peak of a gradual increase; or a climax. And, thats the climatic feeling I got last Thursday when the D-J Industrials sprinted some 340 points on the European euphoria to close above 12000 for the first time since August 2, 2011. Such action caused one old Wall Street wag to exclaim, Buy on the cannons and sell on the trumpets! Clearly we bought on the cannons back on October 4th when the indexes broke below their respective August 8th and 9th selling-climax lows.
Feeling Better?
by Scott Brown of Raymond James,
The European debt agreement puts the concerns about Greece off to the side for the present. However, its unclear exactly how much the European stabilization fund will be increased and how it will be financed. The agreement doesnt do much to head off potential problems for Italy and Spain. The government debt situation in the UK is worse than in Spain and Italy but borrowing costs for Spain and Italy are much higher. Thats because Spain and Italy do not have their own monetary policy. There is inherent fragility in the monetary union. TheECB and the EU will have to address this at some point.
Fed Outlook More Asset Purchases?
by Scott Brown of Raymond James,
The Federal Open Market Committee, the Feds policymaking arm, will meet on November 2-3. Clearly, there are some differences of opinion among senior Fed officials regarding the appropriate path for monetary policy. However, the dissenters (those wanting to do less) are a small minority. The FOMC will come together with a somewhat less troublesome near-term economic outlook (no recession in the near term), but there are more concerns about growth in 2012.
Got Jobs?!
by Jeffrey Saut of Raymond James,
Whether this stampede turns out to be that strong will likely depend on the economy, our changing political environment, and Europe. However, I remain cautiously optimistic, believing there is a change afoot inside DC whereby business people are being elected, fostering the hope of simple, market-based solutions to our Nations ills. And, over the last three weeks the stock market appears to be sensing this as well with winning sectors continuing to be Energy, Financials, Consumer Discretionary, and Materials. Such sector rotation suggests the stock market believes things are getting better.
No Recession, At Least For Now
by Scott Brown of Raymond James,
Recent data have helped reduce fears that the U.S. economy is already in a recession. However, there is still a lot of uncertainty about next year. Some of that uncertainty (gasoline prices) is beyond our control, but much is about policy both fiscal policy in the U.S. and efforts to right the ship in Europe. The outlook for growth in the remainder of this year appears a bit brighter than it did a couple of weeks ago. However, the 2012 economic outlook is still troublesome.
Wrong
by Jeffrey Saut of Raymond James,
Near-term overbought is our short-term call, yet we think the lows are in for the year. Regrettably, we also believe there has been so much technical damage that the May 2nd intraday high of 1370.58 marks the high for the year. Nevertheless, we are buyers of favored stocks on weakness given our sense that there will be no recession and that earnings will continue to surprise on the upside.
The September Jobs Report Not Bad, Not Good
by Scott Brown of Raymond James,
The White Houses jobs package would aid the job market to some extent, but legislation has become bogged down in Congress and thats not all due to opposition from the Republicans. To pay for the jobs package, the White House has proposed reducing tax breaks and subsidies, the removal of which is opposed by members of both parties. So, theres not a lot of hope that well get a major jobs bill. That leaves Fed policy as the only game in town. Unfortunately, as Bernanke testified last week, theres only so much that the Fed can do.
Undercut Low?
by Jeffrey Saut of Raymond James,
What do you mean by an undercut low? was a question I received in numerous emails after last Tuesdays verbal strategy comments. Well, for the past few months I have been talking about the similarities to the declines, and subsequent bottoming sequences, of October 1978 and October 1979. I know that the environments are very deferent but, I am referencing just the pricing action of the D-J Industrials. As often stated, those aforementioned declines were just as severe/quick, as what we experienced from the 7/27 intraday high of 12751.43 into the selling climax lows of August 8th and 9th.
The Economic Outlook In A Holding Pattern
by Scott Brown of Raymond James,
The consumer outlook is muddled. Spending growth hasnt been especially strong, but its not falling off a cliff. Real income growth has slowed, but lower gasoline prices may provide some relief over the next several months. Corporate profits and cash flows are strong, helping to support business fixed investment. However, were still facing a significant drag from fiscal policy and Europe is a major question mark. The anxieties of September are likely to continue into October and beyond.
Painful Ups and Downs
by Jeffrey Saut of Raymond James,
Goodbye and good riddance to 3Q11, which has been the worst performing quarter for the SPX since 4Q08. Welcome to 4Q11, and the month of October, which has been termed the Bear Killer since many downtrends have found their nadir in the Halloween month. Indeed, recall that after being bearish since the Dow Theory sell signal of November 21, 2007, we turned bullish in October 2008 when 93% of all the stocks traded on the NYSE made new annual lows. Hopefully, this month will prove as kind for stocks as 2008.
Twist And Pout
by Scott Brown of Raymond James,
As expected, the FOMC opted for Operation Twist, and will sell short-term Treasuries out of its portfolio and buy longer-term Treasuries. However, the size of the Feds operation was larger than anticipated and more out-the-curve, sending yields on long-term Treasuries tumbling sharply. In addition, to further aid the housing market, the FOMC voted to recycle is maturing mortgage-backed securities and agency debt back into mortgage-backed securities. So whats not to like? By themselves, the Feds latest moves arent going to lead to strong GDP growth anytime soon, but they should help.
Its 11:01?
by Jeffrey Saut of Raymond James,
Its 11:01 p.m., do you know where your children are? is a phrase that haunted me reminding my parents that I was out past my curfew. Similarly, investors asked themselves last week, Its 1101, do you know where your stocks are? as on Wednesday the Dow dove through last Mondays intraday low of 1188.36 and headed below the August 9th selling climax low of 1101.54. For 7 weeks I have discussed the importance of holding above the 1100 level, if our analogue to the October 1978 and October 1979 bottoming sequence is going to hold. So far, the correlation between then and now is remarkable.
Fed Policy Outlook Something, But What?
by Scott Brown of Raymond James,
Fed policymakers meet this week at a critical juncture. Growth has slowed in the last few months no recession, but well below potential, leading to some softening in the labor market. Consumer price inflation has picked up in 2011 and August CPI figures were on the high side of expectations. In their public comments, Fed officials have been divided on the potential benefits and risks of additional policy accommodation. However, some action is expected on Wednesday. The only question is which tool the Fed will pull out of its kit.
Deja Vu?
by Jeffrey Saut of Raymond James,
Over the past 41 years I have observed a few comparisons that have had fairly good correlations to what was occurring at the time and have used them to help allay panic among investors at inappropriate times. Most recently, I have suggested the panic lows of August 4th and 8th showed such extreme panic-selling readings that participants had to go back to May 13, 1940, when the Germany Army broke through the Maginot Line and invaded France, to find similar panic levels. That observation was consistent with the analogue I have been using for two months.
Balance Grasshopper
by Jeffrey Saut of Raymond James,
Over the weekend Greece did not default, although for over a year I have expressed the view that Greece has to default; a stance I continue to embrace. This morning, however, rumors are swirling again about a Greek default along with hints that Germany is not going to prevent it. That leaves the pre-opening futures down over 20 points, which would represent a retest of the selling-climax lows. While I am hopeful this will be a successful retest, consistent with the October 1978/1979 bottoming sequence, if 1100 is decisively broken it would imply the rally from the March 2009 lows is over.
Extraordinary Measures Needed
by Scott Brown of Raymond James,
While Fed officials appear to be divided the hawks are a minority. More monetary stimulus is coming but its unclear whether this will include another round of asset purchases or a lengthening of maturities in the Feds asset holdings. Looking at Europe, its difficult to quantify the probability of a banking crisis, the exit of one or more countries from the monetary union, or a complete breakup. The political environment is difficult in a different sort of way than in the U.S. Fiscal and monetary policy efforts in the U.S. may not lead to a strong recovery anytime soon, but at least we try.
Can You Hear Me Now?
by Jeffrey Saut of Raymond James,
In last weeks verbal strategy comments I cautioned to not pay up for stocks since the NYSE McClellan Oscillator was about as short-term overbought as it ever gets. Additionally, I stated that if this is a replay of the October 1978/1979 bottoming sequence we will have opportunities over the coming weeks to buy select stocks at lower prices. Given the European news over the weekend, and yesterdays Euroland equity markets meltdown, it should come as no surprise that the S&P 500 preopening futures are sharply lower this morning.
Policy Conundrums
by Scott Brown of Raymond James,
In a week or so, President Obama will announce proposals to boost job growth and shore up the housing sector. These efforts, even if they could make it through Congress, would help somewhat, but wouldnt boost economic growth substantially. Bernankes Jackson Hole speech showed that the Fed chairman remains optimistic about the long-term prospects for the economy. Current difficulties are unlikely to affect the long-term growth potential, but he stressed that is if our country takes the necessary steps to secure that outcome.
The Summer Wind
by Jeffrey Saut of Raymond James,
Just like the surfer interviewed over the weekend who grabbed a board and leapt into the Irene-induced waves, investors need to grab a board and catch a wave if they want to achieve success. But to do that, first you need to get into the water! The time to stand on-shore was months ago, not after a ~20% decline in the S&P 500 (SPX/1176.80) from its intraday high on May 2 to its intraday low on August 9. While we have been pretty conservative in our stock recommendations over the past three weeks, we would become more aggressive if the SPX can break out above the recent rally-high of ~1208.
Pounded
by Jeffrey Saut of Raymond James,
I have been pounded with questions about the Dow Theory sell signal I spoke of; and, that occurred three weeks ago. The ubiquitous question has been Hey Jeff, how can you tell people to buy in light of the signal? My response has been that such a huge amount of energy had been used up in rendering the Dow Theory sell signal that the market, at least on a short-term trading basis, is likely a buy. Reinforcing that view are numerous oversold readings of epic proportions.
Whats A Central Banker To Do?
by Scott Brown of Raymond James,
The Kansas City Feds annual monetary policy symposium in Jackson Hole, Wyoming is attended by central bankers from around the world. For U.S. investors, the focus will be on Bernankes speech on Friday 8/26. Many market participants are hoping for a repeat of last year, when the Fed Chairman signaled the possibility of a second round of asset purchases QE2. However, while the August 9 Federal Open Market Committee indicated that its members were discussing a range of policy tools to promote growth, the FOMC is unlikely to pull the trigger on another round of asset purchases anytime soon.
Terminator 3: Rise of the Machines
by Jeffrey Saut of Raymond James,
While people who live in glass houses should not throw rocks, I have to observe how the media has trotted out super-bear Robert Prechter at every major stock market low for the past decade. They featured him again last week. Combine such anecdotal gleanings with the aforementioned market valuation metrics and it suggests a downside inflection point may have been reached. And while the bottoming process should take weeks, many individual stocks have likely already bottomed.
Rumours
by Jeffrey Saut of Raymond James,
When asked how he made his money, Mr. Rogers answered, I sell euphoria and buy panic. Currently, gold and Treasuries are gapping on the upside; and, stocks are gapping on the downside. The implication, though I believe gold is in a secular bull market, suggests positions should be sold in metals and the freed-up cash should be used to buy sound stocks with decent dividend yields. The weeks ahead will determine if this is the correct strategy. All said, IMO it is too late to panic. The time raise cash, was months ago. Now it is time to selectively redeploy that cash into select equities.
Crisis Averted, A Re-focusing On Prior Worries
by Scott Brown of Raymond James,
Fiscal policy in the U.S. and abroad is going the wrong way, weakening the prospects for global growth. What about monetary policy? In the U.S., Fed policymakers meet this week. As Chairman Bernanke testified in mid-July, even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. The Fed could provide more explicit guidance on how long short-term interest rate would remain low and how long the balance sheet would be maintained at its current elevated level.
Default?
by Jeffrey Saut of Raymond James,
We have many great campaigners inside the D.C. Beltway, but far too few have the ability to govern given that their main concern is to get reelected. Maybe Warren Buffet had the right idea when he said, I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than three percent of GDP all sitting members of congress are ineligible for reelection. As for the Nations AAA rating status, I think we are in for a downgrade no matter what happens inside the Beltway as the pendulum always swings too far in each direction.
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