Jeff Saut Presents: Mr. Market
Listen to Mr. Market...
"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conductive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he feels depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another enduring characteristic: he doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to ignore him or take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market; you don't belong in the game. As they say in poker, 'If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy.'"
. . . Warren E. Buffett
Most investors felt like patsies last week since so many of them had embraced that old market axiom, "so goes the first week of the new year, so goes the month, and so goes the year." Indeed, with the New Year's opening week Dow Delight (+2.6%) participants had settled-in for a January Jump that should leave the senior index higher for the month and thus implying higher prices for the year. After last week, however, the January Effect may be turning into the January Defect. Surprisingly, back in our
"When the Dow closes below its December closing low in the first quarter, it is frequently an excellent warning sign. Jeffrey Saut, managing director of investment strategy at Raymond James, brought this to our attention a few years ago. The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970s. Hooper dismissed the importance of January and January's first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday shortened week. Instead, said Hooper, 'Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out. . . . If the December low is not crossed, turn to our January Barometer for guidance. It has been virtually perfect, right nearly 100% of these times' (view the complete results here)."
Regrettably, last Friday's Flop left the DJIA below its December lows, triggering Lucien's advice to "watch out!" Fortunately, we had already been "watching out," having ignored Mr. Market since mid-December when we were stopped-out of (read: sold) most of those trading positions that were purchased near the lows in mid/late-October. Indeed, "Mr. Market has another enduring characteristic: he doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you." Plainly, Mr. Market's quotations have been uninteresting to us recently, save some of the investment positions we recommended during the last week of December. Those recommendations were made in dividend-paying vehicles like 6.8%-yielding Enterprise Products (EPD), 7.9%-yielding Four Corners Trust (FCT), and 6.8%-yielding, anti-dollar bet Aberdeen Asia Income Fund (FAX), all of which had sold off due to end of the year tax-loss selling (we still like 'em, by the way).
The question now becomes, "After last week's Dow Dive is this one of those times when Mr. Market 'feels depressed and can see nothing but trouble ahead for both the business and the world? On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.'" Obviously, the world's backdrop suggests that Mr. Market is currently depressed, given its saber-rattling combined with its ability to stop its oil production and close the Straits of Hormuz to shipping. Then there are Osama bin Laden's revelations, the Nigerian mess, the twin war consternations, a scandal induced Nikkei Nosedive, numerous earnings warnings/shortfalls, and the list goes on. So where does this leave us? Unfortunately, while we hate to keep repeating ourselves, we remain in agreement with the savvy folks at Knott Capital Management, whose eponymous captain, Charlie Knott, opines (with our emphasis added):
"With these concerns, our risk-adverse and conservative nature forces us to maintain a 'predominantly defensive' investment stance. Investors shouldn't have a highly optimistic or hardened pessimistic mindset. Proper sector-selection is the best tactic to achieve above-average investment results. We favor those industry groups where valuations are reasonable, pricing power is formidable and earnings growth seems assured. We continue to sell-on-strength and buy-on-weakness. This defensive tactic is flexible and adjusts to the market's volatility. It also allows gains to accrue as 'money is taken off the table.'"
Fortunately, this stance has produced wonderful total returns for us. We continue to invest accordingly.
The call for this week: When the going gets tough, the tough go on the road. And, that is the reason we left for
"In conclusion, since our mid-October buy 'em call we have suggested that the S&P 500's trading target was at the 1280 – 1300 level, which should occur in late January. Well, here we are. We think the stock market by most measurements has already made a big bet. To expect much more from here would be a long-odds play. We would rather make the 'intelligent' bet and not risk the farm."
Whether the recent Dow Dump is the beginning, or the ending, of the recent consternations, investors should note that the S&P 500 (SPX) tested, and held, its 50-day moving average at 1261.28. Yet, our proprietary overbought/oversold indicators are NOT currently oversold. Consequently, we remain defensively positioned.
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