Jeff Saut Presents: "January"
What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid?"
Editors Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.
"The last 35 up First Five Days were followed by full-year gains 30 times for an 85.7% accuracy ratio and a 13.7% average gain in all 35 years. The five exceptions include flat 1994 and four related to war. Vietnam military spending delayed start of 1966 bear market. Ceasefire imminence early in 1973 raised stocks temporarily. Saddam Hussein turned 1990 into a bear. The war on terrorism, instability in the Mideast and corporate malfeasance shaped 2002 into one of the worst years on record. The 20 down First Five Days were followed by 10 up years and 10 down (50% accurate). In Midterm Election Years this indicator has had a spotty record - almost a contrary indicator. In the last 14 Midterm years only six full years followed the direction of the First Five Days and none did in the last seven. The full-month January Barometer has a better Midterm record of 64.3% accurate." . . . 2006 Stock Trader's Almanac
"So goes the first week of the new year, so goes the month, and so goes the year" . . . was the cry from the Street of Dreams last week as Wall Street ignored the fact that Santa failed to call this year with the perfunctory "Santa Rally," yet popped the cork anyway for the first week of January with an attendant 2.3% rally for the DJIA. The holiday-shortened week began with Tuesday's 130-point Dow Delight and the averages never looked back. Interestingly, the first trading day of the year has now been up 10 out of the last 15 years with the biggest winner being 2003's 266-point Dow Wow. Also interesting is that the second day of the New Year has now risen 10 of the past 13 years. Moreover, a week like we saw last week, where the first four days of the new year all were all up, has only occurred six times in the past 50 years and in all six cases has been a precursor for pretty decent equity returns for the year.
Plainly, the media was replete with such factoids last week; what the masses know, however, is sometimes not worth knowing. Certainly history suggests that we should accept what everybody knows about the January effect and anticipate it by buying, or holding, stocks for higher prices. But, knowledge generally has value on Wall Street only when the crowd is unaware and has not anticipated it. Remember last year when the crowd bullishly entered the New Year emboldened by the Santa Rally and the mantra that there has never been a down year for the DJIA in a year ending with the number "5." Well, we all know how that turned out with the DJIA losing 0.6% in 2006.
Ladies and gentlemen, "So goes the first week of the new year, so goes the month, and so goes the year" is not sacrosanct and participants should keep in mind the anecdote about the man who had a dream centered on the number four:
First he dreamed about four sheep jumping over a fence. Then it was four pickles floating in a jar followed by four women chasing him. The whole dream was one recurring theme about the number four. Being a betting man, when he awakened the next day he decided the number four couldn't lose for him that day. He called his friendly bookie and placed a $444 bet "to win" on the number four horse in the fourth race. Later that day he called to find out how he had done. His bookie said that his horse had lost but did come in number four. "Well, who won?" the man asked. "Pickles," said the bookie.
While the "pickles pundits" will snort, "we're going vertical" . . . the January effect or defect aside, looking longer term for 2006 our investment posture assumes that "cash is not trash" and "defense continues to be a decent offense," a stance that has produced superior returns for us over the last five years. Currently, we now are favoring large caps (not mega caps) over small/mid-caps. That is a big strategic change for us after adamantly recommending small/mid-caps as THE place to be from October 2001 until October 2005. While we will still "mine" this universe, believing that outsized earnings growth will come from select small/mid-cap situations, their outperformance since April 1999 makes said performance VERY long-of-tooth and therefore not good "odds bets." As for the "growth versus value" question we keep getting, we have always stated that Wall Street will "pay up" for outsized growth, yet we agree with Warren Buffett that the growth versus value question is "fuzzy thinking." To wit, " in our opinion, the two approaches (growth vs. value) are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid?"
On interest rates, we have clearly been wrong; believing that in a finance-based economy the Fed would stop its rate-ratchet around 3.5% - 3.75%. Hereto, despite the pickle-pundits' cries that the "Fed is done," it appears to us as if the Fed is going to continue raising rates until there is an "accident" consistent with its historic modus operandi. While such action should be bullish for the dollar, we continue to expect the dollar to lose its tailwinds (foreign earnings repatriation, Homeland Investment Act, Europe raising rates, etc.) this year. And, last week China fired another "shot across the dollar's bow" when it intimated that it was going to diversify more of its reserves out of U.S. dollars. Maybe that is one of the reasons our anti-dollar investment in 6.8%-yielding Aberdeen Asia-Pacific Income Fund (FAX) has rallied 5.9% since December 30, 2005, yet still trades at a 5.2% discount to its net asset value. Also worth noting is that despite the DJIA's 2.3% rally over that same timeframe, the dollar has declined 3.3% against the euro, and 3% versus the Dollar Index, causing one Wall Street wag to ask, "Are stocks going up or is the measuring stick (a.k.a the dollar) going down?!" Consequently, to foreign investors, last week's DJIA rally still left them with losses in "real" terms. If our weaker dollar "call" proves correct, it should be a positive development for U.S. multinational companies and "stuff stocks" in general (energy, agriculture, water, timber, fertilizer, cement, precious/base-metals, etc.).
As for some special situations for the New Year, we recently polled our analysts for some of their best ideas at the request of a major East Coast-based financial institution. Some of their ideas are as follows and they are all rated Strong Buy by our fundamental analysts: Enterprise Products Partners (EPD); Syniverse (SVR); Consol Energy (CNX); Patterson Energy (PTEN); Lifepoint Hospitals (LPNT); Checkfree (CKFR); Chesapeake Energy (CHK); Intermec (IN); and Ingram Micro (IM).
In conclusion, in addition to the January Effect we will be watching the December Low Indicator (December 2005's closing low was 10755.12). As reprised in the 2006 "Stock Trader's Almanac:"
"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."
The call for this week: One of our institutional sales folks said to us last week, "I want you to be bullish!" Our response was, "We were one of the very few bullish folks in mid-October." He said, "True, but only for a few weeks." Well that statement is just plain wrong, because since our mid-October "scale buy 'em" call, and our October 25, 2005 "the lows are in" call, we have maintained a trading objective for the S&P 500 of 1280 - 1300 and targeted a trading-top for late January. We did, however, state that the easy money had likely been made back in early/mid-December. Moreover, we were unwaveringly bullish in the investment account on the small/mid-caps from October 2001 until October 2005, when we began favoring large-caps (not mega-caps). We have also been steadfastly bullish on "stuff stocks" (tangibles) for the past four years, and remain so, believing that "stuff stocks" are in a secular bull market. Using the starting point of the spring of 2003, which everybody seems to want to use, the aforementioned strategy has produced returns in one of our investment accounts as follows: +21.9% (2003); +18.0% (2004); and +14.8% (2005). Meanwhile, the speculative/trading account has returned over that same timeframe: +119%; +31%; and +26.2%, respectively . . . enough said.
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