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Jeff Saut: The Lows Are In


The soothsayer has spoken...


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.

We don't pen many Special Strategy Alerts so when we do, obviously we think something has changed. That something is the equity markets. Recall that for the past few weeks we have been suggesting that a trading bottom was at hand. Our only question was whether that bottom would be made by a selling-climax or a selling dry-up. Yesterday that question was resolved in selling dry-up form. Verily, the DJIA had two opportunities to give us a selling-climax. The first was last week when Wednesday's Dow Delight (+128) was followed by Thursday's Dow Dump (-133). Yet on Friday the DJIA didn't really accelerate on the downside. The second potential selling-climax opportunity came yesterday on the Baghdad events and the bears still couldn't muster a selling-squall.

Plainly, the news from Iraq is getting worse and yesterday was no exception. Indeed, yesterday's events smacked very much of the Tet Offensive that began in 1967 and proved to be the turning point of the Vietnam War. Think about it. On Monday Iraqi insurgents crashed into the Red Zone (supposedly extremely secured by coalition forces) and managed to get to the allegedly "secure" hotels that house most of the international media/contractors covering the war. Moreover, they were able to set-off three huge car bombs. That, in our opinion, was why the administration prematurely announced the appointment of Ben Bernanke to the head of the Federal Reserve. And it worked, because Ben "helicopter" Bernanke's nomination, when combined with Hurricane Wilma, left little room in the media for Baghdad.

Clearly, the stock market liked Mr. Bernanke's anointment, yet it should have come as no surprise given his elevation to the President's Council of Economic Advisors months ago. Also of no surprise should be the stock market's positive response since the DJIA rose 1.1% on the day of Paul Volcker's nomination and 1.7% on Alan Greenspan's. But memories are short on the street of dreams, for most new Fed Heads have come into that post in a hawkish-mode to get the "manhood" needed for the job. Recall Mr. Volcker came in as a "hawk" and the equity markets went into a slow-motion crash. When Alan Greenspan was anointed (1987) the equity markets went into a real crash. Regrettably, Ben Bernanke will have to lose his "helicopter" moniker and it is likely that he too will do that by entering his position in a hawkish mode (read: continue to raise interest rates). And while that is a negative wild-card, our sense is that the equity market "lows" have
been made.

That "bottoming" view is derived from our notes of 35 years and our sense of market history. As chronicled in our comments of the past two weeks, "The history of October maulings is that they last three weeks and encompass roughly a 10% decline. They also tend to bottom near the end of the month with an 'I think I'm going to be sick' type of downside hour or two." Obviously we have given up on the "I think I'm going to be sick" selling-climax type of low. The reason is that time has run out for the downside and the action of the past few sessions has given the averages a "cushion" above their recent reaction lows. Further, we are entering the months of November/December, which we have learned the hard way is a difficult timeframe to put things away on the downside. This is likely because of the festive nature of the Thanksgiving, Christmas, and year-end ebullient seasonality. Even after the October 1929 crash "they" could not break the markets back down in November/December!

Consequently, the "call" is that the lows are "in." How far the rally will carry is anyone's guess since we never got the perfect crescendo downside-climax. But, higher is our "call" and we would therefore be buyers on any weakness. Accordingly, we added to our long index positions yesterday (DIA, NDX, BKX).

In addition to yesterday's list of names. . . here are some more that are covered by our analysts:

1. Motorola (MOT) - sweet spot of the product cycle; great products for the holiday selling season; top-line momentum; improving margins; taking market share.

2. Ingram Micro (IM) - shares have "stalled" into this week's earnings release on fears that earnings momentum is waning, which is unlikely.

3. Hilton (HLT) - shares have been "crushed" for numerous reasons as highlighted in our analyst's recent report, yet this week's earnings report should be good.

4. Cognos (COGN) - as reflected in our Canadian analyst Steven Li's note yesterday:

"Another heads-up - you may see some volatility in BI (business intelligence) space today (10/24/05). The article in WSJ talking about Microsoft (MSFT) moves in BI. As expected, MSFT announced plans today to begin selling on Nov 1 its Business Scorecard Manager that helps turn sales and customer data into report cards. The last time (April, June) MSFT's forays into BI made the rounds, BI sector traded down 2-3% - although this time around, BI share prices are already looking inexpensive so impact may be more subdued. Our thoughts:

1. Not new news. We have stopped counting how many times these competitive noises make it to the market. We just want to reiterate what we have said before i.e. Based on our conversations with consultants, Microsoft does not yet have the mind share in BI to seriously mount a challenge to a Cognos or a Business Objects on an enterprise scale deployment, at least in the near- to mid-term. For example, while Microsoft often highlights its leading market share in OLAP as a sign of its success in BI, we note that a lot of that is probably due to the fact that Microsoft OLAP is bundled with SQL Server - and so it does not necessarily mean that users are using it. Cognos or other OLAP products often sit on top of Microsoft SQL Server as well.

2. We also estimate Cognos' exposure to the low end of the market, which would likely be the more vulnerable to Microsoft advances, is small. We estimate Cognos derives 80%+ of its revenues from Global 3500 corporations.

3. We actually believe Microsoft's push into BI is more to support its drive in the database (against IBM and Oracle) instead of competing head-on against the independent BI vendors. Should Microsoft BI forays give them an edge against the other database vendors, we believe that could prompt faster rate of consolidation in the BI space. While Microsoft as a threat should never be underestimated, we believe concerns can be overdone."

The call for today: Ben Bernanke was the "safe" choice for an embattled President Bush. Clearly, the equity markets liked the choice and consequently the lows should be "in" . . . and obviously that means we are traveling to speak at an institutional conference, making this report probably the last strategy comment of the week.

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