Jeff Saut Presents: Dr. Doom
...in this business if you are not forecasting "Dow 20,000" you are deemed a "bear."
Well, it finally happened, last week one of my own gang called me Dr. Doom. I guess it was inevitable because in this business if you are not forecasting "Dow 20,000" you are deemed a "bear." However, the veiled reference to Dr. Doom and Dr. Gloom of an era gone by is not exactly appropriate. Indeed, the dynamic duo of Dr. Henry Kaufman (Dr. Doom) and Dr. Albert Wojnilower (Dr. Gloom) were the market gurus of the day in the 1970s and were predicting the end of the economic world as we knew it. Clearly that has not been my mantra, as anyone reading these missives since 1999 knows.
Verily, my firm turned cautious with the Dow Theory "sell signal" of September 1999 and looked like idiots as the markets traded higher into their 2000 "tops." That said, we stayed cautious on the overall averages into the 9/11/01 tragedies despite the fact that we posted decent investment returns over that 24-month period using individual stocks and mutual funds. Following the Trade Towers, my firm turned pretty bullish on a trading basis and were aggressively bullish at the November 2002 lows and again at the March 2003 subsequent retest of those November 2002 lows. All of our bullish "calls" on the U.S. Indices, however, have been within the context of our "range-bound" stock market thesis. And notably, the S&P 500 remains in a trading range locked between its peak of 1553 and its reaction low of 775.
Moreover, anyone listening to my firm's continuing message of the past five years knows we have been unwaveringly bullish on "stuff" (oil, gas, coal, timber, fertilizer, agriculture, base/precious metals, cement, water, and anything remotely related to our long-standing stuff-stock theme). We have also been steadfastly bullish on the emerging markets over that same timeframe, which has produced some spectacular returns for our clients. Most recently, the emerging markets have continued to outperform their U.S. "brethren," for despite the S&P 500's 12.9% year-to-date gain, Bombay is up 46.8%, Caracas is better by 123.4%, Jakarta has gained 52.7%, Mexico has climbed 44.7%, Brazil has improved by 36.7%...well you get the idea.
While my firm has been wildly bullish on most of these markets, our conservative vehicle of choice to play such venues has been MFS's International Diversification Fund (MDIDX), which checks all of the investment style-boxes, and has returned 24% year-to-date net of fees. So if you want to "hang" the Dr. Doom moniker on us that's fine, we'll monetize that title all the way to the "bank," content in the knowledge that you have plainly not been listening to our strategic message of the last seven years. Or as one money manager emailed us last week:
"I just listened to your verbal strategy comments of last Tuesday. You said you have been too cautious on the aggregate indices over the past few months. Well maybe that's true, but there were some other successes you didn't mention that have been very impressive (you may have mentioned them on certain calls, but I didn't hear them all because I missed a few): i.e., EWM (you felt strong about Malaysia – low inflation/strong growth); EWC and EWZ – similar; water, water everywhere – VE, SZE, ITT, and WTS; nickel – Inco and Falconbridge; the grains (wheat, corn, soybeans, etc.) – BG; the repeal of PUHCA – POM, ITC, and unofficially ILA; many of the tech stocks "in drag" like ROG, IN, S, TWX, ORCL, AMT, SBAC, etc.; as well, you recommended MANY of the Exchange Traded Funds/Holders, and numerous mutual funds, that have produced HUGE gains for our investors. These are just a few of the ideas I own for myself and many clients that have been very good, and in some cases, great! I know you were only alluding to your caution of recent history, but while we are not doing a lot of 'trading' right here, we are thrilled with the calls you have made and we love your themes!!"
To which I replied – thank you very much!
As for the "here and now," my firm has deemed the recent performance by the major market indices to be somewhat "unnatural." Markets typically go up, correct by 25%, and then re-rally if they are going to trade higher. This, ladies and gentlemen, has not been the case recently as the averages have "unnaturally" vaulted higher without so much as any correction. We have suggested this phenomena was triggered by Goldman Sachs' re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it.
Following that, the Department of Energy mysteriously said it would not add to the Strategic Petroleum Reserve (SPR) until after the winter months, even though the SPR was below prudent norms. This is also a mystery to me, but once again there you have it. Then, when it looked like the equity markets were set-up to correct (read: decline) in mid-October, the NYSE petitioned the SEC, and was granted, a mysterious reduction in margin requirements for an already over-margined hedge fund community. And that "mysterious surprise" gave the major market indices another leg-up (read: re-rally). Again, why in the world one would introduce more leverage into an already over-leveraged hedge fund community is a mystery to me! Also mystical is why every time the equity markets look like they are set up for a downside correction, do "buyers from Mars" appear in the futures markets to prevent a decline? My firm has documented such occurrences in past missives where those "mysterious buyers" have shown up at 6:30 at night and "bid" the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time.
The current unnatural state of the equity markets continues to leave my firm cautious; although we have learned the hard way it is difficult to "break" the equity markets to the downside during the ebullient month of December. Consequently, our sense is that the markets will consolidate here and then attempt to trade higher into year-end. If the S&P 500 can vault above 1415, with conviction, we can see near-term objectives into the 1440 – 1445 level. While my firm is disinclined to play the indexes on a trading basis, we have purchased some stocks recently in investment accounts. For example, we bought HCC Insurance Holdings (HCC) on its options back-dating scandal which caused the company's CEO to resign. At the time the shares had declined to where they were trading at roughly 1.5x book value for only the second time in HCC's history. We also recommended Opsware (OPSW) on its recent earnings "miss," and concurrent share price decline to $7.80, since the market for its IT automation software is new and un-penetrated, giving Opsware the ability to gain momentum and build its brand awareness. Another name for your consideration is Joy Global (JOYG), which is rated Equal Weight by my firm's research affiliate Lehman Brothers with an attendant $57.00 per share upside price target. Since the shares are down from their $72 mid-March 2006 high, hopefully they have already been through their respective bear market.
The call for this week: Over the past few weeks all asset classes have rallied. However, that "all skate" environment changed last week with most of the commodities my firm monitors turning down in price. Sill, many of our proprietary stock indicators made new all-time highs, yet the D-J Industrial Average (DJIA) has failed to post a new closing high since November 17th. More importantly, the D-J Transportation Average (DJTA) has not confirmed the DJIA's "march" to new all-time highs. Indeed, the Transports remain well below their all-time high of 4998.95, recorded last May. According to Dow Theory, this is a another cautionary "red flag." Also arguing for caution is the current overbought nature of the equity markets. Meanwhile, the 10-year T'Note bottomed at a 4.40% yield last week, and closed Friday yielding 4.55%, and the D-J Utility Average registered a "buying climax" (read: potential top). Further, we got a short-term "buy signal" on the U.S. Dollar Index last week (read: stronger dollar), and a short-term "sell signal" on the precious metal, as the cognitive dissonance environment continues. My firm continues to invest and trade accordingly...
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