Jeff Saut Presents: Everybody's Unhappy!?
the time to be aggressively bullish was seven weeks ago, not now . . .
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.
"Money managers are unhappy because 70% of them are lagging the S&P 500 and see the end of another quarter approaching. Economists are unhappy because they do not know what to believe: this month's forecast of a strong economy, or last month's forecast of a weak economy. Technicians are unhappy because the market refuses to correct, and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S., they have missed the biggest double play (a big currency move plus a big stock market move) in decades. The public is unhappy because they just plain missed out on the party after being scared into cash after the crash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. . . . Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise. Frustrating the majority is the market's primary goal."
Robert J. Farrell, Merrill Lynch, September 5, 1989
Longtime stock market aficionados will remember Bob Farrell as Merrill Lynch's brilliant investment strategist from an era gone by. Yet, we think his comments from 1989 are as appropriate now as they were then. Recall that back in 1989 was when Lincoln Savings & Loan (S&L) was "taken over" by the Feds and the Resolution Trust Corporation (RTC), which was created to bail out hundreds of bankrupt S&L's. It was a heady time when the bankruptcy arena was "flush" with investment opportunities. Regrettably, with so many players "mining" that field today, the opportunities are not so compelling. However, Mr. Farrell's comments still ring true given the recent "Dow Delight." Indeed, most professional participants are "unhappy" due to underperforming portfolios, and consequently bonus risk, and ultimately job risk . . . hello Bob Stansky, who was just replaced as "captain" of Fidelity's famed Magellan Fund. Meanwhile, much of the public has completely given up on stocks in favor of real estate. Amid this backdrop what happens? Well, stocks dutifully bottomed in mid-October and began to rally. Since then, the ensuing explosive rally has caused a professional "pile-on" effect as portfolio managers are attempting to j-a-m one year's worth of performance into the last two months of the year!
Surprisingly, we anticipated the current rally, suggesting that participants "get their buy-list together" at the beginning of October and instigated a scale-in "buying approach" to the equity markets in mid-October. That stance was punctuated by our "The Lows Are In" strategy report of October 25th. Since that report our recommendations have done pretty well. Indeed, as measured by our "buy 'em call" the "Analysts' Best Picks List" (ABPs) performance since mid-October has been +12.2% and up 8% since our October 25th missive. As for the plethora of emails we received last week regarding the Zack's Investment Research stock-picking contest that showed Raymond James' Focus List performance as number one for the quarter, the year, five years, and seven years, we have included the table of results we received from Zack's below.
Despite this performance, many folks remain unhappy. Indeed, "Economists are unhappy because they do not know what to believe: this month's forecast of a strong economy, or last month's forecast of a weak economy (hello Fox Trot). Technicians are unhappy because the market refuses to correct, and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S., they have missed the biggest double play (a big currency move plus a big stock market move) in decades. The public is unhappy because they just plain missed out." So what do we do from here?
As stated last week, regrettably, the time to be aggressively bullish was seven weeks ago, not following a 13% rise in the NASDAQ 100 and Bank Indices. As the Lowry's organization concluded in last Friday's
weekly report: "In summary, the significance of new buy-signals, or new highs in the major price indexes, at this stage of an old bull market, should be downplayed. Investors should focus on retaining their strongest stocks and getting rid of laggards." That verbiage, ladies and gentlemen, sounds strikingly similar to what we said in last Monday's report. To wit, "As such, at least on a short-term trading basis, we are focusing not on what to buy currently, but what percentage of our 'long' trading-positions to sell." Consistent with those comments, we are using stop-loss orders on all of our positions and are raising those stop-loss points as the various markets move higher. And, last week ALL of the indices we monitor moved higher and actually closed near their weekly highs. Moreover, the NYSE Index and the S&P 400 Mid-Cap Index rose to new all time highs as our phones lit-up with the question, "Do you still favor the large caps?" To which we responded, "While we are always looking for small/mid-cap ideas, because of their ability to grow at outsized rates, strategically we still favor the large-cap universe."
Inferentially, large caps make sense currently because portfolio managers (PMs) like Bob Stansky, who like big-cap stocks, are being replaced by PMs that favor small/mid-cap companies. We have seen this "movie" before at stylistic inflection-points. Recall that it was none other than Jeff Vinik who was replaced by Mr. Stansky in 1996 for not chasing technology companies back then. Other names that "retired" at, or near, style inflection-points were investment legends like George Soros, Michael Steinhardt, and Julian Robertson. From a timing standpoint large caps also make sense given the outperformance of small/mid-caps over the last 79 months, making their "move" very long-of-tooth from a historical perspective. And, that outperformance has left most of the small/mid-cap indexes more expensively priced than their large cap brethren, as can be seen in the following chart from CS First Boston:
Additionally, last week the Advance-Decline line for the S&P 500 "tagged" a new all-time high, suggesting that our inferential, timing, and valuation metrics are being confirmed in better breadth for the large-cap universe of stocks. So yes, after four years of pounding the table on the small/mid-caps we have now gone from overweighting them to underweighting them. Other strategic musings include: 1) A sense that oil has bottomed, which should put the wind at the back of the energy stocks as we enter the winter months; 2) A notion that growth should be favored over value; 3) A sense that gold is reaching for a near-term price peak; 4) Base metals, like copper, also appear to us to be reaching for a near-term price peak; 5) The observation that when yield curves flatten/invert, volatility tends to increase 12-18 months later (read: 2006); and 6) A feeling that the markets are pretty overbought short-term, suggesting the "easy money" (on a trading basis) has been made. Verily, when we got bullish in mid-October the percentage of stocks above their respective 30-day moving averages was below 20%; now nearly 90% of stocks are above their 30-day moving averages. Further, most of the ARMs Indexes' moving averages are at overbought levels not seen in months, let alone years.
Therefore, we think investors need to be much more selective in their trading/investment selections at this juncture. Two investment ideas we were suggesting a few months ago were large-caps focused Adams Express (ADX) and Tri-Continental (TY). Both of these closed-end funds were/are selling at roughly 15% discounts to their net asset values, implying that purchasing them would be like buying the S&P 500 (SPX) below the 1100 level. For those of you that didn't heed our advice in mid-October, we think you can still buy those near-term "lows" using both of these vehicles. As for the surprise of the week, well, Strong Buy-rated (by Raymond James Ltd.) Cognos (COGN) stated that it was "extremely disappointed with third quarter results," yet saw its shares actually rally. And that caused one Wall Street wag to comment, "When the market ignores bad news, that's good news!"
The call for this week: Warren Buffett has remarked, "Investing is not a game where a guy with the 160 IQ beats the guy with the 130 IQ . . . Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." Manifestly, our temperament suggests that the time to be aggressively bullish was seven weeks ago, not now . . .
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