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Jeff Saut Presents: Integrity


A ray of hope for all Wall Street investors was embedded in last week's "guilty" verdict.


"We look for three things (in our managers): intelligence, energy and integrity. If they don't have the latter, then you should hope they don't have the first two either. If someone doesn't have integrity, then you want him to be dumb and lazy."

. . . Warren Buffet, 2005 Annual Meeting

"Integrity" is defined by Webster's as, "A firm adherence to a code of especially moral or artistic values." Yet while lacking integrity, clearly the dynamic-duo from Enron was anything but dumb and lazy, which is what made them so dangerous. Obviously, the jury agreed last week as their "guilty" verdict confirmed that the Enron logo was not the only thing that was "crooked" at the Enron organization. And that caused one Wall Street wag to exclaim, "Justice is a train that often arrives late!" "Justice arrived late" indeed, for the Enron saga has been going on for years. Yet, a ray of hope for all Wall Street investors was embedded in last week's "guilty" verdict. In fact, participants should take heart because the "guilty" verdict seemed to arrest the "selling stampede" that we had envisioned. Recall that selling stampedes, like buying stampedes, typically last 17 to 25 sessions, with only 1½- to three-day counter-trend moves, before they exhaust themselves. Since we began our day-count sequence from the Dow's failed attempt to make a new all-time high on May 10th at 10670, last Friday would have been day 12 in said downside skein.

Coincidentally, on May 10th, I was interviewed by Ian McDonald, who quoted me the next day in The Wall Street Journal. To wit, "It's close enough that I have a hard time believing they, whoever they are, won't push this thing up to a record soon. But, I don't understand it and I don't trust it." Plainly, we had thought the highs for the year were "in" last January. And while that was true for many of the various averages, it was blatantly untrue for the S&P500 and the DJIA. Yet last Thursday's "guilty" verdict gave the S&P 500 the upside-legs we spoke of on CNBC that afternoon and again in Friday morning's verbal strategy comments. To reprise a few lines from those comments:

"But 'guilty' was the call and that call screws up our 17- to 25-session downside day-count sequence. Why? Well, because if the decision would have been 'not guilty,' many retail investors would have thrown in the towel (in our opinion) and sold their stocks, figuring that the 'game' was rigged, leaving them little opportunity to win. And that selling should have built into a downside-dive leading to a selling-climax that would have been easy to identify and which would have given us a buy-point to commit a substantial amount of capital to the equity markets, yet alas it just wasn't meant to be! Indeed, 'not guilty' was the call and we suspect that verdict arrests the decline in the near-term, providing the stability that affords a 'throwback' rally for the equity markets. Plainly, participants could see that change of pattern with the equity markets firming into the close rather than selling off again in the final hour of Thursday's and Friday's sessions. So it appears Thursday was the start of a minimum of a three-session rally, which may develop into something more. And while we are not looking for any miracles right here, the initial upside target for the S&P 500 should be at the point where it broke-down around the 1290-to-1295 area. Do we feel great about said rally? Well, not really, but in this business you have to take what the markets give you!"

Currently, we think the equity markets are likely to give us a rally. Whether the envisioned rally is worth playing is debatable, but nevertheless we advised kamikaze trading-types to buy the index of their choice in Friday's strategy comments. Our particular indexes of choice were the Dow Diamonds (DIA) and the S&P 500 (SPY), which traders should be long around 112 and 128, respectively, with very close stop-loss points. As for investors, our recommendation on United HealthCare (UNH) was stopped-out last week with a 9.6% loss. While we still think these shares are attempting to make a bottom, in these erratic markets we are sticking to our discipline of, "If you are going to be wrong, be wrong quickly!"

Broken, but unbowed, we made another investment recommendation on 10%-yielding Synagro (SYGR) last Friday. As we understand the story, some private equity investors wanted to liquefy their position and selected Bank America (BAC) to do the secondary offering. Forgetting that Bank America trades very little of Synagro's stock, said shares were trading around $4.90/share when the deal was announced. Yet the deal was priced at $4.15. Unfortunately, the hedge fund community bought the deal on the expectation that the shares would rally back to the pre-offering price of $4.90. When they didn't, that same hedge-fund community sold their shares, driving the price down to $3.85/share, which we are using as our "uncle point" (read: stop-loss point). We think that Synagro will generate another $26 million in incremental revenues this year, and in the process produce another $9 million in incremental EBITDA. Moreover, the Philadelphia water-purification RFP is a wild-card that could provide an additional revenue stream. Consequently, we think these shares are a decent speculation, provided you adhere to our "uncle point."

Turning to the recent "heart attack" in many of our "stuff socks," fortunately, we have been rebalancing our investments in this complex over the past few months (read: selling partial positions) and holding the proceeds from those partial sales in cash. And, that discipline has given us the "profit cushion" to withstand the recent declines in stocks like 3%+ yielding Canadian Oil Sands Trust (COSWF), as well as UTS Energy (UEYCF). Both of these stocks play to the Canadian Tar Sands theme, a theme we have embraced for the last four years and which are followed by our Canadian research team. The comments from that research team were reiterated last Friday in a report titled, "Did You Miss The Last Rush?" where the team answers that question by noting, "We view this as an excellent opportunity to establish, or add to, oil sands holdings." We think these stocks, along with most of the other stuff-stocks, remain in a secular bull-market and believe that the corrections in this complex should be BOUGHT, just like you bought the pauses/corrections in the tech/telecom complex during their "heart attack" declines in the mid/late-1990s. We continue to trade, and invest, accordingly.

The call for this week: Well, it's another manic Monday, except it is really Tuesday. And we will see if "Turning Tuesday" lives up to its name with all of the indices poised for a sharply lower opening. Last week most of the indexes tested and held their respective 200-day moving averages. If those lows are violated all bets are off.


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