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Jeff Saut Presents: Getting, Keeping, Losing!


...staying rich is nearly as difficult as getting rich!


Editor's 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.

". . . great fortunes are not insulated from risk: The same tides of economic change and
progress that were creating these new fortunes were also destroying old ones. Since 1982 the economic and technological progress unleashed by supply-side policies has ousted some 60% of the incumbent tycoons from the Forbes Four Hundred.

There are, basically, two kinds of wealth: tangible and financial. Tangible assets already exist: real estate, buildings, mineral deposits, farmland, works of art, stockpiles of commodities, wares of the past. Financial assets consisting of stocks, bonds, and other securities represent not so much tangible wealth as a pledge of future production.

. . . The cycles between these two forms of wealth respond to public policy. Times of inflation and high taxes favor existing wealth over new wealth, tangible assets over financial assets, collectible capital over productive capital. Tangibles tend to yield a relative untaxable flow of benefits; housing, jewelry, art and leisure mostly untaxable returns. Securities tend to yield a taxable and inflatable flow of income on a principal that dissolves with the decline of currency. Put it this way: Financial assets do best in times of low inflationary growth. Hard assets do best in times of high inflation and high taxes. In the 1980s a sudden shift between these assets shook The Forbes Four Hundred.

– George Gilder, The Slippery Slope of Wealth

We spent time over the July 4th weekend reading more thoroughly some of the material that we had skimmed months ago and put aside for later study. One such piece was the Forbes 400, an article devoted to the 400 richest people in America. A couple of things leaped out at us. First of all, staying rich is nearly as difficult as getting rich! Remember the property moguls like Donald Trump who took over in the mid-1980s and who are now a shadow of their former selves? Indeed, it is one thing to make a fortune and another to keep it! You know what happened to the Hunt Brothers, who attempted to "corner" the silver market in the early 1980s. You also know what happened to the Donald Trump trophy-real-estate crowd of the late 1980s. New fortunes tend to replace old fortunes. New industries surge as others slide, placing new people in the Forbes 400.

To that net-worth changing point, after being pretty bearish from the Dow Theory "sell signal" of September 1999 until the Twin Trade Tower tragedies, for the last five years we have suggested that the secular bull market had shifted from financial assets to what George Gilder terms "tangible assets" in the aforementioned quote. For stock market purposes, we have called such tangible assets "stuff stocks" (energy, timber, agriculture, fertilizer, cement, precious/base-metals, etc.) and invested in the shares of those companies. Our bullish view on "stuff" was/is reinforced by a chart of financial assets, divided by commodities, dating back to 1877. Worth noting is that once one of these asset-class "shifts" between financials and "stuff" takes place, it tends to last 10 to 15 years. At a mere five years into the "stuff cycle," we think this theme has a long time left to run. And, said shift has placed many new participants on the Forbes 400 list.

Consequently, we remain "thrilled," to use a word from our June 12th missive titled "Thriller," that many of the stuff-stocks have declined over the past few months, because for the "prepared investor," lower prices present opportunity! Indeed, if you "rebalanced" (read, sell partial positions and hold cash) ALL of your investment positions since the beginning of this year, and held those proceeds in cash as we advised, you should be in pretty good shape for the upcoming opportunities. For example, our trading "buy 'em" recommendation of June 13th on CNBC has played fairly well and traders have benefited from that "call." Subsequently, we have recommended the scale-up selling of those trading positions since we think there will be an eventual downside re-test of those "lows" (S&P 500; 1220 – 1230). If that re-test is successful, we will re-deploy the balance of our cash position in the investment account back into favored stocks with an emphasis on "stuff," preferably stuff-stocks with a yield. Most recently, we recommended some energy stocks for investment accounts, spurred by the merger and acquisition (M & A) activity. While some have argued that such activities are "top of the cycle" events, we don't see it that way.

Consider this, when the per capita incomes in this country went from $5,000 to $20,000, the consumption of "stuff" went up geometrically. And that, ladies and gentlemen, is exactly what is happening not just in China and India, but in Vietnam, Malaysia, Thailand, Uzbekistan, Singapore, etc. (Singapore Sovereign Debt denominated in Singapore dollars, by the way, is likely one of the safest investments in the world). We believe this rising per-capita income in the emerging countries, and concurrent consumption of more "stuff," is an unstoppable trend. Therefore, we view the recent M & A activity as long-term investments being made by "smart money" driven by resource scarcity, development constraints, and underinvestment in plant and equipment to produce "stuff" for the past 30 years (energy, water, zinc, copper, nickel, lead, etc.). We also believe that crude oil has reached a permanently higher plateau and subsequently called our Houston-based energy team, given the M & A activity, to give us some of its best names. The names the team gave us were: Ultra Petroleum (UPL), TODCO (THE), Patterson (PTEN), Chesapeake (CHK), and Comstock (CRK). Many of these companies are the best allocators of capital, as seen in the nearby chart. Moreover, we continue to like the strategy of buying the "flops" in fundamentally sound companies and most of these energy names have declined by 20%+ from their mid-May highs. Yet by far, our favorite name over the past few years has been 3.8% yielding Canadian Oil Sands Trust (COSWF), which effectively trades in Canada.

As for some other names on our "buy list," a name from our correspondent researcher's list (Lehman), which plays to our long-standing PUCHA theme (Public Utility Holding Act), is 3.9% yielding ITC Holdings (ITC). According to Hoover's, "ITC Holdings owns and operates 2,700 miles of power transmission lines in southeastern Michigan (including Detroit and Ann Arbor). ITC was created in 2003 to acquire International Transmission Company. The independent business transmits electricity from generation facilities to the distribution utilities that serve nearly 5 million customers in 13 countries. It monitors the grid from eastern Michigan Electric Power Coordination Center." We are also drawn to one of Lehman's "10 Uncommon Values" recommendations, namely INTUIT (INTU).

The call for this week: Most of the "players" we know squared their stock positions in last Thursday's Dow Delight (+217) and left until July 10th. Consequently, like last Monday, the rest of this week is likely "noise" until participants return next week. It is worth noting, however, that the S&P 500 broke out above its 50-DMA (1275) last week and is in a position to challenge its recent reaction high at 1290, which is just fine with us, since we still have some of our long trading positions in place (DIAs, SPYs, QQQQs, NDXs). Also of interest is that gold looks to have bottomed in the prescribed zone between its 200-DMA (at the time $541) and the point at which it broke out to the upside ($580). Meanwhile, oil and gasoline are trying to break out to new all-time highs and the dollar is sagging again. We continue to invest, and trade, accordingly.

P.S. We are leaving today for another road trip and will not be doing any verbal strategy comments the balance of this week. See you next Monday.

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