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Jeff Saut: Emerging Markets Emerge as Leaders


Accounting shenanigans continue at the financials. Look abroad for real gains.

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.

Investing is a lot like whaling. Investors are constantly searching for that whale of a stock with the "ambergris factor" -- that rare substance that means massive returns. This has been especially true recently: Investors who missed the stock-market lows of 9 weeks ago are now desperately searching for stocks that have the sweet smell of success.

This is why I've spent the past 3 weeks explaining that I can find no instances where the senior index has gone back down and broken below a major low, like the demonic low of 666 (on the S&P 500) recorded on March 6, after only 6 weeks of rally. Six months later, yes, but not after a mere 6 weeks!

Indeed, it was 10 weeks ago when numerous portfolio managers (PMs) paraded across CNBC commenting they had to be in 30% cash, because they could not risk the Dow Jones Industrial Average (DJIA) falling to 5000. However, 6 weeks later (April 20), with the S&P 500 up some 30%, those same stock-shy PMs were compelled to buy stocks for performance derby reasons. And that's why there have been no more than 1- to 3-session pauses/pullbacks since the March lows.

Indeed, 6 weeks into this rally, many market mavens were still waiting for the worst to happen, the second shoe to fall, so to speak. Meanwhile, I repeatedly counseled that the worst had already occurred given the sequence of events following the ill-fated Lehman Brothers bankruptcy. And that skein of bad news socked stocks into their October 10 capitulation-climax lows, which is where the bottoming process began. I also said that, if the news got any worse than it was last October/November, they would have to close the New York Stock Exchange, and I would retire.

Said bottoming process looks to have ended with the March 9 undercut low. Since then, the rally has been explosive. To be sure, the current rally is now legend, having eclipsed the previous longest buying stampede of 41 sessions. For the record, today is session 45 since the stock market bottomed, and I've clearly been too cautious for the past few weeks. I guess I should have anticipated the rally might extend itself, having begun from oversold readings not seen since the December 1974 Dow low - but alas, life can only be fully understood in retrospect. Nevertheless, I've learned the hard way not to press my bets anytime a buying stampede lasts for more than 25 sessions.

Speaking to the financials: I think Joseph Stiglitz put it best by saying the stress tests weren't "much of a stress." No one should have been surprised by the tests lack of rigor, since TARP money is running out, and confidence needed to be strengthened. Furthermore, one of the key tenets of banking regulation has always been to keep audits secret, so as to keep the public from making runs on the bank. Consequently, it should come as no surprise that the "stress test" was un-stressful.

Accordingly, one old Wall Street wag lamented, "How can I go from a totally insolvent banking system a few months ago to a banking complex that 'only' needs $75 billion now?" Plainly. the accounting shenanigans continue, but nobody seems to care. The financials continued to soar last week.

Nevertheless, I'm still avoiding the marquee financial names -- Wells Fargo (WFC), Citigroup (C), Bank of America (BAC), et al. -- since I believe many of them still have problems. Moreover, if this does indeed turn out to be a new bull market (and I'm letting Dow Theory make that call), history suggests the leading group of the last bull market typically isn't the leading group of the new bull market. Therefore, I think it doubtful the financials will be the leaders. As of this point, I believe the leaders of any new bull market will be the international markets, particularly the emerging and frontier markets.
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No positions in stocks mentioned.
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