Jeff Saut: Surviving the Year of the Rat
Rigging your portfolio for heavy financial weather.
"If you show an American an image of a fish tank, the American will usually describe the biggest fish in the tank and what it is doing. If you ask a Chinese person to describe a fish tank, the Chinese will usually describe the context in which the fish swim. Americans usually see individuals; Chinese and other Asians see contexts. What happens if collectivist societies, especially those in Asia, rise economically and come to rival the West? A new sort of global conversation develops. The opening ceremony in Beijing was a statement in that conversation. The most striking features were the images of thousands of Chinese moving as one – drumming as one, dancing as one, sprinting on precise formations without ever stumbling or colliding. [It was] a high-tech vision of a harmonious society, performed in the context of China's miraculous growth."
--David Brooks, the New York Times
Obviously, we're back from Raymond James' National Conference in our nation's capital. But, I've got to admit: Between the conference's educational sessions, dinners, wine and the muscle relaxants I was taking for a disc injury incurred while "rigging" our Florida house for heavy weather (read: Hurricane Fay), I didn't pay much attention to the markets last week.
Similarly, I recommended "rigging" portfolios for "heavy weather" late last year, fearful of many of the events that have since come to fruition. Clearly, the "Year of the Rat" has lived up to its name, since "Rats" have a tendency to be opportunistic, with an eye for bargains, but are unwilling to pay too much for anything. Because of their intellect and observational powers, Rat people possess prudence and perception. "Rats" seem to be able to anticipate problems, and are able to see the big picture.
Like the Rat, I too have been opportunistic this year, often commenting that it seems to be more of a trader's, rather than an investor's, environment. This morning, I thought I'd take my lead from the Chinese and try to look at the "context" of the markets from a longer-term perspective.
To this point, my firm's technical analyst, Art Huprich, penned an excellent report last Friday based on his talk at the National Conference entitled, "A Long-Term Perspective and More."
Art began by noting that when secular bull markets end (1982-2000) history suggests that the major market averages can move sideways for a decade (or more) with very little upside progress. To demonstrate this tendency, he referenced the secular bull market from 1949-1966, which saw the DJIA peak at 995 for a gain of 514% from those 1949 lows.
Art described this period as a "fat cycle" when all you needed to do was "throw a dart" to make money. Following the DJIA's secular price peak in 1966, however, came a "thin cycle," whereby there were a number of mini-bull and mini-bear markets, but by 1982 the senior index was actually 22% lower than it was in 1966.
To readers of these missives, such revelations should come as no surprise, since I opined that following the decline telegraphed by the Dow Theory "sell signal" of September 1999, it was likely going to be a range-bound environment for the S&P 500 (SPX). That did not, and does not, mean investors cannot make money.
Manifestly, investors have made a lot of money on my firm's "call" in the fourth quarter of 2001 to make oversized investments to "stuff stocks" (energy, timber, cement, base/ precious-metals, water, etc.), preferably stuff-stocks with a dividend yield.
Similarly, my firm has favored small/mid-capitalization stocks over their large-cap brethren during that same timeframe; and, as Art observes, the outperformance of the small/mid-cap complexes has been noticeable. To wit, while the SPX gained 64% from 2001's fourth quarter into 2007's fourth quarter, the S&P Small Cap 600 was up 149% and the S&P Mid Cap 400 was better by 132%.
Both Art and I continue to favor the small/mid-cap complexes given their superior relative strength.
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