Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Jeff Saut: Heads I Win, Tails You Lose


With the British $4 bln "bank run" on Northern Rock after only one day since it borrowed funds from the Bank of England, the contagion continues to spread and caution is a good thing.

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.

"Heads I win, tails you lose" pretty much sums up the way I currently feel about the equity markets as we enter this Fed-focused week. I have been bullish on stocks since the "selling stampede" lows of August 16.

Recall those lows were pretty climactic following the 10%, 20-session slide that culminated with a two-and-a-half-day Dow Dive that lopped 750 points off of the senior index. Verily, there were 1132 new daily lows registered on August 16, marking the most daily lows for the NYSE since the Long-Term Capital Management crisis!

Following those lows the DJIA has recouped roughly 1,000 points, spurred by a friendly Fed, a housing-friendly President, and a concerned Congress. Their combined monetary, fiscal, and jawboning efforts have been punctuated by a two-week injection of some $111 bln for the M-2 money supply, which was the largest such monetary surge I have chronicled in my notes going back into the 1960s.

Clearly those efforts have worked, with Wall Street taking the collective "bit" in its mouth and the proverbial "carrot in front of the horse" being this week's FOMC meeting. And there, ladies and gentlemen, is the rub.

Plainly, the equity markets have rallied on the belief that the Federal Reserve is going to cut the economically influential Federal Funds rate. Consequently, if it doesn't cut rates, stocks will undoubtedly sell off.

If, as anticipated, the Fed cuts rates by 25 basis points (bp), it is likely that rate reduction has already been discounted by the recent stock surge. If, on the other hand, rates are cut by a full 50 bp, I think the markets will interpret that move as an indication the housing/subprime-contagion is a lot worse than the powers that be are telling us. Indeed, "Heads I win, tails you lose!"

Consistent with these thoughts, I am on "hold" in the trading account, as well as the investment account, on a short-term basis. While bullish since the August lows, I have always maintained that bottoms tend to be a process involving both price and time. Potentially I have met the "price" requirement given the 20-session, 10% correction, "selling stampede" that culminated on August 16.

That is why I am treating the August lows as an "internal low" until proven wrong. I am now contemplating the "time" component. As previously noted, the 1990 and 1998 correction-sequences saw prices peaking in July, declining into August, and then rallying sharply before retesting those August lows in the September/October timeframe. Whether it plays that way this time remains to be seen, but I am cautious following the initial throwback rally we have experienced into this week's FOMC meeting.

Also remaining to be seen is how far the "contagion" reaches. Manifestly, despite all the rhetoric, said contagion is not contained as demonstrated by the central banks' and politicos' Herculean efforts to dampen its effects.

I have never believed the housing/financing "bubbles," created by the now critical "esteemed chairman" (read: Alan Greenspan), would be overcome without some kind of knock-on effect. In my mind the only question was, "When will the roosters eventually come home to roost?"

Apparently that day has arrived and I continue to think it will be a minimum of 60 to 90 days before that question will be answered. Given the financial engineering that has left a spider-web of toxic derivatives, leverage investments, SIVs (structured investment vehicles), hedge funds, etc., the extent of the collateral damage remains unknowable.

In such an environment, I continue to adhere to the prime directive of managing "other peoples' money;" that being, "do no harm!" At the August lows, I was pretty aggressive on the "long side" of the stock market. Now I am more sanguine. Nevertheless, I still like the themes that have served us so well over the last six years, that being "stuff" (oil, gas, coal, grains, fertilizer, cement, water, etc.).

Currently, I am particularly emphasizing agriculture and gold. Interestingly, soybeans rallied 6.6% last week, cotton was up 5.9%, and wheat improved by 2.7%. While my firm owns a number of the ag-based stocks, for those investors looking for new agricultural names the recently created Van Eck Vectors Agribusiness ETF (MOO) is a good approach to the agricultural sector... and I continue to invest accordingly.

Click here to enlarge.

Click here to enlarge.

(Charts courtesy of

The call for today: I am in Nashville at the Raymond James National Conference, which is just as well since I am currently cautious. And with the British $4 bln "bank run" on Northern Rock after only one day since it borrowed funds from the Bank of England, the contagion continues to spread and caution is a good thing.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos