Jeff Saut: If Santa Fails To Call?
"When Santa fails to call the bears will roam on Broad and Wall."
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.
"When Santa fails to call the bears will roam on Broad and Wall."
- Stock market saying
"Now that we are in the holiday season, you will be hearing more about the so-called 'Santa Claus Rally.' It is a well-known phenomenon, first discovered by Yale Hirsch and published in his Stock Trader's Almanac. During this year-end rally, stocks tend to advance, sometimes sharply, from the day after Christmas to the first two days after New Year's Day.
But now, just as the retailers have extended the Christmas shopping season to Halloween, the Santa Claus Rally has been extended by traders to cover the final two to three months of the year... Is the Santa Claus Rally historically factual? The answer is yes. In terms of the original Santa Claus Rally, 65% of the time (going back 100 years), stocks have advanced during the week following Christmas Day, and have done better than December as a whole... In the past eight years, November and December have been extremely bullish. Even during the bear markets, 2000-2003, stocks rallied in the final two months."
- Dr. Mark Skousen, Chairman, Investment U
It's the holiday season again as I sit here in New York, watching Rockefeller Center's ice skaters glide by in the shadow of this year's Christmas tree towering above the rink. There is a hint of snow in the air and spirits are ebullient. Spirits were also ebullient at Friday's Holiday Festivus, a gala affair benefiting the Ruby Peck Foundation for kids. In attendance were such Wall Street wags as John Mauldin, Tony Dwyer, Steve Shobin, Toddo, and the always insightful Stephanie Pomboy, to name just a few. Here too the mood was ebullient, not just about the holidays, but the equity markets as well. Clearly I agree with that ebullience, for over the years I have learned the hard way not to be bearish during the November/December timeframe.
Indeed, in all of my NYC media appearances I reiterated my bullish trading stance that was set up by November's successful downside retest of the mid-August lows. Recall I have opined since turning bullish at those August lows that bottoms tend to be a function of both price and time. And, that while the July-August stock slide hopefully achieved the price requirement, ever since mid-September I have cautioned about the time element, suggesting a downside retest of the August lows was in order. Almost on cue, the markets peaked in September/October and started back down as I left for Europe. Lo and behold, upon my return said downside retest was in full regalia and I penned my report titled "Bulls, Bears and Retests," dated 11/26/07, which in essence told participants to "buy stocks."
On that Monday the DJIA declined 237 points and I received a plethora of phone calls that questioned my bullish tilt because things looked pretty bad in the charts. Consequently, in Tuesday's verbal strategy comments (11/27/07), I reiterated my bullish trading stance, stating that these were the kind of news headlines, scare tactics, pricing action, etc. that typically accompany downside retests and trading bottoms. Ever since, I have suggested the Santa "Clause" has begun.
Once again, however, in last week's travels, I got numerous questions regarding the government's recent plan to "bail out" the U.S.'s profligate mortgagees in what appears to be an attempt to abrogate the sanctity of legal contracts.
The queries centered on what a negative effect this is going to have on the equity markets. My response has been that I am not so sure, for while I have warned of the increasing traction protectionism, regulation and intervention have gained with the politicos (Democrats and Republicans), I am not certain last week's mortgage plan is all that negative for the equity markets. Admittedly, at first blush, the mortgage "bail out" looks like government's consummate intervention and over-regulation. Moreover, I have learned that anything is possible from politicians entering an election. However, not even I could believe the politicos would be so stupid as to abrogate the fifth amendment of the U.S. Constitution, which reads:
"No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation."
Readers should heed the aforementioned phrase, "nor shall private property be taken for public use, without just compensation." For participants holding vehicles invested in certain mortgages, whose value by contract is derived from the resetting of those mortgages at higher interest rates, there is clearly not "just compensation" for said incursion. Still, such authorities as the American Securitization Forum, which represents the bond industry, says the newly crafted guidelines comply with legal requirements for modifying loans in bonds and protecting the economic interests of investors. Further, the Federal Deposit Insurance Corporation (FDIC) says investors are better off even if mortgage interest rates are frozen, noting that foreclosures can cost as much as half the cost of the original mortgage loan. Intrigued by such esteemed organizations' statements, I researched the topic and found these insightful comments from Brad DeLong.
Consequently, I remain bullish into year-end, thinking the equity markets will work their way irregularly higher and am "riding" my trading/investment positions accordingly. I also remain steadfast in my belief that the U.S. dollar is bottoming, which implies I should continue to reduce my anti-dollar "bets" and rebalance (read: partially reduce) my "stuff stock" positions that have made me so much money over the last six years. As for my international investments, hereto caution is warranted, yet I continue to think accounts should be buyers of weakness due to my belief that select international markets will provide outsized returns going forward. As always, I attempt to keep such investments simple by owning core investment positions in mutual funds like the MFS International Diversification Fund (MDIDX), First Eagle Global Fund (SGENX), Aim International Allocation Fund (AINAX), and Oppenheimer International Diversified Fund (OIDAX), while overlaying these core investments with ETFs (exchange traded funds) in countries I want to overweight like India, Malaysia, Vietnam, Thailand, Brazil, Mexico, Argentina, etc. Such a strategy allows me to be more proactive in my approach to the international markets (read: easier to rebalance).
As for individual stocks, I have always liked the idea of buying fundamentally sound stocks when they experience a "downside hiccup," for various reasons, believing that such occurrences provide investors with the price "margin of safety" often spoken of in Benjamin Graham's book The Intelligent Investor. One such stock I have prized over the years, but always considered pretty expensive and thus never bought, is Verifone (PAY). Recently Verifone's financials have been "called" into question, with an attendant 50% downside price haircut. I am considering it for the investment account during this year's "tax loss" selling season.
The call for this week: Well, I am traveling again. This week I'm off to Memphis to see institutional accounts (by the way, Mason Hawkin's, of Longleaf Partner's fame, mutual fund is again "open" for investors), and to speak at various investment seminars.
Speaking of speaking, the Fed speaks this week, but I find it of little consequence whether it says 25 bp or 50 bp, for the S&P 500 has already spoken when it broke out above the key 1490 – 1495 level. This move puts the S&P 500 roughly 100 points higher since my "buy 'em" call of 11/26/07, leaving the markets pretty overbought on a short-term basis.
Still, I think the Santa rally will extend irregularly higher into year-end and I continue to trade/invest accordingly.
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