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Jeff Saut: The Sound of the Santa Rally?


Dow Jones may better its November 4th highs.

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.

Last Thursday, I journeyed to New York City to attend Minyanville's annual Festivus, as well as to celebrate Minyanville's brand-new Emmy award. Clearly, investors would be a lot better off today if they had heeded Minyanville's warnings a year ago - but that's a discussion for another time.

Minyanville, however, is more than just a brilliant website; it is a community where investors (individual and professional) gather to share investing insights, as well as to build relationships with some of Wall Street's best and brightest.

Plainly, I believe in relationships, having suggested that the new millennium would be the age of the relationship. Indeed, the '70s was the decade of the product, as the baby-boomers graduated college and bought their first cars, their first houses, etc. The '80s was the decade of the image, in which we bought the bigger house in the gated community. The '90s was the decade of the experience: We traveled to Europe and brought back stories, encounters, not things.

The new millennium, by contrast, will be the age of the relationship. Such relationships have developed over the years via the Minyanville community, and this year was no exception. To be sure, I invited a number of retail, as well as professional, investors to this year's Festivus, and introduced them to such notables as John Mauldin, Jeff Macke, Guy Adami, Stephanie Pomboy, Todd Harrison (Minyanville's Founder/CEO) and Tony Dwyer, to name but a few. My guess is these introductions will turn into professional relationships that will be beneficial for all concerned. The investment tone at this year's event remained pretty cautious; however, there were some attendees waxing bullish on certain asset classes.

One such portfolio manager was particularly keen on distressed debt, and I agree with him. One of the problems with the current equity market is that distressed debt is potentially offering equity-like returns (read: double-digit returns), and therefore affords strong competition for investment capital. Moreover, with distressed debt, investors don't need to contemplate how deep and long the recession will be - only if the company will be able to service said debt.

While I personally don't have the skill set necessary to delve into distressed debt, there are numerous closed- and open-end funds that do, and most of them are selling at a substantial discount to their net asset value. One such fund is Lord Abbett Bond Debenture Fund (LBNDX), which has a healthy measure of distressed debt.

Speaking to the equity markets, last week I said on CNBC, while standing on the floor of the NYSE:

"First, until proven wrong, I continue to think October 10, 2008 represented the 'capitulation low' when of the 3,130 stocks that traded on the NYSE, a shocking 2,901 (or 93%) of them made new yearly lows. Subsequently, even though all of the indices we follow have registered lower prices since October 10th, none of those lower lows have been accompanied with anything close to the new yearly low ratio that occurred on October 10th!

"Second, while the S&P 500 (SPX) traveled below its 2002 'low,' the DJIA did not, and that's a huge downside non-confirmation. Third, I can find nowhere in history were the major averages have declined by 50% and there has not been a major 'throwback rally' even if the averages eventually went lower. And fourth, I've learned the hard way that it is extremely difficult to put stocks away to the downside during the ebullient month of December."

Consistent with these thoughts, I have continued to recommend that accounts position themselves accordingly, and, more importantly, not be heavily "short" of stocks, even though that's currently de rigueur on the Street.
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No positions in stocks mentioned.
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