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Jeff Saut: This Market Wants to Rally


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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.

Henry Ford, while touring a newly automated car plant with then-UAW president Walter Reuther, asked, "Well, Walter, how are you going to get these machines to pay union dues?"

Reuther replied, "But Henry, how are you going to get them to buy cars?"

Because I grew up in Detroit, I often heard Mr. Reuther's name while adults were discussing the auto industry. In fact, hanging above my desk is the front page of the Detroit News from the day I was born; the headline reads "UAW Threatens Break in Talks." Obviously, Walter Reuther's name is prominently featured in the article.

During my formative years, I often overheard our neighbors arguing about whether labor or management was responsible for the auto companies' woes; in reality, it was a combination of both. However, one thing was true back then that isn't true today: In the past, Detroit made pretty crappy cars. Today, Detroit makes some of the best cars in the world.

Given the current economic mess, we cannot afford to let the auto companies go bankrupt - not just because of the loss of jobs, but because of the collateral damage to the financial fabric of the country.

While it's true that shuttering the auto plants would devastate the auto suppliers, as well as the restaurants and retailers around those plants, along with the state and local governments that depend on taxes from the auto sector, the real damage would be to the already tottering financial community.

Consider this: General Motors (GM) has some $62 billion of debt; add in Ford (F) and Chrysler, and that total debt figure is much higher. Then tack on another layer of risk for the $250 billion worth of credit default swaps (CDSs) written on GM, Ford, Ford Motor Credit, and GMAC debt.

As Michigan Senator Carl Levin notes, "A collapsed US auto industry would lead to defaults on over $1 trillion in corporate bonds, credit default swaps and other financial instruments."

Ladies and gentlemen, the last thing the world needs is Credit Crisis, Part II. And that's why the Bush administration sprang into action on Friday. Accordingly, the stock market "sprang back" after last Friday's early morning mauling, leaving the DJIA (8629.68) better by 64 points for the session.

It was the second Friday in a row that the senior index demonstrated such resiliency: Following the previous Friday's horrific employment report, the DJIA closed up nearly 260 points. Such action only serves to reinforce my view: The stock market wants to rally.

Manifestly, since the October 10th psychological "low," where 93% of NYSE stocks recorded new yearly lows, the markets have beemin "bottoming mode." In addition to the downside non-confirmation by the DJIA and DJTA (3245.40), the fact that we can find nowhere in history where the major averages have fallen by 50% and not experienced a subsequent substantial rally (even if the average eventually went lower), it's worth considering that today's asset allocation disciplines call for a rebalancing out of Treasury notes/bonds and into stocks, particularly now that dividend yields are well above Treasury yields.
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No positions in stocks mentioned.
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