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Jeff Saut: A Millionaire-Friendly Market?


A re-rally after this one will show whether the bulls are here to stay.

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.

A recent Reuters article said that 2008 will be the first year since 2002 that the US millionaire population has shrunk. Indeed, the number of households with a net worth of $1 million or more (excluding primary residences) fell 27% in 2008. Meanwhile, high net-worth households ($5 million or more) declined 28%, and "affluent households" --- households with $500,000 or more in net worth -- also shrank 28%, to 11.3 million households.

The article went on to say that "many of the nation's millionaires are entrepreneurs, small business owners and corporate executives - a group that will play a vital part in driving an economic recovery. Those population groups are the ones that create jobs in the country."

As I read the article, a couple of things leaped out at me. First of all, staying rich is nearly as difficult as getting rich. It's one thing to make a fortune; quite another to keep it. Remember the oil tycoons, like the Hunt brothers, who dominated the Forbes 400 list in the early 1980s, but then fell from grace? You also know what eventually happened to the trophy-real-estate crowd who dominated the Forbes' wealthiest list in the late 1980s.

Then there were the "Internuts." I recall seeing the 2 founders of Razorfish interviewed on CNBC following the company's IPO, when shares soared from $16 to more than $80 in just a few months. Obviously, those 2 20-year-old founders' net worth also soared - before their stock fell to zero. New fortunes replace the old, and new industries surge as others slide.

Consequently, I'd like to pose the following question: "If so much wealth has been destroyed in the financial markets, are they now priced to spawn new entrants for the Forbes 400 list?" In my view, the answer is a decided "maybe."

Clearly, I've made some decent profits since identifying the early March 2009 stock market lows. I've also shown many metrics suggesting the equity markets are pretty cheap for the first time in decades. Moreover, I've repeatedly noted that the time to be cautious was a year ago, not following a nearly 58% decline by the S&P 500 (SPX) from its intraday high of 1576 on October 11, 2007 into its intraday demonic low of 666 on March 6, 2009.

Accordingly, I've been adamant that the equity markets were in a bottoming process that began on October 10, 2008, when 93% of the stocks traded on the NYSE made new yearly lows, a capitulation reading not seen since the 1960s. While the SPX eventually went lower into its November 20 short-term price low, that 93% capitulation reading was never breached.

My firm subsequently rode the ensuing rally into the beginning of January, where we deemed a correction would be due. Said correction ended with an undercut low, and we were bullish. Since then, the SPX has experienced a "buying stampede" that's lasted 20 sessions.
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No positions in stocks mentioned.
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