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Jeff Saut: This Isn't the End of an Era


Don't let the "shoulda, woulda, couldas" get you.


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 man has rigged up a turkey trap with a trail of corn leading into a big box with a hinged door. The man holds a long piece of twine connected to the door that he can use to pull the door shut once enough turkeys have wandered into the box. However, once he shuts the door, he can't open it again without going back into the box, which would scare away any turkeys lurking on the outside. One day he had a dozen turkeys in his box. Then one walked out, leaving eleven. 'I should have pulled the string when there were twelve inside,' he thought, 'but maybe if I wait, he will walk back in.' While he was waiting for his twelfth turkey to return, two more turkeys walked out. 'I should have been satisfied with the eleven,' he thought. 'If just one of them walks back, I will pull the string.' While he was waiting, three more turkeys walked out. Eventually, he was left empty-handed. His problem was that he couldn't give up the idea that some of the original turkeys would return...

-- Why You Win or Lose, by Fred C. Kelly

"I should have bought at Dow 8000 when the DJIA broke above the downtrend line that was formed by drawing a descending line from the May 2008 high to the September 2008 high. Now we are probing another descending trend line that can be seen by drawing a similar line connecting the October 2007 high with the highs of December 2007, May 2008 and October 2009," exclaimed one disgruntled portfolio manager last Friday because the senior index again continued to not surrender much ground last week.

Indeed, despite all the calls for a correction (including my firm's), the Dow remains resilient. And those correction calls are now legend with certain pundits trumpeting that the "bear market rally is over" and we're now going to re-test, and break, the March lows. Other mavens continue to opine that the 1937-38 Dow déjà vu is the preferred pattern, which also suggests that new lows lay ahead.

To be sure, references to the 1930s abound with folks like financial historian Niall Ferguson appearing on Charlie Rose waxing that the United States will suffer the same fate Britain did following World War II. To wit, the UK was broke, deeply in debt, the British Pound was destined to lose its status as the world's reserve currency, and Britain itself was in secular decline.

Shortly after Ferguson's appearance was Singapore's first Prime Minister Lee Kuan Yew. He, too, opined that the US was potentially at the end of an era unless the nation summons the mental fortitude, and toughness, to reverse its current course. Clearly, nostalgia is reigning on the "Street of Dreams," causing one savvy seer to recall Vera Lynn's 1930s song, "We'll Meet Again." The lyrics are:

We'll meet again. Don't know where, don't know when. But I know we'll meet again. Some sunny day. Keep smiling through. Just like you always do. 'Til the blue skies drive the dark clouds far away.

Plainly, this song suggests the end of something, and in fact was played at the end of the movie On the Beach, which centers on a post-World War III environment whereby the entire northern hemisphere is polluted by nuclear fallout. The only part of the earth that's still habitable is the far south of the global, namely Australia. Yet as the radiation spreads, even the Australians begin dying. The final scenes show the deserted streets of Melbourne as the song "We'll Meet Again" plays. Indeed, the end of an era.

Our firm, however, doesn't buy the idea that our nation is at the end of an era. While the US is certainly in a "hard spot," our sense is that economist Joseph Schumpeter's notion of "creative destruction" will play once again.

One can actually see it at work as labor and capital are moving from dying industries to growing industries like electric cars, biotechnology, green companies, infrastructure, etc. We've been on the infrastructure theme for years, with particular emphasis on electricity and water. Interestingly, much of the stimulus money earmarked for infrastructure is going to be used for replacing our country's aged water pipes. Obviously, that's good news for pipe manufacturers and we have tilted portfolios accordingly.

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No positions in stocks mentioned.
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