Jeff Saut: Painful Ups and Downs
In all likelihood, this isn't the start of a secular bull market.
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.
Painful ups and downs have become a way of life to investors and traders recently, for as repeatedly stated in these missives we are experiencing the longest skein in the Dancing Dow of "up one day and down the next" since the 1940s! Still, my thesis remains intact in that the "selling stampede" ended on July 15, 39 trading sessions from the mid-May highs. From those lows, I've suggested the equity markets were likely involved in a "buying stampede" that would eventually carry the S&P 500 (SPX) into the envisioned target zone of 1320–1330.
Recall that "buying stampedes," like "selling stampedes," typically last 17–25 sessions, with only one- to three-day counter-trend attempts, before exhausting themselves. It just seems to be the rhythm of the "thing" in that it takes that long to get everyone bullish enough, as well as "long" enough, in time for the ensuing downside correction. While it is true that some stampedes have lasted 25–30 sessions, it is rare to have one go more than 30 days like the recent "selling stampede" we experienced into those July 15th lows. Interestingly, when I stand back and look at a chart of the SPX since those mid-July lows, what I see is a slow-motion "buying stampede," even though it certainly doesn't feel like one!
Nevertheless, since July 15th the SPX has moved irregularly higher without so much as anything more than a one- to three-session pause/pullback with Friday's 300+point "Dow Wow" coming on day 18. If the pattern continues to play, our day-count sequence would have the equity markets topping sometime this week as the "short sellers" run for cover into Friday's option expiration expiation. The quid pro quo could be that the 25-session "selling stampede" in indexes like the ProShares Ultra Oil & Gas (DIG) could be nearing an end, at least on a trading basis.
As for the building sense that the "worm has turned" and things will get economically better from here, while I do believe the housing news will not get a whole lot worse, I also think it will not get materially better.
I do, however, believe the news regarding mortgage delinquencies, defaults, and foreclosures will indeed get worse. And consider this; the banks still have a nearly $5 trillion dollar exposure to real estate. That exposure represents more than 50% of their total assets! By my pencil, even if housing prices stop going down, which is doubtful in the near-term, the banking complex will continue to reduce exposure to real estate as it attempts to shore-up its balance sheets.
Unfortunately, as long as this sequence continues to play, credit for the economy will remain lacking and/or extremely tight, as is being telegraphed in the chart below. For a finance-based economy like ours, this is troubling since it now takes $5.57 in new debt to fuel $1 worth of GDP growth. And that, my friends, is why I remain more concerned about the economy in 2009 than I have been during 2008.
As for the investment account, our fundamental energy analyst had this to say about one of our favored positions, namely Outperform-rated Linn Energy (LINE):
"There was a lot to like in this quarter, with adjusted EBITDA increasing to $162.1 million, providing a stellar distribution coverage ratio of 1.57x, above our estimate of 1.52x. Moreover, after interest expense, distributions, and maintenance capital, the company generated $41 million in excess cash flow, or $0.36/unit. Strong distribution coverage is set to continue, providing ample excess cash flow and the potential for a near-term distribution increase. Another positive development was an improved hedging outlook. Linn took advantage of the recent run up in commodity prices, restructuring a portion of its oil hedges, canceling some collars and raising swap prices in 2009 through 2012. After layering in the new hedges, we are raising our estimates.
Linn is attractively priced on a forward yield basis, with one of the highest yields in the E&P MLP universe (12.7%). Due to this yield, the rising distribution coverage ratio, and our confidence in the sustainability of the distribution growth curve, we believe Linn provides a highly attractive risk/reward profile. We reiterate our Outperform rating and $26.00 target price, based on a 6x multiple to our 2009 EBITDA estimate, the high end of the traditional E&P range of 4x to 6x."
The call for this week: Friday's date read "8-8-8," which is considered by many to be a pretty lucky sign.
Consequently, there were a plethora of Asian weddings, the likely reason why the Olympics began on Friday, and the stock market reacted accordingly with its own celebration of +302 points (DJIA). I think the "crazy 8s" will continue to party this week into my envisioned 1320 – 1330 target zone for the SPX, which is where I recommend selling your remaining trading positions and/or raising your stop-loss points.
Is this the start of a new secular bull market? I doubt it because by our notes there have been 24 daily Dow Wows of 300+ points and none of them have been within the confines of a secular bull market. I continue to invest and trade accordingly.
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