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Jeff Saut: Outlook Still Favorable in the Runaway Rally


The "music" may pause, but it's not likely to stop.


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.

"The actual private object of most skilled investment today is to 'beat the gun.' As Americans so well express it, to outwit the crowd and to pass the bad, or depreciating halfcrown, to the other. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs -- a pastime in which he is the victor who plays 'snap' neither too soon nor too late, who passes the old maid to his neighbor before the game is over, who secures a chair for himself when the music stops. Or to change the metaphor slightly, professional investment may be likened to those newspaper competitors in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors, as a whole; so that each competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. We have reached the third degree where we devote our intelligences to anticipating what the average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."

Bet it surprises you that the aforementioned quote is from John Maynard Keynes' legendary book The General Theory of Employment, Interest, and Money, written back in 1935. Read it a couple of times away from the maddening crowd, and reflect on it, because certain phrases will grab you with their wisdom! Bet you it also brings back memories of last year's market machinations, and a wish that -- if I had only "beat the gun," or passed the "old maid" in time to avoid the final "snap."

Currently, however, fear of the "music stopping" worries most investors. Indeed, last week my firm received this email, which typifies many of our emails over the past few months. To wit:

"Jeff, as I watch the equity markets go higher and treasury yields plummet, I can't help but think that something strange and potentially troublesome is happening here. I just can't understand why, if the economy is on the way to recovery and the treasury is poised to issue billions and billions of debt out as far as the eye can see, why anyone would buy a 30-year treasury at a 4.1% yield. All this while the interest paid on these bonds is worth less and less (to foreign buyers) as the dollar falls further and the equity markets, seemingly in la-la land, ignore this situation and continue to go higher. Are we headed for another October 1987?"

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No positions in stocks mentioned.
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