Random Musings From a Summer Vacation
Raymond James
Jeffrey Saut
June 21, 2010
Well, I’m back from the first consecutive two weeks of R&R I have taken in a decade. So what’s happened in my absence? Well, the economic Chernobyl in the Gulf continues; and, if it wasn’t so tragic, it would actually be funny for it was none other than Richard Nixon who first uttered the phrase “energy independence.” At the time, our country was importing roughly 30% of its crude oil needs. Eight Presidents, and 18 Congresses, later we are importing more than 60% of our needs. Disgustingly, over the past 40 years the country’s energy policies have been aimed at anything but “energy independence.” And here they go again, as last week President Obama appointed a group of men and women to “study the causes of the Gulf of Mexico spill and make recommendations for the future of off-shore drilling.” Amazingly, this group consists of environmentalists and academics, but doesn’t include ANYONE from the oil industry!
Meanwhile, stock market analysts continue to attempt to quantify BP’s (BP/$31.76/Market Perform) liability for the Gulf tragedy. To this point, I was on TV late last week with an analyst who opined that since BP has created a $20 billion claims-fund the situation is now quantifiable. While I am certain this gentleman is smarter than me, I am also sure I have seen more cycles than he. Indeed, I remember Chernobyl, Bhopal, Three Mile Island, etc., and let me assure you such events always cost more, and take longer, than forecast. Consider this: what if oil guru Matt Simmons is right and there is more oil beneath the Gulf’s surface than people think?
Also consider what happens if said oil makes it into the “loop current” and subsequently travels up the eastern coast. Scarily, here is what Mr. Simmons said on TV last week (as paraphrased):
Matt Simmons was on Bloomberg earlier, adding some additional perspective to his original appearance on the station, in which he initially endorsed the nuclear option as the only viable way to resolve the oil spill. Simmons refutes even the latest oil spill estimate of 45,000 – 60,000 barrels per day, and in quoting research by the Thomas Jefferson research vessel, which was compiled late on Sunday, quantifies the leak at 120,000 bpd. What is scarier is that according to the Jefferson the oil lake underneath the surface of the water could be covering up to 40% of the entire Gulf of Mexico. Simmons also says that as the leak has no casing, a relief well will not work, and the only possible resolution is, as he said previously, to use a small nuclear explosion to convert the rock to glass. Simmons concludes that as punishment for BP’s arrogance and stupidity the government ‘will take all their cash.’ Now if only our own administration could tell us the truth about what is really happening in the Gulf ...
Verily, if only our own elected representatives could tell us the truth! Let’s see, we’ve gotten a Healthcare Bill that was “pushed through” via thuggery tactics, a jobs bill that created very few jobs, proposed financial reform crafted by elected officials that have never run a business let alone have a grasp of basic economics, and now we’ve got a Gulf tragedy that should have elicited a massive response in the first week following the Deepwater Horizon horror. However, what we got is a slow-footed response that would not even set aside the Jones Act and allow non-U.S. flag ships, which were offered and had the capability of capturing 90% of the oil spewing into the Gulf, to sail into U.S. waters and address the situation, driven by political fears of upsetting various labor unions. Ladies and gentlemen, I am not speaking to the difference between Republicans and Democrats, but rather the burgeoning lack of common sense inside the beltway. I mean, how in the world can someone be elected to Congress that thinks an additional 8,000 U.S. soldiers in Guam will cause the entire island to capsize?! Wake up America, common sense is fleeing the D.C. beltway. And if you don’t believe me, listen to legendary business man Steve Wynn in this clip from CNBC (http://www.cnbc.com/id/15840232/?video=1506508223&play=1).
No wonder the stock market has stutter-stepped recently as it contemplates the lack of common sense permeating our Nation’s capital. Also worth considering is just how much business is being “brought forward” into 2010 on worries that tax rates will be higher next year. Despite what our elected nimnods think, people are indeed rational. According to a 2004 U.S. Treasury Department report, “high income taxpayers accelerated the receipt of wages, and year-end bonuses, from 1992 to 1993 (by) over $15 billion in order to avoid the effects of anticipated increase(s) in the top tax-rate from 31% to 39.6%.” To be sure, if people think tax rates will be higher next year than they are currently, those folks will shift production/income out of next year into this year to every extent possible. Potentially alarming, spurred by the prospect of increased taxes, rising prices, higher interest rates, and more governmental regulations, participants could be shifting income, and demand, into 2010 from 2011. Regrettably, if true, this increases the chances of a double-dip recession in 2011, an event we have argued against until now. Manifestly, the mid-term November elections will have a dramatic impact on events going forward (IMO). If the progressives/liberals secure a “win” (in November), I think it presents a HUGE headwind for the economy and the stock market as job-killing agendas like Cap and Trade prevail. However, if there is a swing to a more fiscally responsible Congress, I think it would have positive ramifications for the economy and the various markets. Accordingly, the upcoming elections are likely the most important of my lifetime.
Speaking to the stock market, since entering 2010 one of my mantras has been, “I think the trick this year will be to keep the out-sized profits we made from the anticipated bottom of March 2009.” Most recently, during the entire month of April 2010, I advised participants to raise cash and hedge portfolios to the downside. Following the “flash crash” (May 6), over the subsequent weeks, I recommended selling those downside hedges given the extreme oversold readings registered in that mini-crash. Since then, I have suggested that just like a heart-attack patient doesn’t get right off the gurney and run the 100-yard dash, the equity markets are unlikely to do the same. Accordingly, I continue to believe we have time to selectively recommit the cash raised in April to favorably positioned stocks. And, “selectivity” is the watchword because in addition to the Dow Theory “sell signal,” which was registered in the May Mauling, my proprietary intermediate trading indicator is also on a “sell signal” as can be seen in the nearby chart (the red bars indicate caution). Further, the attendant monthly chart of the S&P 500 (SPX/1117.51) shows the monthly stochastic indicator counsels for caution as it appears to have turned down. Therefore, as repeatedly stated in these missives, “The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.” And, we continue to invest, and trade, accordingly.
The call for this week: The current debate de jour centers on whether what we have experienced since the March 2009 “bottom” is just a rally in an ongoing bear market or the beginning of a new secular bull market. Plainly, this is not an unimportant question, for the difference is whether you become more invested on weakness or less invested on strength. As for me, since the initial Dow Theory “sell signal” of September 1999, I have opined that the equity markets were likely going to be in a trading range characterized by numerous tactical bull and bear markets. My strategy, therefore, has been to attempt to determine where there is a secular bull market and tilt the investment account (80% of the portfolio) accordingly. Since the 4Q01, I have been adamant that there is a secular bull market in “stuff stocks” (energy, agriculture, metals, water, electricity, cement, etc.), preferably “stuff stocks” with a yield, as well as a bull market in emerging and frontier markets. I still feel that way despite my near-term caution. For the other 20% of the portfolio (the trading account), I have recommended a more dynamic approach in an attempt to take advantage of the various mini-bull/bear market “swings.” The most recent example of this strategy was the recommendation to layer downside hedges, and “bets” on increased volatility, into portfolios during the entire month of April as protection for the “long” positions in the investment account. Currently, those hedges have been shed, leaving the trading account flat. And, this morning that looks to be at least partially correct given the Chinese news, albeit still half wrong since the trading account is indeed flat. Nevertheless, I’m back and hopefully can get in step with the various markets this week.
P.S. – I have jury duty tomorrow so there will be no verbal strategy comments.
S&P 500 (Monthly chart) with Stochastic Indicator
(c) Raymond James
