“That Was the Week That Was?!”
by Jeffrey Saut, Chief Investment Strategist, Raymond James
November 11, 2013
That Was the Week That Was, informally TWTWTW or TW3, was a satirical comedy program on BBC television in 1962 and 1963. It was devised, produced, and directed by Ned Sherrin and presented by David Frost. An American version by the same name aired on NBC from 1964 to 1965, also featuring David Frost. And last week was just such a week for me. The week began with a lunch with Bob Doll, who hangs his hat at Nuveen where he manages a number of mutual funds. Like me, Bob is bullish, believing that markets react to things on the margin and on the margin, things are getting better. He also thinks 2% - 3% GDP growth is a sweet spot for the equity markets. The next day I got an email from Jim Swanson, the sagacious strategist for MFS, who was thanking me for the “shout out” I gave him in a strategy report recently. He too believes a 2% - 3% GDP growth rate is a sweet spot for the equity markets. Jim recently wrote:
As we enter the fourth quarter and look back at 2013 so far, we could pessimistically conclude that this year has brought us more of the same sluggish 2% real growth that we have seen in the United States since the end of the last recession in mid-2009. Any comparison with the annualized quarterly growth rates of 4% or even 5% during the business cycles of the 1980s and 1990s is painful. ... [B]ut perhaps there is another way to look at the cycle. The real story might be that those 4% to 5% growth rates came at a cost we may not experience this time. In other words, we are not seeing bubbles erupt, as we did back then, when we all knew — or should have known — that recession was always lurking and the excessive credit expansion would come to an abrupt end. The current state of 2% growth is occurring without the exuberance of junk bond lunacy or the overreaching big company mergers and acquisitions on the corporate side. And on the household side, retail sales keep going up, even without Joe and Mary Consumer hocking the family home to buy a new outdoor kitchen or travel on a luxury cruise line. There is a strong possibility that the growth inherent and observable in this cycle is organic, simple and self-sustaining. If so, the post–World War II average cycle length of five years may well be exceeded by several years.
To Jim’s last point, about the average cycle being exceeded, Bob Doll told me he really liked my point about how the current bull move is not 56 months in duration, but 25 months. My view is that pundits don’t measure the 1982 to 2000 secular bull market from the December 1974 “nominal price low,” but rather from the “valuation low” of August 1982. Therefore, we should not measure the current bull move from the March 2009 “nominal price low,” but rather from the “valuation low” of October 4, 2011. QED, we are not 56 months into this move, but 25 months; and, for the record, the average duration of a bull move is 50 months.
The next night I had dinner with Fidelity’s strategist, Dr. Claus te Wildt, who, like the rest of my companions last week, is bullish. He shared that the more negative news he hears the more bullish he gets. After a few glasses of Alsatian wine, we discussed themes and individual stocks. Surprisingly, the next day I got an email from Rich Bernstein, the former strategist at Merrill Lynch who is now the eponymous captain of Richard Bernstein Advisors. In the email was Rich’s “7 Themes to Navigate Volatility.” To wit: 1) The American Industrial Renaissance (AIR); 2) Reflating Japan; 3) Early-Cycle Europe; 4) High Yield Municipal Bonds; 5) Treasury Bonds for Diversification; 6) Small-Cap U.S. Banks; and 7) Cash as an Asset Class. Of course, investors can get at these themes via the two funds Rich manages for Eaton Vance – the Richard Bernstein Equity Strategy Fund (ERBAX/$13.70) and the Richard Bernstein All Asset Fund (EARAX/$12.25). You can also get at the AIR theme using First Trust’s Richard Bernstein TS American Industrial Renaissance UIT (FWRVLX/$10.12).
As for the reflating Japan theme, my friends at the Riverfront Investment Group believe that while historically Japan has been very slow to change, once they decide to change the whole population gets behind the move. That’s how Japan went from an agrarian society to one of the world’s best steel producers in a very short period of time. Currently it looks like Japan has turned the corner, and with Abenomics and an exceptionally friendly central bank, Japan could do quite well for years to come. In addition to Riverfront’s funds, there are some ETFs like the Japan Smaller Capitalization Fund (JOF/$9.21), or the Wisdom Tree SmallCap Dividend Fund (DFJ/$50.49). Then there is the largest fund for Japan, the iShares MSCI Japan (EWJ/$11.72).
For early cycle Europe, as well as some emerging/frontier markets exposure, I own the MFS International Diversification Fund (MDIDX/$16.14), which is managed by my friend Thomas Melendez. And while I don’t really like bonds of either the muni or Treasury flavor, I have to admit bonds are one of the few asset classes that are non-correlated to stocks that should act as a downside hedge to a decline in the equity markets. For the small capitalization U.S. bank theme, I own the Hennessy SmallCap Financial Fund (HSFNX/$25.37), managed by another friend, namely David Ellison. Speaking to “cash,” I have always said that cash is an asset class because to assume the investment opportunity sets that are available today are as good or better than those that will present themselves next week, next month, or next quarter is naïve; and you need cash to take advantage of new opportunities. Last week’s TW3 was punctuated by the stronger than anyone expected economic reports (GDP and jobs reports) and the surprise interest rate cut in Europe. That trifecta brought back the “buy the dippers,” but they failed to recapture last week’s intraday highs. From a purely technical standpoint, that potentially sets the equity markets up for a pullback, which would coincide with my timing models. This week should tell us what near-term direction the markets will take.
Because, like late last summer, I have downside timing points slated to “hit” this week, I really don’t have much interest in committing more cash right here, preferring to see what happens later in the week. The following stocks from Raymond James’ research universe, however, did beat earnings and revenue estimates last week, and raised forward earnings guidance. Also, all of these screened positively on my proprietary indicators, which is why I would put them on your “watch list” for the potential purchase on any decline in the equity markets. Finally, each of these stocks is rated Outperform by the covering fundamental analyst: Natus Medical (BABY/$19.18); DineEquity (DIN/$80.86); Fleetcor Technologies (FLT/$113.60); OraSure Technologies (OSUR/$6.86); Cardinal Health (CAH/$62.30); LaSalle Hotel Properties (LHO/$30.95); McKesson (MCK/$158.56); and CVS (CVS/$63.78).
The call for this week: That was the week that was, but this is the week that is! While I must admit Thursday’s Tumble took the NYSE McClellan Oscillator into deeply oversold territory, none of the 10 S&P macro sectors recorded oversold readings. In fact, only two of them have fallen back to merely a neutral reading. That would be the Financials and the Utilities. As far as oversold country-specific ETFs, hereto there are only two, Columbia (GXG/$19.30) and Mexico (EWW/$62.94). Moreover, while the D-J Industrial Average (INDU/15761.78) made a new all-time high on 11/7/13, thus confirming the D-J Transportation Average’s new all-time high on 11/4/13 of 7017.34, rendering yet another Dow Theory “buy signal,” the stock market’s internal energy has been used up in achieving that “buy signal.” Additionally, the divergences continue to mount with almost all of the other major market indices making their respective all-time highs on October 30th, and declining ever since. This week should be the key to the stock market’s direction into year-end.
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