The Summer Wind (Saut)

Tuesday, August 30th, 2011

The Summer Wind

August 29, 2011

by Jeffrey Saut, Chief Investment Strategist, Raymond James

“The summer wind came blowin’ in from across the sea. It lingered there to touch your hair and walk with me”

… Frank Sinatra, lyrics by Johnny Mercer

Irene “came blowin’ in” over the weekend for the first hurricane to hit the East Coast in years. In fact, New England has not experienced a hurricane since “Bob” attacked in 1991. For over a year I have been commenting about the weird weather that was surely coming. Since then we have experienced the anticipated extremely cold wet winter, tornados in the Midwest of historic proportions, floods around the world, hurricanes, and droughts. Indeed, in Russia droughts destroyed 40% of the grain crop, sparking an attendant rise in grain prices. The same drought caused 30 foot deep “cracks” to appear in the farmlands north of China’s Inner Mongolia Autonomous Region, keeping farmers out of the fields. Meanwhile, other parts of China have been experiencing floods and mudslides. In this country certain regions have seen 100-year floods, while places like Texas have had 100+ degree temperatures for months with no rain. I could go on, but you get the idea — the weather has turned undeniably weird.

To be sure, I have commented that while to some degree the environmentalists are right about the climate change being attributable to “man,” undeniably the weather is also being compounded by a La Niña weather pattern coupled with more volcanic ash in the atmosphere than anyone can remember. That combination has allowed the Tropics to expand as the Tropic of Cancer and the Tropic of Capricorn have moved toward the Poles. Well, that’s not factually correct because the Tropics can’t really expand since they are defined as being 23° 16’ 16” above and below the equator. What has expanded is the “reach” of the Hadley cell winds, which have moved closer to the North and South Poles. Recall the Hadley cell winds dominate the Tropics carrying hot equatorial air up into the troposphere where atmospheric circulation carries that air north and south. The air eventually sinks back to Earth. Where the air rises, the atmospheric pressure is low, causing heavy rains and storms. Where it sinks, it produces high pressure areas characterized by deserts like the Australian Outback. The shift in the Hadley cell winds has played havoc with the trade winds, producing droughts in otherwise moist parts of the world and monsoons in previously dry locals. Said “shift” has allowed tropical zones, and deserts, to expand. This is not an unimportant event because the changed weather patterns have major implications for agriculture and the world’s soil bank.

To wit, much of the world’s topsoil is eroding and therefore declining in nutrient quality. According to wiseGEEK:

“Topsoil is the upper surface of the Earth’s crust, and usually is no deeper than approximately eight inches. The Earth’s topsoil mixes rich humus with minerals and composted material, resulting in a nutritious substrate for plants and trees. It is one of the Earth’s most vital resources.”

Unfortunately, topsoil erosion is occurring much faster than nature can replace it. In addition to the weather, modern agriculture techniques have hastened the erosion, as has row crop planting (corn, soybeans, cotton, tobacco, etc.) since row crops erode soil much faster than sod crops. Regrettably, once soil is gone, you can’t get it back! Plainly, this has grave implications because as I have stated for years, “When per capita incomes rise, the first thing people want is clean water, the second is a better diet.” With per capita incomes rising rapidly in emerging countries, the burgeoning food demand has left global grain consumption exceeding production; and over the next few decades the situation is likely to get worse because food production needs to expand by some 50% just to meet the estimated demand. Ladies and gentlemen, this means an additional ~6 billion acres of land is needed to meet the upcoming food demand, but only ~2 billion acres of good land is available. Thus, farmland should be a good investment and there are select public companies that play to this theme. Also of interest are ag-centric “technology” companies that hopefully can ameliorate some of the upcoming food shortfall.

I revisit the weather, water, and agriculture themes today not only because they have been three of my long-standing themes, but to emphasize why they should continue to be viable investments going forward. Importantly, water is by far the most undervalued asset I know of, yet it is difficult to find water-centric investments. Not so with agriculture.

As for the stock market, recently the most ubiquitous question has been, “Was that the bottom?” My response has been, “I think so.” Verily, if one has been using the October 1978 and 1979 bottoming patterns as a template, the correlation, at least so far, has been pretty remarkable. If that R² continues, it suggests the “selling climax” lows occurring on August 8 and 9 should prove to be the lows. However, that does not mean we can’t spend a few more weeks in “bottoming mode.” As stated, the October 1978 bottoming sequence took 6 – 7 weeks, while the 1979 sequence encompassed only 4 – 5 weeks. The ideal chart pattern would be what a technical analyst terms a “wedge” formation (see chart below). According to StockCharts.com:

“Wedge: A reversal chart pattern characterized by two converging trendlines that connect at an apex. The wedge is slanted either downwards or upwards demonstrating bullish or bearish behavior respectively.”

While a “wedge” bottoming formation should take a few more weeks to complete, many stocks have likely already bottomed. In past missives we have used some of the names our fundamental analysts believe have bottomed. Names like: EV Energy Partners (EVEP/$65.85/Strong Buy), LINN Energy (LINE/$36.97/Strong Buy), Health Care REIT (HCN/$48.62/Outperform), Campus Crest (CCG/$11.35/Strong Buy), Abbott Labs (ABT/$50.15/Outperform), and CenturyLink (CTL/$34.44/Strong Buy) to name a few. Last week, however, our energy team upgraded Chevron (CVX/96.85) to a Strong Buy and it is therefore worth your consideration. For further information on any of these, please see our analysts’ comments.

The call for this week: Just like the surfer interviewed over the weekend who grabbed a board and leapt into the Irene-induced waves, investors need to “grab a board” and catch a wave if they want to achieve investment success. But to do that, first you need to get into the water! The time to stand on-shore was months ago, not after a ~20% decline in the S&P 500 (SPX/1176.80) from its intraday high on May 2 to its intraday low on August 9. While we have been pretty conservative in our stock recommendations over the past three weeks, we would become more aggressive if the SPX can break out above the recent rally-high of ~1208. And while the odds of a recession have clearly increased (to 30%), my hunch remains we will avoid it. Accordingly, I will leave you with this quip from our restaurant analyst, “Every casual dining company that has spoken to Wall Street has said they have seen no evidence of behavior change despite all the scary headlines of the past six weeks or so. If we have a recession, this would be the first one in my 25 years as an analyst that was not foreshadowed with weakness at full service (the most discretionary) restaurants.”

Click here to enlarge

Copyright © Raymond James

Tags: Chief Investment Strategist, Climate Change, Degree Temperatures, Frank Sinatra, Frank Sinatra Lyrics, Grain Crop, Grain prices, Hadley Cell, Inner Mongolia Autonomous Region, jeffrey saut, Johnny Mercer, South Poles, Summer Wind, Tornados In The Midwest, Tropic Of Cancer, Tropic Of Capricorn, Volcanic Ash, Weather Pattern, Weird Weather, Wet Winter
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Seismic Window (Saut)

Monday, March 21st, 2011

Seismic Window

by Jeffrey Saut, Chief Investment Strategist, Raymond James

March 21, 2011

At the risk of sounding like a kook, I began writing about the weird weather in September of last year. The text read like this:

“I revisit the coal theme this morning because the La Niña weather pattern, combined with numerous volcanic eruptions that put large amounts of ash into the atmosphere, has allowed the Tropic of Cancer and the Tropic of Capricorn to expand. The result has brought increased hurricane activity, soaring temperatures, Asian floods, droughts (Russia has lost 30% of its wheat crop), and the list goes on. While the current focus is on the unusually warm weather, don’t expect this to continue as the Northern Hemisphere faces an upcoming VERY cold/wet winter due to massive amounts of volcanic ash in the atmosphere. Energy stocks, therefore, should be over-weighted in portfolios with the biggest ‘bang’ going to the Exploration & Production stocks (E&P), as well as coal stocks.”

Again, at the risk of sounding like a kook, this morning I offer another topical view from Jim Berkland, a geologist that has a decent record of targeting potential timeframes of increased earthquake activity. Know that Mr. Berkland correctly forecast San Francisco’s Loma Prieta earthquake (aka, “The World Series” earthquake) that occurred on October 17, 1989 right before the third game of the World Series. He did so by using a combination of tidal tables, lunar/gravitational phases, animal behavior, beached whales, and a keen sense of the “Pacific Ring of Fire.” That prediction caused a suspension from his job as County Geologist for Santa Clara, California on fears that future predictions might cause mass hysteria. Also know that many of his predictions never came to pass and consequently he too is considered a kook by some.

That said, his interview with Neil Cavuto begins (see it here: http://www.youtube.com/watch?v=xQXDt4VdS0E) with Jim stating that the months of October, March, and April are the most dangerous for earthquakes in the San Francisco Bay area. He further opines that March 19th’s full moon, where the moon made its closest approach to Earth until 2016, coincides with the equinoctial tide. While some folks are familiar with ocean tides, most are unfamiliar with Earth tides (caused by the Sun and Moon’s gravitation), as well as groundwater tides. Accordingly, all three tides will be at their zenith during what Jim terms the “seismic window” between March 19 and March 26. He continues by citing the recent million dead fish in Redondo Beach and the “beaching” of whales. His claim is that the Earth’s magnetic fields change dramatically right before earthquakes; since most fish/animals have magnetite in them to navigate those magnetic fields, said fish/animals become confused by the change. As a sidebar, magnetite (or lodestone) is the most magnetic of all naturally occurring minerals on the planet. Jim cites such events happening shortly before the 1989 World Series quake, the 2004 Indian Ocean earthquake, the 1964 Alaska earthquake, etc. He concludes with the fact that the Alaska’s 9.2 Richter scale quake occurred with a full moon.

While I certainly don’t want to ride into history as the Joe Granville of my era, I do find it unsettling that Chile’s 8.8 earthquake has been followed by New Zealand’s 6.2 quake and now Japan’s 9.0 tragedy in what appears to be a series of events occurring in a clockwise rotation around the Pacific Ring of Fire. If so, the next target should be either Alaska (the Aleutian Trench), or our west coast (the Juan de Fuca Subduction Zone, see chart). Joe Granville, by the way, hit the peak of his stock market career with his faulty prediction in April 1981 that a major earthquake, “would make Phoenix waterfront property during the week of April 10, 1981.”

Yet it is not really the threat of earthquakes that keeps me cautious on the stock market. Despite the fact that we still have not had more than three consecutive down days since September 1, 2010, and therefore the Buying Stampede remains intact, I can’t shake the feeling it actually ended on February 18. If that subsequently proves correct, we are at session 20 of a Selling Stampede. Recall, stampedes (both up and down) typically last 17 – 25 sessions before they exhaust themselves. A few have extended for 25 – 30 sessions, but it is rare to have one last for more than 30 sessions. Indeed, previously the longest stampede chronicled in my notes was a 52-session upside skein, of course that is until the September 2010 to February 2011 affair, which if ended on February 18 was legend at 117 sessions. If not, today is session 137 in the upside stampede.

Another thing that keeps me cautious is that the U.S. is going to find it increasingly difficult to finance its enormous debt given that our primary lenders are going need more of their capital at home. Think about it, the Chinese are now running a trade deficit, the Japanese are going to have a huge “call” on their capital, Europe is facing larger and larger bailouts for the PIGs, the petro-dollar nations (Middle East) are trying to buy-off dissidents, and the Federal Reserve is slated to stop QE2 in June. Unless the Martians start lending us money it is difficult to see how our cost of capital is not going to rise.

As for Japan, it is a strange feeling to attempt considering how investors should position themselves in light of this tragedy. As stated, I have thought Japanese stocks were cheap for quite some time. They obviously got cheaper last week given the Nikkei 225’s 20% decline from its March 9 high into last Wednesday’s intra-day low before firming late week. Plainly, this weakness caused a concurrent drop in the two investment vehicles I have been using since May 2009, namely Japan Smaller Capitalization Fund (JOF/$8.70) and WisdomTree SmallCap Dividend Index (DFJ/$41.55). These funds are now back to the levels I originally recommended them. Those wanting to invest in Japan should consider said vehicles using last week’s intra-day low as a failsafe point. I also think Japan will use more liquefied natural gas (LNG) and consequently I have recommended 6%-yielding Teekay LNG Partners (TGP/$39.98/Strong Buy) for investment accounts. Obviously, the nuclear nightmare had an equally deleterious impact on nuclear stocks. Hereto, a buying opportunity may be at hand. Accordingly, investors should consider the Global X Uranium ETF (URA/$14.85), which is a fund that holds a basket of more than 20 uranium stocks. I would use last week’s intra-day low of $13.25 as an “uncle point.”

While I remain cautious on stocks in the short-term, I am steadfast in my two-year belief that the equity markets are in an “up” phase for reasons often scribed in these reports. Last Friday the insightful folks at Minyanville gave me yet another reason to be constructive. To wit:

“The current myth is that it is ‘all one market.’ This was true from ~2005 to 2009 (according to the DeMark Indicator) in what people called the ‘grand reflation’ or ‘reflation trade’ and subsequently went bust. All stocks, virtually all risk assets really, had identical DeMark counts. If you covered up the name and price of the stock, and nearly all commodities, it was impossible to tell what you were looking at. They all looked alike, which in my universe is the same as saying correlations went to 1.0, which is what happens during bear markets. At the onset of bull markets the correlations break down and things begin to diverge once again. That has been happening for over a year now. It is not apparent in indexes due to their capitalization weighting, but in individual stocks it is. People now treat every company as if it were AIG or Lehman Brothers. But some companies actually have good business models and are making money despite the ongoing housing collapse and economic stress.”

The call for this week: Minyanville’s insightful CEO (Todd Harrison) had this to say on Minyanville’s must have “Buzz and Banter,” late last Friday, “A confluence of elements have come together today, including a potential ‘blink’ in Libya, relative calm in the Mid East and optimism regarding the nuclear situation in Japan. One other item bears mentioning and that’s the news the Fed says some banks can resume dividends after the stress test. That news has poked the ‘piggies’ back through the $52 level for the KBW Banking Index (BKX/$52.09) and lent a ‘bid’ to the (overall) tape.” Recall, after avoiding banks for ~10 years, I turned constructive on them last November when the bank index began outperforming the S&P 500 (SPX/1279.20). While I have not recommended the money center banks, I continue to embrace many of the regional banks often mentioned in these letters. I also remain an energy bull and offer 6.8%-yielding LINN Energy (LINE/$38.80/Strong Buy) for your consideration. LINN has a 20-year reserve life, a 100% ROI on drilling, 30% organic growth, a 7% cost of capital, is 95% hedged, and has a 50/50 mix of oil to natural gas. As for the stock market, for weeks I have suggested that any correction should be contained in the 7% – 10% range. On cue, the SPX declined 7.06% from its intra-day high of 1344 to last week’s intra-day low (1249), begging the question, “Is that it?” While I would like to think so, I just don’t believe it since we have had two 90% Downside days and two nearly 90% Downside since the February 18 high. However, that opinion could change if the SPX can hold above 1280 combined with a 90% Upside Day.

Source: Granny Geek.

Sites for monitoring earthquakes:
http://earthquake.usgs.gov/earthquakes/recenteqsww/Quakes/quakes_all.php
http://www.msnbc.msn.com/id/42037498/ns/world_news-asia-pacific/

Copyright (c) Raymond James

Tags: Asian Floods, Beached Whales, Chief Investment Strategist, Coal Stocks, Commodities, Earthquake Activity, energy, energy stocks, ETF, Floods Droughts, Hurricane Activity, India, jeffrey saut, Jim Berkland, Mass Hysteria, Neil Cavuto, oil, Russia, Santa Clara California, Topical View, Tropic Of Capricorn, Volcanic Ash, Weather In September, Weather Pattern, Weird Weather, Wheat Crop
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