This article is a guest contribution by Jeffrey Saut, Chief Investment Strategist, Raymond James.
August 23, 2010
“Our friend Percy Wong of Bank of America recently observed that the ‘only crowded trade was on the sidelines,’ which we felt summed up the current summer, and the mood amongst most of our clients, perfectly. Indeed, there is a lot to digest, what with a) fears for one's job/business following a tough past three years, b) very haphazard economic data, c) the emergence of new risks (e.g., sovereign bond risk amongst European signatures) and d) the new reality of global economic growth no longer being driven by the United States but instead by emerging markets. No wonder so many investors are looking to take cover, whether in the form of bonds (with US 2-year yields now at a record low 0.48%) for investors who believe that fiat currencies will hold their own, or gold for those more skeptical on the ability of paper money to withstand its value, even in a deflation.
“But all the confusion does not mean that there are no trends out there for investors to follow. For example, the current outperformance of South East Asian bond, equity and currency markets make fundamental sense and have yet to run their course. The same can be said for the outperformance of consumption-related stocks in China (a trend which should be given a further boost by the renewed wave of financial deregulation in China). With its very undervalued currency, it is hard to not like Korea's exporters and the overall Korean equity market. In Scandinavia, Switzerland and perhaps even the UK, we have governments with balance sheets that make sense or that are in the process of improving, while local central banks will be forced to maintain very easy monetary policy if only to prevent gains against a Euro which, structurally, should remain weak. From there, it is very possible to envisage an era of sustained outperformance of equity, bond and local currency markets. Undeniably, the overall macro uncertainty is much higher than we would have expected at this point in the cycle. Nevertheless, this does not mean that the trades that made sense six months ago no longer make sense today. There are alternatives to the sidelines.
...GaveKal
“Crowded trade?”... you bet; and, I have to admit I too am guilty of having a lot of cash currently. To wit, for investment accounts I have recommended having roughly 20% in cash, while for trading accounts I have been pretty much on the sidelines since recommending selling all of the downside hedges in late-May and early-June. Since then, while I have added some stocks to investment accounts, trading accounts have been relatively flat even though the McClellan Oscillator telegraphed the July rally. That tepid trading strategy is driven by the fact my intermediate trading indicator has been in cautionary mode since the first week of May as shown in last week’s report. Nevertheless, there are indeed alternatives to the sidelines. For example, last week one of our stocks was “bid for” as Intel (INTC/$18.91/Outperform) made an offer to acquire computer security company MacAfee (MFE/$47.03/Market Perform). Interestingly, the same hedge fund manager that gave me MacAfee a month ago now suggests the McAfee announcement potentially puts another of our stocks into play, namely Red Hat (RHT/$32.54/Outperform). Additionally, I was duly impressed with how some of our stocks held up last week. Names like Walmart (WMT/$50.22/Strong Buy), Johnson & Johnson (JNJ/$58.74/Outperform), Allstate (ALL/$27.75/Strong Buy), American Tower (AMT/$47.43/Strong Buy), etc. certainly resisted the stock market’s machinations. Yet, it is not just select stocks that afford an alternative to cash.
To be sure, I still like the idea of distressed debt. And this week I am off to Boston to meet with the good folks at Putnam, as well as a number of other institutional accounts. Recall, I have been recommending Putnam’s Diversified Income Trust (PDINX/$8.04) for the past few months after spending an hour with Rob Bloemker, who is the head of fixed income for the Putnam organization. With roughly a 10% yield, and duration of a little over 1 year, I think PDINX affords the potential for equity-like return over the next few years. Surprisingly (at least to me), while Rob has his own money in PDINX, he is also buying individual stocks. He reasons that with the S&P 500’s earnings yield (earnings/price) at its widest spread to Treasuries in decades, the combination of PDINX and stocks is an attractive strategy. Obviously, I agree. Reinforcing that strategy is this from Citigroup’s (C/$3.75/Strong Buy) Robert Buckland who found 10 prior divergences between global bond yields and stock prices. Six times stocks were proven right, two times bonds were right. The other two times there was no clear winner.
