Jeffrey Saut: Investment Outlook (December 10, 2012)

“New York, New York”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

December 10, 2012

“My little town blues are melting away I’m gonna make a brand new start of it in old New York. If I can make it there, I’d make it anywhere. Come on; come through, New York, New York.”

... Theme song from “New York, New York”

I have loved New York since working on Whitehall Street in the early 1970s. Every year I return around this time of the year to attend Minyanville’s Festivus event to raise money for the financial education of underprivileged children. Last week I spent time attending said event, seeing institutional accounts, doing media, and renewing friendships. Indeed, it’s always terrific to spend some time “on set” with Maria, Liz Claman, Trish Reagan, Matt Nesto, well you get the idea. I was surprised, however, to see pumps still sucking water out of the subway. In fact, part of the subway system, and a few streets around the exchange, remain closed. Moreover, while cellphones have always dropped calls in NYC, Hurricane Sandy has definitely exacerbated that annoyance.

While my schedule was jam packed, the highlight of the trip was lunch with my friend Craig Drill, eponymous captain of Drill Capital. A few months ago I told Craig I was coming to “the city” and he invited me to lunch. I thought “lunch” meant sitting around his conference table with Craig and his team – CIO Steven Reynolds, Dr. Al Wojnilower (named Dr. Doom in an era gone by), and Jerry Goodman (aka Adam Smith, author of many books like The Money Game) – but I was in for a big surprise. My first surprise came as I entered the elevator only to see Ken Langone – “seed investor” of Home Depot (HD/$64.45/Market Perform), former director of the NYSE, President/CEO of Invemed Associates, patron of many charities, etc. As I looked at him, I said, “You’re on TV.” He said, “Me, not me.” I said, “I have been on TV with you.” Then the elevator door opened and we walked into Craig’s offices. As we strolled towards the conference table my jaw nearly hit the floor. Sitting around the table were Michael Price (MFP Investors), David Einhorn (Greenlight Capital), John Hathaway (Tocqueville Asset Management), and others that I did not immediately recognize, but who turned out to also be icons in this business. Sitting down at the table, I spied a list of the attendees. As I studied their names, and the companies of these folks, it became apparent I was clearly the only interloper there.

Ken Langone opened the meeting by taking about Home Depot and the products that have been “selling off the shelf.” Plainly, generators have been a “hot” item, but the usual seasonal goods are also selling well. He then centered on the Presidential election, the Republican Party, and politics. With Ken ending on a political note, the conversation turned to Stephen Bell, the Senior Director of the D.C.-based BiPartisan Policy Center. At a young 69 years of age, Steve has seen a lot; he is well connected inside the Beltway, and knows how the Washington Waltz plays. He began by stating, “All outcomes to the fiscal cliff are binary, and they are either going to half bad or really bad.” He continued, suggesting that if the President really wants to make a deal, he needs to use some of his “political capital” to give Boehner some “political cover” because each of them are going to have to agree on things their constituencies won’t like. Recall what President Clinton did after in essence being impeached and subsequently tried a second time in the Senate. Bill Clinton took a deep breath, and putting all the political in-fighting aside, announced, “We need to balance the budget.” Having lived inside the Beltway myself, that is how things get accomplished in Washington.

The conversation then moved to the equity markets, as well as individual investment ideas. It was noted that the apartment rental complex is “on fire,” punctuated by Sam Zell’s recent bid for a large stake of the apartment company “Archstone.” Of course that squares with my theme given there are millions of 18+ year olds still living with their parents, but they are starting to move out. Another lunch-mate talked about one of his companies moving its entire manufacturing operations back to the U.S. from China due to quality issues, rising Chinese wages, increased transportation/insurance costs, etc. Hereto, this is a theme I have highlighted for some time, and I have many examples reinforcing this theme. To be sure, the reindustrialization, or reshoring, theme is intact.

As for individual ideas, Joe Foster, portfolio manager (PM) of Van Eck International Gold Fund (INIVX/$17.27) told me that if the same “guys” that are printing money are buying gold it reinforces the belief in gold as an alternative currency. Two recent such “buyers” have been South Korea and Brazil. He added, however, “Gold needs a new catalyst.” John Hathaway, PM of Tocqueville Gold Fund (TGLDX/$64.74), agrees and opined that with the large capitalization gold stocks trading at about 5x earnings, and the illiquid names trading for pennies on the dollar, it feels like capitulation. Another idea, with a concurrent favorable rating from our fundamental analyst, was Apple (AAPL/$533.25/Outperform). To wit, AAPL has a market capitalization of roughly $502 billion, but it has approximately $130 billion in cash. Accordingly, ex-cash, you are getting the operating company for $372 billion whose shares trade at a price earnings (P/E) level of about 11x what our analyst (Tavis McCourt) thinks Apple will earn next year ($46.22 2013E EPS). Another idea, from that same hedge fund manager, was a “short” on Intel (INTC/$20.16/Underperform), which our fundamental analyst (Hans Mosesmann) downgraded last week. The story related to me during lunch went like this – Intel is borrowing money in the bond market to fund its dividend and buy back shares. Importantly, it has “missed” the new growth markets (iPhone, tablets, etc.). Intel’s competitors trade at lower multiples of earnings, therefore INTC’s shares should be at $12 per share.

As for me, I emphasized the theme that eventually your computer is going to reside in your phone/mobile device. Consequently, the tower stocks should continue to do well. The two names mentioned, which are followed by one of our telecommunication analysts with favorable ratings, were American Tower (AMT/$75.45/Outperform) and SBA Communications (SBAC/$69.08/Strong Buy). The other theme I referenced was obesity because the baby boomers are entering their diabetes years. Hereto, our analysts favor DaVita (DVA/$106.49/Outperform) and DexCom (DXCM/$13.64/Outperform). For further information please, see our analysts’ research reports.

The call for this week: In D.C. the main objective has always been to keep the train from careening off of the track. Consider this, John Boehner is under pressure to make a deal because if he doesn’t he may not be reelected as Speaker of the House when the new Congress convenes (January 4th). As paraphrased from last Friday’s Morning Tack:

The leading contender for Boehner’s position (if he is indeed at risk) is Virginia’s Eric Cantor, who has what Shakespeare termed, “A lean and hungry look.” Having lived inside the D.C. Beltway, I think Boehner will “cave” and embrace the President’s 39.6% “Clintonesque” tax bracket, putting the Obama administration in somewhat of a ”box” as the Republicans turn the discussions away for social issues and towards entitlement reductions and the “debt ceiling.” If you start hearing names like Austin Smythe, Jon Traub or Alexis Covey-Brandt, who are all very senior staffers, you will know the “wheels” of an agreement are turning.

That view would gain traction if the S&P 500 (SPX/1418.07) can finally vault above the often mentioned 1420 – 1430 resistance level, which might be telegraphing such a “deal.” Regrettably, the NYSE McClellan Oscillator remains overbought and the stock market’s “internal energy” is pretty used-up. That means we are likely to continue going sideways (between 1400 and 1420) into this week’s Federal Reserve meeting. I will keep you updated via the daily Morning Tack.

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