Please make it stop!
by Jeffrey Saut, Chief Investment Strategist, Raymond James
December 15, 2014
He said: “Jeff, you sure were right in Thursday morning’s verbal strategy comments when you said we should get a bounce following Wednesday’s 90% Downside Day, but that that bounce should not hold and for the perfect set-up to occur for the Santa Rally would be to have the S&P 500 come back down and travel into the 2000 – 2010 level.”
I said: “Sometimes you get lucky.”
He said: “Do you still think the right level is 2000 – 2010?”
I said: “I do, or maybe even a little overshoot to the downside given today’s action.”
He said: “Well, the S&P is at 2012, is that close enough to buy?”
I said: “It’s Friday, and while the markets can do anything, once they are into one of these downside skeins they rarely bottom on a Friday. I did see it happen once in the Bankers’ Panic of 1907, but it is pretty rare.”
He said: “Okay, I will wait until next week, but please ‘make it stop’!”
That was a conversation I had with one of our financial advisors last Friday and I truly share his pain, especially in the energy space. Andrew Adams and I have written numerous times about rude crude and its nasty decline, as well as the reasons for it. I have scribed my thoughts about “oil as a weapon,” actually I first heard that concept from Bob Hardy, but last week my friend Arthur Cashin included this quip from arguably the best strategic thinker on Wall Street, namely Don Coxe of Coxe Advisors:
“... By October, it was becoming clear to us and others that Saudi Arabia and its Gulf Emirate allies could not afford to continue petro-pricing business as usual with sectarian wars exploding out of control, threatening the entire region. In particular, they were infuriated that the Shia regime in Syria was being propped up by Iran and Russia. Moreover, Iran seemed to be getting closer to becoming a nuclear power with each month. Amid the chaos, the Islamic State terrorists had suddenly become a formidable challenge to the entire region, and they were getting increasing revenues from oil properties they had seized. The Saudis had long since concluded that U.S. President Barack Obama was a weak reed – at best. So, we believe they felt forced to stop the cash flows to Syria, Iran and the Islamic State and deter Russia.
They decided to keep pumping oil, allegedly to fight fracking, but also to weaken their regional foes. No one knows how long this strategy will continue. The Gulf States have trillions in sovereign wealth funds to back their budgets. Our pal Bob Hardy, who writes the invaluable Geostrat blog, has been talking about oil as a weapon for a longtime – going back to a meeting between Prince Bandar and President Putin late last year. While the meeting was private, sources say the meeting turned contentious when Putin refused to ease back on support for Syria and Iran in exchange for Saudi ‘help’ in maintaining or even boosting the oil price. The reason the Saudis didn't move earlier may have been ‘market conditions’. They needed U.S. fracking supplies to build to a level that would make destabilizing the equilibrium very easy and not require a large and obvious production boost.”
Obviously, oil is in the news and was the highlight of last week with a concurrent “hit” to our equity markets on news the International Energy Agency had reduced its oil demand outlook due to falling consumption. The highlight of my week, however, was spending three to four hours with Putnam portfolio manager (PM) Jerry Sullivan, who manages the Putnam Multi-Cap Core A Fund (PMYAX/$17.10), which I own. I like the fund because at $230 million it is small and nimble. However, Jerry also runs the much larger Putnam Investors A Fund (PINVX/$21.29). Having worked closely with Peter Lynch in an era gone by, Jerry employs many of the same tenets Peter used. Like Peter he keeps it pretty simple with three basic “buckets.” First is the Legacy Bucket that uses large cap boring stocks that tend not to go down much over the long term. Bucket two is the Smart Money Bucket, where he tracks insider non-option buying/selling as reflected in SEC document Form 4. The third bucket is termed Special Situations, which needs no explanation. Other Putnam funds I have written about in the past, and that I own, include: Putnam Fund for Growth & Income (PGRWX/$20.95) PM Bob Ewing, Putnam Voyager Fund (PVOYX/$29.48) PM Nick Thakore, Putnam Capital Spectrum Fund (PVSAX/$38.09) PM David Glancy, and Putnam Diversified Income A Fund (PDINX/$7.53) PM Bill Kohli; and yes, I have personally met with all of these portfolio managers and like their investment styles.
As for the stock market, as most of you know I was looking for early month weakness to set up the Santa Rally, but I thought the weakness would begin the first week of December and I did not think it would be as severe as what we saw recently. Indeed, last week the equity markets suffered their worst point decline in three years with the D-J Industrials losing ~678, while the S&P 500 (SPX/2002.33) shed ~73 points, leaving the SPX about 2 points above its 50-day moving average of 2000.75. The dive took the SPX into the 2000 – 2010 zone I referenced in Thursday morning’s comments and has left the McClellan Oscillator more oversold than it was at the October 15, 2014 “selling climax” low. I think the downside is mostly played out here and would look for some kind of trading low during the beginning of this week. The question then becomes, “Will that be the start of the Santa Rally into year-end?” To answer that question we will need to look at the quality/durability of any rally that develops, but at worst I believe the rally would play itself out in the 2030 – 2040 level and then come back down into the 1970 – 1980 zone before Santa arrives on Wall Street. In any event, we should know the answer to said question by the end of this week. Meanwhile, the economic reports continued to look good last week with 14 of the 17 economic reports coming in better than expected, Retail Sales topping estimates, the NFIB Small Business Optimism Index hitting its highest level in seven years, and the University of Michigan’s Confidence Report at its best level since 2007. To be sure, things are getting better!
The call for this week: This week will determine when we will start the Santa Rally. As stated, I think the downside is mostly played out here and would look for some kind of trading low during the beginning of this week. The question then becomes, “Will that be the start of the Santa Rally into year-end?” To answer that question we will need to look at the quality/durability of any rally that develops, but at worst I believe the rally would play itself out in the 2030 – 2040 level and then come back down into the 1970 – 1980 zone before Santa arrives on Wall Street. Last week I took another shot at trying to pick the bottom of crude oil’s decline when oil was testing its 15-year uptrend line at $60. Alas, that level did not hold either (strike 2). Over the weekend I came across an interesting oil to gold chart that suggests while we are not there yet, we are very close to a bottom (maybe third time is the charm?). Accordingly, I continue to think buying the midstream MLPs into year-end makes sense. I would also note that some of the names mentioned by our fundamental analyst on the midstream MLP conference call last week already look to have bottomed. Well, so much for “never on a Friday” as the S&P futures are better by 13.50 points at 6 a.m. on the passing of a budget. We will have to now see if the 2030 – 2040 level stops the “Budget Blast.”
Copyright © Raymond James
