Hoping for a Rally in This Whipsaw Environment

Excerpt from Raymond James strategist Jeffrey Saut's latest essay:

In this whipsaw environment, trading has been difficult. However, our yield theme recommendations (read: dividends) are holding up pretty well. Some of the names that play to this theme and are favorably rated by our fundamental analysts remain Linn Energy (LINE), Alaska Communication (ALSK), Embarq (EQ), Inergy (NRGY), Legacy Reserves (LGCY), Magellan (MGG), and Teekay (TOO), to name but a few.

The call for this week: Friday felt like Bear Stearns II (BSC), since the news about the GSEs broke on Friday just like with Bear Stearns. Hopefully, this week will be a déjà vu dance of the week following the Bear Stearns’ news with the financials leading the way to the upside. Yet as Michael Steinhardt recently said, “There is rarely a moment such as this where as a contrarian, one sees so many reasons technically, [and] stock market-wise, to be bullish. I can’t imagine a circumstance where a market is more available, more ripe, for a rally than this one. Still, this time it’s different.”

 

Comments

[Sly]

With regard to the comment 'it's different now'… I think I can help put it in perspective…
What we are seeing is the result of the Fed avoiding a crash/panic in March. Crash/panic is bad for the recapitalization of equities. You can't prop things up equities forever so the best case is an orderly decline down (i.e., better than a crash). It's like holding a heavy weight with a rope… you can't pull the weight up and dropping the weight would be bad. You just have to hold on with all your might and let it slide down a little at a time.

The idea is that:
1) Many banks would be below their minimal capital threshold and some would be insolvent… if they had to value loans at MTM value. Though, of course, the banks are liquid… for now.
2) The banks, being undercapitalized, need to recapitalize
3) The Fed is helping them to recapitalize. By the way, the Fed is owned by and run by the big banks (not a secret)
4) The banks will recapitalize in three ways… a) By making profits (and putting their profits into capital b) From selling new shares and c) selling assets
5) The Fed is helping with 4a by keeping short term interest rates low. Banks borrow short and lend long so the steeper the yield curve the more profits and the more quickly they recapitalize
6) The Fed is helping with 4b by propping the equity markets up (i.e., propping the stock price of the banks up). For example, cutting interest rates by 75 basis points in one night.

In a certain sense the plan is working. By avoiding a crash in March, the S&P bounced off 1270 and went up, given banks a chance to sell equity at higher prices than they would have seen otherwise. Banks and investors hopefully took the hint (since you can't explain the plan explicitly otherwise it won't work)… some did and some didn't. In any case… don't expect the equity markets to return to 'normal' until the props the Fed introduced (TSA, etc.) are removed… or rather, once the banking system is recapitalized. Until then there is the pressure, like a weight, forcing things down. By the way, I don't think the Fed cares about what equity prices are, per se… or, rather, that the recapitalization of the banking system is 100 times more important to the Fed.

[The hand]

Let me add my two cents about what's "different now". Firstly, I would like to echo Sly's comments above.

But in addition there are many new issues (from a historical prespective) that are influencing the current financial system - and the relative gravity of each, or how they are interacting is hard to quantify.

1) The euro - a relative new currency with a lot of strength combined with what i view as very poor management.

2) The continuing movement of the economic center of gravity from North America/Europe to Asia.

3) The war on terror specifically Iraq and Afganistan. Besides the human and economic toll this is taking, it diverts attention away from the real war - economics.

While watching the Administration's roll out of the firemen yesterday to try to calm the markets, the FED chairman said that we were not technically in a recession. He is right. Our historical means of gaging the markets and industry plain do not sync with the new reality. Using the historical means of picking stock or predicting movements should be questioned.

This is why it feels different now to me.