The Responsible 545 People

Investment Strategy: "The 545 People Responsible for America’s Woes"

By Jeffrey Saut | 25 August 2008

Greetings from Washington, D.C., where I am speaking at the Raymond James Financial Services National Conference, so these will likely be the last strategy comments of the week. Nevertheless, I love "the Beltway" having lived and worked here for many years, yet Washington is more of a "process and power" town rather than a "product and money" town. This was most recently demonstrated when a mere two Congresspersons shut down debate on the much needed energy bill, adjourned Congress, and literally had to turn off the lights to force the rest of their colleagues to leave the Capitol building! In the mess we currently find ourselves, such shenanigans sadly remind me of my elementary school days, which is why I am penning this morning’s missive.

It should be noted that I am apolitical. In fact, my industry makes sure I stay that way. But being in Washington, D.C., concurrent with the start of the Democratic Convention, and approaching the elections, I couldn’t help reflecting on the [both] candidates’ pandering to a largely uninformed electorate while avoiding the really hard issues that need addressing. Again, bear in mind that I am indeed apolitical and that none of these comments are sponsored by Raymond James. Also know that my bumper sticker reads, "Re-Elect No One." And with these thoughts in mind, I urge you to consider the following prose from syndicated columnist Charley Reese:

"Politicians are the only people in the world who create problems and then campaign against them. Have you ever wondered why, if both the Democrats and the Republicans are against deficits, we have deficits? Have you ever wondered why, if all the politicians are against inflation and high taxes, we have inflation and high taxes? You and I don't propose a federal budget. The president does. You and I don't have the Constitutional authority to vote on appropriations. The House of Representatives does. You and I don't write the tax code. Congress does. You and I don't set fiscal policy. Congress does. You and I don't control monetary policy. The Federal Reserve Bank does. "One hundred senators, 435 congressmen, one president and nine Supreme Court justices— 545 human beings out of the 300 million— are directly, legally, morally and individually responsible for the domestic problems that plague this country. I excluded the members of the Federal Reserve Board because that problem was created by the Congress. In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered but private central bank. I excluded all the special interests and lobbyists for a sound reason. They have no legal authority. They have no ability to coerce a senator, a congressman or a president to do one cotton-picking thing. I don't care if they offer a politician $1 million dollars in cash. The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislator's responsibility to determine how he votes. "CONFIDENCE CONSPIRACY: Those 545 human beings spend much of their energy convincing you that what they did is not their fault [[The supremes don't even bother, preferring to hide behind a smokescreen of law, precedence, custom and similar lawyerly arcana.: normxxx]]. They cooperate in this joint con regardless of party. What separates a politician from a normal human being is an excessive amount of gall [[and the ability to prevaricate and obfuscate without limit, at the drop of a hat, no doubt also helps: normxxx]]. No normal human being would have the gall of a SPEAKER, who stood up and criticized G.W. Bush for 'creating deficits'. The president can only propose a budget. He cannot force the Congress to accept it. The Constitution, which is the supreme law of the land, gives sole responsibility to the House of Representatives for originating and approving appropriations and taxes. "Who is the speaker of the House? She is the leader of the majority party. She and fellow Democrats, not the president, can approve any budget they want. If the president vetoes it, they can pass it over his veto [[only if they have the votes which, thank God, they don't yet! : normxxx]] REPLACE THE SCOUNDRELS. It seems inconceivable to me that a nation of 300 million cannot replace 545 people who stand convicted— by present facts— of incompetence and irresponsibility. I can't think of a single domestic problem, from an unfair tax code to defense overruns that is not traceable directly to those 545 people. When you fully grasp the plain truth that 545 people exercise [the full and total] power of the federal government, then it must follow that what exists is what they want to exist. "If the tax code is unfair, it's because they want it unfair. If the budget is in the red, it's because they want it in the red. If the Marines are in IRAQ, it's because they want them in IRAQ. There are no insoluble government problems. Do not let these 545 people shift the blame to bureaucrats, whom they hire and whose jobs they can [instantly] abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power. Above all, do not let them con you into the belief that there exist disembodied mystical forces like ‘the economy,’ ‘inflation’ or ‘politics’ that prevent them from doing what they take an oath to do. Those 545 people and they alone, are responsible. They and they alone, have the power. They and they alone, should be held accountable by the people who are their bosses— provided the voters have the gumption to manage their own employees. We should vote all of them out of office and clean up their mess. "Gumption," now there’s a word from an era gone by that seems to have faded from the American lexicon. As I recall, "gumption" is defined as initiative and/or common sense [[Dictionary: (1) Boldness of enterprise, initiative, or aggressiveness; (2) guts, spunk; (3) common sense.: normxxx]]. It’s also a word I would ascribe to a "real" statesperson. According to Winston Churchill, "A politician thinks about the next election, a statesman thinks about the next generation." Unfortunately, at least in this town (D.C.), there are not many "statespersons" left because when you tell the electorate what really should be done for the benefit of future generations, you get voted out of office. For example, I know hundreds of retired couples that receive in excess of $500,000 per year of interest/dividend income from their investments. Now I don’t know if the figure is $300,000, $500,000, or $1,000,000 per year in such income, but at some level you should not be entitled to Social Security payments because you just don’t NEED them! Common sense? You bet it is, yet you won’t hear any politician proposing such legislation because as Winston Churchill stated, "A politician [only] thinks about the next election."

And, here they (read: politicians) go again as the table seems to be set that will take policy responses to the housing/ financial crisis in an unorthodox, wrong-footed, direction [[regardless of which "chosen" panderer is elected: normxxx]]. History, however, shows quite a few instances whereby unorthodox steps have turned out badly. Nevertheless, last week the "cry" went out to use taxpayers’ money for reconstituting the Reconstruction Finance Corporation (from the 1930s), as well as the Resolution Trust Corporation (1989), to ameliorate the financial fiasco (read: [hugely] bigger government and more government intervention).

Yet, the RTC did not recapitalize the banks’ balance sheets, nor did it purchase distressed properties, which is likely what is currently needed. Further, it is increasingly evident that the government will use its "balance sheet" to shore-up the GSEs (Government Sponsored Entities) like Fannie Mae (FNM/$5.00) and Freddie Mac (FRE/$2.81). Unfortunately, a few "statesmen" recognized this potential problem YEARS ago, and said so, but their warnings went unheeded by the "politicians." Still, rumors of the potential GSE bailout rallied the equity markets last Friday, renewing hopes that a new "up leg" for stocks is in place. While I would certainly like to believe that is the case, the metrics just don’t suggest it.

Indeed, while we were pretty bullish at the mid-July "lows," we subsequently sold those trading positions into strength, thinking that the upside "buying stampede" would exhaust itself in the typical 17–25 session timeframe, which implied the equity markets were due to peak during the week of August’s option expiration (August 15th). Moreover, many of the finger-to-wallet indicators we use to identify major market "lows" were sorely lacking at last month’s downside selling climax. However, we opined that the "selling stampede" in groups like energy/gold might be coming to an end during that same option expiration week since their respective downside skeins had lasted the perfunctory 17–25 sessions. Accordingly, for trading accounts, we recommended the scale-down buying of select Exchange Traded Funds (ETFs) playing to those groups. And given the large rallies in those groups last week, prudent trading types should have sold partial positions respectively. As for investment accounts, we continue to emphasize the clean balance sheet, solid fundamentals and dividend yielding names so often mentioned in these missives.

The call for this week: According to Lowry’s,

"[Last] week’s increase in Selling Pressure, to its highest level of the bear market (thus far), plus the lack of 90% Downside Days immediately preceding the mid-July market low[s], showed no signs of [the] diminishing selling so vital to the start of a sustained market advance. . . . [Indeed] The rally in the DJIA from its July low to [the] August high has been characterized by a steady increase in Supply (read: sellers) and sluggish Demand (read: buyers). This combination appears much more consistent with a rally in a bear market than with the start of a major move higher."

Regrettably, that’s the way it has been since we wrote about the Dow Theory "sell signal" of last November. Meanwhile, the DJIA (11628.06) and S&P 500 (SPX/1292.20) have broken below their respective March 2008 "lows," while the small-cap (SML/387.46) and mid-cap (MID/814.92) indices have not. And don’t look now, but commodities had their biggest weekly rally in decades last week as things continue to get curiouser and curiouser.



For Trading, Not Eating!

August 18, 2008

"...the 1890s have come to be known as the Yukon-Klondike Gold Rush days, as thousands of rugged individuals swarmed to the northern climes to find fortune and glory. Unsurprisingly, during the winter of 1896-97 the Alaskan ports were frozen solid and therefore closed to all shipping traffic. Food became very scarce and very expensive since new supplies had to be brought in over land at great hardship. Reportedly, a can of sardines that had cost $0.10 in New York could be priced at 10 times that amount by the time it reached the gold miners in Alaska. "Still, there was great demand even at such inflated prices. For instance, in one remote mining town the price of one highly embellished (with much lineage advertising the sumptuousness of its contents), overly large can of sardines was sold at rapidly escalating prices from $10.00, to $30.00, then $50.00. Finally, one desperately hungry miner paid $100.00 for the can of the highly sought after sardines. He took it back to his room to eat. He opened it. To his amazement, he discovered that the sardines were rotten. Thoroughly angered, he sought out the person who had sold him the tin and confronted him with the rotten evidence. The seller was amazed and shouted, ‘You mean you actually opened that can of sardines? You fool; those were trading sardines, NOT eating sardines!’" ... Anonymous

Similarly, "for trading, NOT for eating" has been the strategy we have employed with our recommendations on the financial and real estate groups since turning constructive on them at the end of June. Indeed, anticipating that the "selling stampede" was coming to an end, we advised accounts that at such downside inflection points you want to purchase those groups with the worst relative strength characteristics for trading purposes because those are the groups that have been "pushed down" the most. To be sure, just like when you push down too far on a spring you eventually get a "boing" bounce-back, we thought the financials and the real estate stocks had been compressed to the point where they would give us the biggest "bounce backs" off of the selling-climax "lows." We subsequently recommended numerous exchange-traded funds (ETFs) playing to those groups and began scale-buying them into the mid-July "lows."

Since those "lows" we have opined that the equity markets were likely involved in an upside "buying stampede," which should last the typical 17— 25 sessions. In last Monday’s letter we went on to state:

"Nevertheless, since July 15th the S&P 500 (SPX/1298.20) has moved irregularly higher without so much as anything more than a one— to three-session pause/pullback with Friday’s 300+ point DOW WOW coming on day 18. If the pattern continues to play, our day-count sequence would have the equity markets topping-out sometime this week as the ‘short sellers’ run for cover into Friday’s option expiration expiation. The quid pro quo could be that the 25-session ‘selling stampede’ in indexes like the ProShares Ultra Oil & Gas (DIG/$78.59) could be nearing an end, at least on a trading basis."

Well, last Friday’s option expiration was indeed session 23 from the July 15th low and accordingly we followed our own advice and used strength during the week to scale-sell some more of our trading positions. Verily, we consider both the financial and real estate groups to be "trading sardines, not eating sardines" since we doubt the news surrounding them will get materially better anytime soon. And that, ladies and gentlemen, is why we just "rented" those positions for trading purposes rather than 'investing' in them.

Speaking to the investing account, followers of these reports know that for months we have counseled accounts to reduce exposure to our beloved "stuff stocks" (energy, materials, base/precious-metals, cement, timber, etc.) even though we continue to think "stuff" remains in a secular bull market. We began recommending rebalancing (read: selling partial positions) said holdings on fears that the politicos were going to do everything in their power to drive the price of crude oil lower into the elections, for obvious reasons. Our long-standing target for the price of crude has been its 200-day moving average (DMA), which now stands at $110. With rude crude changing hands in mid-July at $147/bbl that strategy looked pretty foolish.

Last week, however, oil tagged $111/bbl and our strategy doesn’t look nearly as wrong-footed.While crude oil’s recent 25% price decline looks bad in the charts, the price declines of many energy-related equities now exceeds 40% over that same timeframe. We believe the "selling stampede" in the energy complex is overdone and is therefore nearing an end. Moreover, with the recent decline in crude prices, numerous members of OPEC have been calling for production cuts. While we are not expecting production cuts in the near-term, we continue to believe that if prices fall further, OPEC will step in and defend a price near $100/bbl. Obviously, we've found a price that slows oil demand, but in our view, long-term oil fundamentals remain strong.

Consistent with these thoughts, we recommend the gradual re-accumulation of the energy stocks, particularly ones with outsized dividend yields. For fund investors there are a plethora of closed-end funds and ETFs like the aforementioned ProShares Ultra Oil & Gas, which is leveraged two-to-one on the upside. Additionally, in past missives we have mentioned a number of higher yielding names recommended by our fundamental energy analysts, like 12%-yielding, Outperform-rated Linn Energy (LINE/$20.40). This morning we offer for your consideration Strong Buy-rated Delta Petroleum (DPTR/$16.10) using its convertible bond, as well as Strong Buy-rated Chesapeake Energy (CHK/$45.53) using its convertible preferred "D" shares. As always, terms for these convertibles should be checked before purchase.

As with oil, we have been cautious on precious metals this year despite our belief that the yellow metal also remains in a secular bull market. We think the decline from $990/ounce on July 15, 2008 into last Friday’s close of $792 is overdone. The gold stocks have fared even worse, as can be seen in the charts on the next page. While many pundits are blaming gold, and oil’s, decline on the stronger dollar, we don’t see it that way. Plainly, we have been bullish on the dollar since late last year when we recommended closing down all of our anti-dollar "bets" that had been in place since 4Q01. And, at the margin the dollar’s recent strength is responsible for a modicum of the slide in "stuff stocks." However, we think there is more afoot than just that.

Indeed, the recent accelerating rotation out of "stuff" we think is largely being driven by a gathering sense that not only is the U.S. economy slowing noticeably, but so is the rest of the world. While true, we continue to believe the U.S. economy will avoid a recession and continue to muddle through (read: 0.0%— 2% GDP growth), although the odds of a recession in 2009 have clearly risen. Nevertheless, we like gold stocks at these price-points, but are again turning cautious on the U.S. dollar (see charts); and, as with energy stocks, are recommending gradual re-accumulation. Here too, there are numerous closed-end funds and ETFs, but one for your consideration is the Deutsche Bank Gold Double Long Note (DGP/$15.86).

The call for this week: Regrettably, for most of this year it has been more of a trader’s market than an investor’s market. While we are a much better investor than trader, we have attempted to navigate the volatile environment using the trading side of the portfolio. Recall that we advise using 80% of your equity portfolio for investment ideas and 20% for trading. And when we say "trading," we DON’T mean day trading! Rather, we try to wait for a trading "set up" whereby the odds are tipped so far in our favor that if we are wrong we are going to get stopped-out quickly with hopefully small losses and live to play another day. And, that’s the way it is on session 24 since the July 15th "selling climax" lows. Indeed, "for trading, not investing!"

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.