Dancing in the Dark? It’s Correction Time
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Can you imagine Ginger Rogers and Fred Astaire dancing the Continental without music? Or watching the cheesy ABC show “Dancing With the Stars” with no music?
Billionaire investor George Soros has no problem imagining any of this. Shortly before the market crash in the early 2000s, he said, “Maybe I don’t understand the market, but I prefer not to have the same kind of exposure I’ve had up to now. In some ways, I think the music has stopped, only most people are still dancing.”
The chief investment strategist of Raymond James Financial, Jeffrey Saut, relates Mr. Soros’s thinking to today’s market, which a number of worried pros say is well overbought, given the Dow’s roughly 1,500-point surge from its July lows.
A correction shortly, actually in the second week of December, is, in fact, precisely what a concerned Mr. Saut sees happening as a result of what he describes as the market’s current and ongoing over-leveraged dance, once again without any music. Accordingly, he has moved from his aggressively bullish strategy at the mid-June trading lows to one that’s aggressively cautious today.
In effect, Mr. Saut believes the basis of the market’s sprint to new highs is essentially illusory because it ignores a slew of negative factors that could derail the rally and lead to a reversal. Or, put another way, investors are dancing in the dark.
A member of the multibillion-dollar Harris banking family in Chicago and its investment consultant, John Harris, is an even bigger worrywart. “We’ve sold everything but the kitchen sink,” he tells me. “I think the market is headed lower because common sense tells you it just can’t keep going up like it has been.” Part of that expected decline reflects his doubt the economy can sustain its momentum, especially so, he says, because of the worrisome decline in housing.
Mr. Saut, laying out his case for a swing to a more cautious stance in a preponderantly bullish market environment, offers the following:
• Recent reports leave little doubt that the economy is slowing. Indeed, GDP, capital expenditure shipments, private payrolls, industrial production, existing home sales, the Institute for Supply Management (ISM) numbers and retail sales have all been contracting.
• If you deduct share repurchases and seasonally adjusted earnings, earnings momentum has been slowing since the fourth quarter of 2005 and is currently tracking toward mid-single digits.
• The personal savings rate appears to have bottomed, implying Americans are saving more. The negative implications: For every 1% increase in the savings rate, the business sector loses roughly $100 billion in profits.
• At its peak, the median price-toearnings ratio of the ValueLine Index — regarded by Mr. Saut as the best representative index for the average stock — was 20.9. Currently, it’s 18.3. So though down from its zenith, it’s not cheap by historical standards.
Mr. Saut is also bothered by what he calls a lot of disconnects. Among them: Why have retail stocks held up so well when Amazon and Wal-Mart don’t believe a retail rebound is sustainable, as evidenced by their cutting their respective capital spending budgets? Why does the American greenback remain amazingly resilient in light of low interest rates and the decision by China, Russia, the United Arab Emirates, Saudi Arabia, Switzerland, etc., to reduce their weightings of dollar reserves? And why did the SEC, in mid-October, reduce margin requirements for select investments by hedge funds?
Despite his caution, though, Mr. Saut is enthusiastic about a number of investments favored by Raymond James and its research correspondent, Credit Suisse. Among them: Sprint Nextel, Chesapeake Energy’s 5%-yielding convertible preferred, Chicago Bridge & Iron, Intermec, L-1 Identity Solutions, Convanta and ITC Holdings.
Although Mr. Saut raises the possibility of a year-end rally following his projected correction in a few weeks, he also notes market breakdowns in December could be significant. He notes, for example, in 2002 the Dow tumbled from its December high of 9,000 to a March 2003 low of 7,400.
Money manager Selwyn Ortz thinks the market’s recent rise will soon peter out because he expects a noticeable pickup in global terrorist activity during this holiday season, which, he believes, could unnerve the market. A principal of Hong Kong-based HK Investments, Ltd., Mr. Ortz says the world is not addressing itself to the problem of radical Islam. “You have people trying to kill you, a profound disagreement how to handle it, as demonstrated by America’s recent election results, and a losing war in Iraq. It all invites more terrorism,” he says.
Taking note of a Western film, an oldie, “How the West Was Won,” Mr. Ortz thinks a modern day futuristic political version should be made. “You can title it,” he says: “How the West Was Lost.”