“Unnatural"
Raymond James' Jeff Saut offers his take on the recent market action:
As for the “here and now,” we have deemed the recent performance by the major market indices to be somewhat “unnatural.” Markets typically go up, correct by 25%, and then re-rally if they are going to trade higher.
This, ladies and gentlemen, has not been the case recently as the averages have “unnaturally” vaulted higher without so much as ANY correction. We have suggested this phenomena was triggered by Goldman Sachs’ re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it.
Following that, the Department of Energy mysteriously said it would not add to the Strategic Petroleum Reserve (SPR) until after the winter months, even though the SPR was below prudent norms. This is also a mystery to us, but once again there you have it.
Then, when it looked like the equity markets were set-up to correct (read: decline) in mid-October, the NYSE petitioned the SEC, and was granted, a mysterious reduction in margin requirements for an already over-margined hedge fund community. And that “mysterious surprise” gave the major market indices another leg-up (read: re-rally). Again, why in the world one would introduce more leverage into an already over-leveraged hedge fund community is a mystery to us!
Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time.
The current unnatural state of the equity markets continues to leave us cautious; although we have learned the hard way it is difficult to “break” the equity markets to the downside during the ebullient month of December. Consequently, our sense is that the markets will consolidate here and then attempt to trade higher into year-end. If the S&P 500 can vault above 1415, with conviction, we can see near-term objectives into the 1440 – 1445 level. While we are disinclined to play the indexes on a trading basis, we have purchased some stocks recently in investment accounts. (emphasis added)
Jeff has been around a long time, has a great track record, and is a wizened Market observer. When someone like him says that market action is unnatural, its worth considering . . .
>
Source:
“Dr. Doom”
Jeffrey Saut
Investment Strategy
Raymond James & Associates, December 11, 2006
http://www.raymondjames.com/inv_strat.htm
Tuesday, December 12, 2006 | 10:30 AM | Permalink
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Comments
Weezie:
Tell me what is inaccurate about this para:
"We have suggested this phenomena was triggered by Goldman Sachs’ re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it."
Posted by: Barry Ritholtz | Dec 12, 2006 11:02:09 AM
Also, Richard Bernstein has forever been a bear, and he is throwing in the towel on bear side today at Merrill.
Is that more likely to be bullish or bearish ?
Posted by: Barry Ritholtz | Dec 12, 2006 11:25:58 AM
Oh well I missed this rally and I'll probably miss the next one as well... Conspiracy or not, I've been around the block a couple of times in this neighborhood and I do not like what I'm seeing. Who knows, perhaps those chaps that predicted "DOW 36,000" will be proven right.
The only thing I am certain of is, that when the music stops I'm going to have a chair to sit on.
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Dec 12, 2006 11:36:40 AM
I have seen Jeffrey Saut on CNBC and he is obviously a very smart man. However, it seems to me that he has obviously been wrong lately and needs to explain to his clients why he was wrong. Everybody is wrong sometime.
Also, wasnt all of this market levitation supposed to end after the election?
Posted by: GerryL | Dec 12, 2006 11:37:38 AM
When Roubini throws in the towel, that will be the proverbial last bear turnubg bullish.
It seems like I recall Merrill bagging a market strategist who had been bearish too soon before the bubble burst. Maybe Bernstein is thinking about job security.
Posted by: S | Dec 12, 2006 11:39:28 AM
weezie:
Conspiracy theories are usually those that are all speculative without fact nor reasoning to back them up.
These market manipulations however - epsecially derivatives - will come to light.
I just finished watching "Enron: The smartest guys in the room". Its a momentum game, it starts small and then gains speed until it is uncontrollable and will only collapse under its own pressure. Amaranth was just the warning.
Once again, you can't only cap the bottom expecting these "unnatural" markets to go on forver.
Posted by: my1 | Dec 12, 2006 11:40:16 AM
Some more for the list;
-)The UnNat RECORD $115 bil net cap inflow in Aug.
-)Which was used to buy up some MBS that nobody wanted heading into an obvious housing down turn.
-) Which resulted in an UnNat 25% gain in FNMA
-) and an even more UnNat gain in the Housing stocks
Posted by: tjofpa | Dec 12, 2006 11:44:51 AM
Weezie comes across as the type of person who paints anybody with a little
skepticism as a conspiracy theorist. Let me remind you, a little skepticism is
healthy and infact essential in any community. If we were a little skeptical
collectively in march 2003, we probably wouldn't be reading the baker-hamilton
report today.
Changing the weighting of the index might not be a conspiracy though
it's hard not to let that thought cross your mind. And changing it right into the
elections does lend some weight to arguments about it being a conspiracy.
But Goldman hasn't explained why they did it. Did you notice their trading profits
increased 50%?
Btw did Richard Bernstein throw in the towel to make it a great contrarian call? :)
I wonder if he's also shorted stocks at the same time :) I'm sure he would disclose
that. No suggestions of a conspiracy here :)
Barry, can you post the link to Richard's missive?
Posted by: Donaldo | Dec 12, 2006 11:45:52 AM
I make it a point to read J. Saut. "However, it seems to me that he has obviously been wrong lately and needs to explain to his clients why he was wrong. Everybody is wrong sometime." I think that in Saut's letter he is pretty straightforward about his position--explanatory with an appropriate amount of contrition.
What I've come to learn is that NO ONE knows what this market is going to do. Educated guesses. Yes. Complete certitude. Nope. What was the track record of the big houses on their investment picks? I think that it was in the 40-45% range.
Posted by: Leisa | Dec 12, 2006 11:54:23 AM
Leisa,
Where do you see contrition in his letter? I just see where he gave up and bought some stocks.
Posted by: GerryL | Dec 12, 2006 12:35:18 PM
Hey he also took off for vacation before the election confident the Republicans would remain in control of the House and Senate... However.... on the subject of the market... I'm in full agreement!
Posted by: Bob A | Dec 12, 2006 12:38:59 PM
This stuff about SPX minis jumping 22 points in Globex in two minutes is not a big deal, if you look at the chart the market settled right back down to where it started by the open, so it had zero market impact. What you must understand is that overnight (US Time) the order book gets really thin and it is a piece of cake triggering a stop, or an automated program makes an error ramping the market. The SPX minis are so thin in Europe its not uncommon to see market makers push it around to influence large orders in underlying US stocks. One of those probably happens in the electronic markets at least once a year, although they are becoming less frequent as participants put more error traps in their automated software. The other consiparcy stuff I refuse to comment on !!
Posted by: vegaman | Dec 12, 2006 12:43:25 PM
Is Bernstein really throwing in the towel? I heard that along with the same statement about both him and Roach from a few people six or so months ago when all he did was take 10% of his allocation and split it with 5% going into two other allocations. I believe it was adding 5% to equities and 5% to cash from a reduction of 10% in bonds. Or maybe it was 5% equities and 5% bonds from a reduction in cash. Hardly bullish given his equity allocation at the time.
Until I saw Bernstein's own words that he had become exhuberantly bullish, I'd say people are misinterpreting anything he says/
Posted by: BDG123 | Dec 12, 2006 12:45:16 PM
Merrill Lynch is calling for a 12% gain in the S&P for 2007. Sounds like everybody else: They anticipate poor economic growth leading to a rate cut, leading to higher multiples and profit margins, leading to economic euphoria, leading to another productivity miracle, leading to the end of all disease, pestilence and ill will towards Alan Greenspan.
Posted by: Mike M | Dec 12, 2006 12:53:48 PM
UBS canned Gail Dudack not to long before the NAZ cratered.
Barry, awesome site re-design.
If anyone is interested, Piscataqua Research has an interesting piece on their site: "The Consumer Crunch." Gotta register to read it, but the analysis is worth it.
Posted by: Vega | Dec 12, 2006 1:40:35 PM
I also follow Saut and appreciate his market insights, but I find this statement to be disingenuous. I read this as "I was bearish but the market went up. My clients underperformed and now they are angry. I now will buy stocks after a big runup. I was wrong but it wasn't my fault."
His statement implies that it has only been through manipulation that the market has risen, ignoring rational and nonconspiratorial factors that have supported to the upside. This would include a massive amount of liquidity worldwide leading to gains in indexes around the world, and private equity buyouts that have just crushed shortsellers and upped expectations of positive equity returns.
Regarding manipulation of the energy markets, GS's explanation of their change in weighting is here:http://www2.goldmansachs.com/gsci/articles/gsci_060816200238.html. Take it for what its worth. It was released in JUNE, and at least some of its effects could and should have been anticipated.
Finally, is it any surprise that political manipulation of the markets may have been attempted at this point of the Presidential cycle? Factors such as money supply, margin requirements, and SPR balances have been prone to manipulation in election years for decades. We don't like it but it happens and it is necessary to prepare for it.
Posted by: TJR | Dec 12, 2006 1:48:39 PM
this goldman re-indexing is really sticking. I read somewere that they were simply moving away from the old gasoline contracts into a new ethonal blended contract...if that makes sense...
Posted by: DD | Dec 12, 2006 1:50:32 PM
GerryL
Contrition in broadcast. But don't look for much, for I don't think that he owes much.
Posted by: Leisa | Dec 12, 2006 1:58:19 PM
This isn't a "impressive" rally at all. Nice 1000 point correction and you back below 2000(which we still are now in reality).
Buy the myth, you become the myth. By the way, why would Roubini "throw in the towel"? He has been talking about this rally lasting in January when it turns.
Posted by: Cherry | Dec 12, 2006 2:21:30 PM
but it really doesn't get much more unnatural than Dick Cheney or Karl Rove now does it? Does it?
When Congress is bought (and paid for) by Corporate largesse and 90% of it funneled down the elephant's maw....
When we had the country so recently "improved" by ONE PARTY RULE....what do you expect?
When you know what side your bread is buttered on, the mid term elections are THE time to make it all happen....What is so hard to understand about this?
Posted by: brion | Dec 12, 2006 2:31:06 PM
I screwed up. Bernstein replaced Christine Callies, who apparently had been too bullish after the bubble burts. My bad.
http://query.nytimes.com/gst/fullpage.html?res=9C00E4DC1F3DF937A35751C1A9679C8B63
Posted by: S | Dec 12, 2006 2:51:05 PM
"This isn't a "impressive" rally at all. Nice 1000 point correction and you back below 2000(which we still are now in reality)."
Oh my......denial isn't a river in Egypt.
Posted by: Fred | Dec 12, 2006 2:55:52 PM
Folks, remember what they said about people who thought there was "unnatural" action in the California energy markets in 2000-01? Right. A bunch of nutty left-wing conspiracy theorists.
And then we heard the tapes.
Grandma Millie probably isn't a reader of this blog, but if she were....
Posted by: Jim M | Dec 12, 2006 3:23:54 PM
This has been a VERY impressive rally, from the July lows to the recent peaks.
Nasdaq: 2014 - 2467
SPX 1231 - 1415
Dow 10,701 - 12342
I don't see how you can look at those gains over only 6 months and describe them in any way other than impressive!
Posted by: Barry Ritholtz | Dec 12, 2006 3:54:23 PM
Why do I have to say it?
Designate the time period your are refering to when you are talking about gains or losses in a market. Perhaps you could also indicate why you chose that time period. It is really easy to tailor the information to prove a point. The mututal fund companies do this all the time when they advertise, one way or the other they will find the set of results that optimize their appearance. I hope we do not have to rely on the manipulation of salient information rather than have an objective interpetation of the results by looking at the overall environment.
Obviously the % up or down out of context can be illusive since the short term market could be folding while the 3 year results could look good. I do not think that most here would disagree that clarity on the trends in a market is desirable.
Posted by: alexd | Dec 12, 2006 4:19:22 PM
