Investment Strategy

A tip o the hat to Barry Ritholtz at The Big Picture for his nugget from Jeffrey Saut at Raymond James called Investment Strategy. A must read and here are some interesting tidbits.

..the recent stock enthusiasm is now past its typical 25-session performance peak. It just seems to be the rhythm of the "thing" in that it typically takes a rally of that length to get participants bullish enough to buy stocks just in time for a downside correction.

Indeed, buying stampedes begin from an oversold-low (like last October) and tend to "run" 17 to 25 sessions, with only one- to three-day pauses/corrections, before a near-term exhaustion point is reached on the upside...

Right now we don't like the odds of being aggressively bullish on the stock indices or gold prices. Plainly, the time to be aggressively bullish on stocks was eight weeks ago, not after a buying stampede. Consequently, we have been opining that in the short-run we are NOT focusing on what to buy, but how much of our trading positions to sell...


A very astute observation as we have recently tracked the DJIA in Market Soapbox running down for 5 weeks, then up for 5 weeks, which ended 11/25. We are currently at the end of week 3 in the latest cycle which appears to be sideways and down

...we believe the economy will regress to the mean (read: soften). Verily, with central banks tightening and energy prices rising again, our sense is the economy is set to weaken, led by an overspent/undersaved consumer...

Another gem, although we see the potential for energy prices to pull back as the economy "softens" and then takes off again, providing more central bank tightening.

And heres another factor besides "FASB stock options expensing" that could effect stock valuations in 2006:
the FASB (Financial Accounting Standards Board) is proposing to move the status of pension and OPEB (post-retirement employee benefit) plans out of the footnotes onto the balance sheet. If done, the notional "hit" to shareholders' equity for the S&P 500 is more than $250 billion...

..today's balance sheets are already overstated due to fallacious pension accounting. To wit, in 2004 the S&P 500 companies reported roughly a $100 billion net pension asset on their balance sheets, when in reality those pension plans were $165 billion under-funded (source: CS First Boston)...

...Jack Ciesielski, publisher of the "Analysts' Accounting Observer, notes, "We're only seeing roughly half of the [retiree healthcare] obligations on the balance sheet." He believes that retiree healthcare costs are twice as large as pension obligations. "A day of reckoning is coming," he added. Ciesielski expects the requisite accounting changes to affect stock prices in industries where "it's going to be a surprise," and not just the auto and airline industries (source: Barron's)...

...When we combine these aforementioned balance sheet "impacts" with the upcoming expensing of stock options, the waning profitability of the carry-trade that U.S. corporations have employed to boost their earnings, compressing profit margins, and a softening economy, it is difficult for us to embrace the rosy earnings forecasts for 2006...
Certainly, food for thought.

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