Market Strategist Jeff Saut on Risk Management Principles

Market strategist Jeff Saut is out with his latest investment commentary entitled, "Don't bet the farm." In it, he lays out some basic risk management principles. The first of which, obviously, is to not bet the proverbial farm on any one scenario, no matter how good it looks. Managing downside risk is the key to success in markets. Louis Bacon, famed hedge fund manager at Moore Capital, will be the first to tell you that. Saut also believes that portfolio rebalancing is one of the tenets of successful investing. This whole conversation is an extension of his commentary last week where proclaimed risk adjusted stock selection is a key to portfolio success.

You can read his entire investment strategy for the rest of his thoughts on risk management but we wanted to touch on his latest market thoughts as well. Saut highlights an excerpt from Lowry's Selling Pressure Index, who writes, "When selling pressure begins to consistently contract, despite new los in the major indexes, such a divergence usually indicates the desire to sell has been largely exhausted; and, the end of the decline may be near at hand." That would certainly prove to be the case (at least in the near-term), given that the market rallied 200 points on Thursday.

The Raymond James Chief Investment Strategist continues to watch the S&P 500's 200 day moving average with a watchful eye. Saut feels that until a breakout to the upside of this level occurs(around 1,112 on the S&P), he is quite happy to remain flat in trading accounts and to position favorable stocks in investment accounts. He continues to pound the table on large cap blue chips such as Walmart (WMT), Intel (INTC), Enterprise Products Partners (EPD), Allstate (ALL) and Microsoft (MSFT). One thing's for certain: many smart investment firms advocate buying high quality stocks as of late.

Embedded below is Jeff Saut's latest weekly market commentary:



You can download a .pdf copy here.

Be sure to also check out Saut's previous thoughts on risk management and keys to portfolio success in 2010.

Jeff Saut: Risk Adjusted Stock Selection & Risk Management Are Keys to Portfolio Success in 2010

Raymond James' Chief Investment Strategist Jeff Saut has penned his weekly market commentary and in it he examins the possibility of the dreaded double-dip recession. Many economists argue that the recession ended around this time last year. Saut proceeds to examine the possibility that these economists are wrong in an effort to gauge the possible worst case scenario. He outlines the fact that 3 out of 38 recessions have qualified as double-dips since 1880. In practically all of those cases, the first recession was 'mild' and then the double-dip was quite harsh. Saut argues that we aren't in for the dreaded DD because the recession we just experienced was anything but mild.

Pursuant to his take on the markets, Saut is not bearish, but he is quite cautious. Last week, he pointed out that there were so many negative indicators that he wouldn't be surprised to see a contrarian stock market bounce. And, that's exactly what happened. You have to hand it to the market strategist as he's correctly removed his market hedges into the turmoil and then correctly called the rally. So, where does he stand now? Since that transgression of events, he has reverted back to his cautious stance for the intermediate term. He thinks any pullback will be contained in the 1040-1050 zone on the S&P 500.

In order to find success in these cautionary times, Saut points to risk adjusted stock selection and risk management as the keys to portfolio success. This is interesting because Lee Ainslie of hedge fund Maverick Capital previously opined that 2010 would be a stockpicker's market. Yet, when you examine the performance of many long/short equity hedge funds, that doesn't seem to be the case at all. Maybe 2010 is truly setting apart the best stockpickers from the rest of the pack. While 2010 has been rough on many big name investors, Abnormal Returns has dubbed the next decade the forthcoming golden age of stockpicking. In the near-term, Saut agrees that stockpicking is key.

A few weeks ago, Saut advised investors to protect gains from the March 2009 rally and his stance remains unchanged there. To help investors with their stockpicking prowess, he has recommended a few names: Microsoft (MSFT), Intel (INTC), Enterprise Product Partners (EPD), Allstate (ALL) and Walmart (WMT).

Specifically on Microsoft, Saut highlights its $3.50 per share in cash, 2% dividend yield, and cheap valuation. Regarding Walmart, he thinks its valuation is low here and sees the company growing revenues in the high single digits and buying back a lot of shares. Lastly, Saut puts in a plug for Putnam's Diversified Income Fund (PDINX) as it has the possibility to generate equity-like returns without the same risk profile as equities. Embedded below is Jeff Saut's entire investment strategy piece for this week:



You can download a .pdf copy here.

Overall, Saut remains cautious longer term. He currently favors growth over value stocks and has highlighted numerous technology sector names in his missives. While he thinks the selling will be contained near-term in the market, he points out the S&P 500's 50 day moving average as a key level of resistance at around 1,100. For more on Saut's market rationale, head to his commentary where he outlined his decisively cautious stance.

Jeff Saut Says Market in Bottoming Process

Jeff Saut, Chief Investment Strategist over at Raymond James, thinks the market is in the middle of a bottoming process. In his latest market commentary, he mentions that the market's 'convalescing period' could take anywhere from two to eight weeks. He is looking to accumulate stocks during this period and has advised to ready your 'buy list' of preferred names you want to own. In the weeks leading up to the pullback, Saut had advocated caution and raised cash levels. The market initially declined recently from the flash crash and then rallied sharply back but did not breach the 50 day moving average. As such, he thinks a re-test of the recent low is in order and he anticipates it will hold.

In terms of what specifically to invest in, Saut had a few recommendations. He in particular likes Brazil as the country has plenty of fresh water, agricultural commodities and energy. While he has been somewhat cautious on emerging markets in the near-term, he is quite bullish for the long-term. For fund investors, he mentions the new Dreyfus Brazil Equity Fund (DBZAX) and for individual stocks he recommends CPFL Energia (CPL). Regarding non-Brazilian recommendations, Saut again mentions 7% yielding Enterprise Partners (EPD) which is on Raymond James' focus list. He mentioned this last time around when he advised to selectively upgrade the stocks in your portfolio.

Jeff Saut ends his commentary by saying, "Indeed, market historians should recall that after a selling climax what typically happens is a one-to-three-session throwback rally followed by a downside retest attempt of those 'lows.' Sometimes the 'lows' are marginally broken, but most of the time they are not. I continue to invest accordingly."

Embedded below is Jeff Saut's latest market commentary:



You can download a .pdf here.

Saut was right in his call to be cautious and raise cash a few weeks ago. We'll have to see if he's correct again if the market does start to bottom here and trade higher. However, many market pundits are calling for the market to go decisively lower, so no we wait. For more from Jeff Saut, you can see his past investment strategy here.

Ten Investment Themes For 2010

From Bank of America Merrill Lynch comes investment strategy in the form of '10 themes for 2010.' Keep in mind that these represent their opinion so take everything with a grain of salt. They feel that next year will be "a genuine watershed" in that it will reveal whether or not this 'recovery' is real or whether the fundamentally drawn out weakness typically associated with bear markets will rear its ugly head. Their Research Investment Committee thinks that the printing of money through quantitative easing and record budget deficits will help the country on the road to recovery but think inflation will remain low throughout 2010, thus providing a bullish environment for stocks and commodities. As with many other market pundits, they feel emerging market demand will fuel commodities (especially gold). On the contrary, they dislike government bonds. The 'top 10' theme seems to be prevalent out of Bank of America Merrill Lynch lately as we also recently covered the top ten stocks owned by hedge funds.

Here is Bank of America Merrill Lynch's Ten Themes For 2010:

1. Government balance sheet risk
2. Rising taxation
3. Alternative yield strategies
4. Financial sector rehabilitation
5. Corporate cash flow beneficiaries
6. Rising global growth
7. The emerging market consumer
8. Commodity price inflation
9. The return of active management
10. Alternative energy
    

So, an interesting set of themes with some arguably already taking place as we head into the end of this year. Let's now take a closer look at each individual theme to examine their rationale, possible investment ideas, and assets to avoid. Here we go:


Theme #1) Government balance sheet risk: For this theme, they cite IMF data that "total public debt as a % of GDP will exceed 100% in advanced economies in 2010." They think that 10 year Treasury yields will be above 4% by the end of 2010.

Investment ideas for this theme: Materials equities and emerging market stocks. Also, intermediate term investment grade corporate bonds.

They think you should avoid long duration US Treasuries. Many prominent investors and market gurus have advocated avoiding treasuries in one form or another, including hedge fund legend Julian Robertson whose inflationary wager we've covered before.


#2) Rising taxation: They again cite the US budget deficit here as well as health care reform and a second stimulus package as the rationale for higher income taxes on both the state and local level in 2010.

Investment ideas: They like general obligation municipal bonds and muni bond ETFs as well as closed end funds. (Specifically: NUV, MYD, NPI, and NPM).

Avoid: Private purpose muni bond issues.


#3) Alternative yield strategies: Next, Bank of America Merrill Lynch's focus turns to the possibility of higher taxes chasing people out of typical dividend plays and they see tax deferred strategies benefiting here.

Investment ideas: Tax advantaged strategies and also large cap plays such as KMP, EPD, PAA, and ETP.

Avoid: Stocks with rising yields due to their decreasing stock price. Be wary of high yield 'traps.'


#4) Financial sector rehabilitation: Fourthly, we see that they think financials will benefit from low rates here in the US with steep yield curves elsewhere in the world. They also believe that the normalized earnings power of many financials has been underestimated.

Investment ideas: Mega cap financials in global markets (particularly in Brazil, China, and Europe).

Avoid: Regional financials and small cap plays. We've seen this trade many times before as many hedge funds have been long money center banks and short regional banks. Whitney Tilson's T2 Partners has been short Regions Financial (RF) as a perfect example. Not to mention, Bank of America (BAC) was one of the most widely owned stocks amongst hedge funds we track in our portfolio tracking series.


#5) Corporate cash flow beneficiaries: BofA Merrill thinks that large cash piles will be deployed in the form of M&A, dividends, and capital spending.

Ideas: Companies that will benefit from capital spending, including temporary staffing companies and the industrial sector. They also like small caps in the sectors of health care and technology.

Avoid: Auto and airline industry equities. Also be wary of corporate bonds of lower-rated issuers.


#6) Rising global growth: For this theme they cite global policy stimulus as well as higher capex obviously and feel the growth will be led by emerging markets.

Investment ideas: Exchange traded funds (ETFs) with exposure to both US and European cyclical plays (large cap industrials and materials). They also suggest mega cap multinational companies.

Avoid: They say to avoid domestic industries/sectors such as telecom, healthcare, as well as consumer discretionary.


#7) The emerging market consumer: This potential theme can be attributed to higher savings rates in other countries as well as the revaluation of the RMB in China which they claim will make the Chinese "5% richer."

Ideas: Asian banks, mega-cap multinational plays as well as emerging market forex versus the US dollar.

Avoid: Discretionary stocks in developed markets.


#8) Commodity price inflation: While we have already seen strong signs of this occurring, they feel the theme plays into 2010 due to emerging market demand strength as well as supply constraints. As far as gold is concerned, they argue that diversification in reserve currency by other central banks (particularly in emerging markets) should yield higher gold prices. Gold has been a hot topic as of late with its notable price ascension. Famous hedge fund manager John Paulson is now banking on inflation and betting against the US dollar via his new gold fund which we examined in-depth.

Investment ideas: Exchange traded funds (ETFs) with exposure to gold or global energy stocks; High quality diversified miners, commodity exporters.

Avoid: Automakers, airlines, and consumer durables.


#9) The return of active management: They feel a decrease in market volatility will see "greater differentiation in asset price performance."

Ideas: Actively managed funds and high quality stocks.

Avoid: Benchmark weightings.


#10) Alternative energy: Apparently this theme will be back with a vengeance after falling out of the spotlight when oil prices crashed down from record highs. Bank of America Merrill Lynch believes that this is a long-term secular theme and that emerging market trends will help fuel this growth. Obviously, higher oil prices will drive further investment into alternatives as well.

Investment ideas: Exchange traded funds (ETFs) that give you exposure to the vast spectrum of alternatives (wind, solar, nuclear, etc).

Avoid: Utilities and 'old energy' equities.


So there you have it, quite an interesting list of potential themes. We'll have to see if the vast majority of them play out, because we've already seen signs of a few of them. For more 'top 10' lists worth checking out, head over to our post on the top ten stocks owned by hedge funds.