“Our friend Percy Wong of Bank of America recently observed that the ‘only crowded trade was on the sidelines,’ which we felt summed up the current summer, and the mood amongst most of our clients, perfectly. Indeed, there is a lot to digest, what with a) fears for one's job/business following a tough past three years, b) very haphazard economic data, c) the emergence of new risks (e.g., sovereign bond risk amongst European signatures) and d) the new reality of global economic growth no longer being driven by the United States but instead by emerging markets. No wonder so many investors are looking to take cover, whether in the form of bonds (with US 2-year yields now at a record low 0.48%) for investors who believe that fiat currencies will hold their own, or gold for those more skeptical on the ability of paper money to withstand its value, even in a deflation.

1. 6363 Woodway Dr. Suite 870
Houston, TX 77057
Phone: 713-244-3030
Fax: 713-513-5669
Securities are offered through
RAYMOND JAMES
FINANCIAL SERVICES, INC.
Member FINRA / SIPC
Green Financial Group
An Independent Firm
Investment Strategy by Jeffrey Saut
Crowded Trade
August 23, 2010
“Our friend Percy Wong of Bank of America recently observed that the ‘only crowded trade was on the sidelines,’ which we felt summed up the current summer, and the
mood amongst most of our clients, perfectly. Indeed, there is a lot to digest, what with a) fears for one's job/business following a tough past three years, b) very haphazard
economic data, c) the emergence of new risks (e.g., sovereign bond risk amongst European signatures) and d) the new reality of global economic growth no longer being
driven by the United States but instead by emerging markets. No wonder so many investors are looking to take cover, whether in the form of bonds (with US 2-year yields
now at a record low 0.48%) for investors who believe that fiat currencies will hold their own, or gold for those more skeptical on the ability of paper money to withstand
its value, even in a deflation.
“But all the confusion does not mean that there are no trends out there for investors to follow. For example, the current outperformance of South East Asian bond, equity
and currency markets make fundamental sense and have yet to run their course. The same can be said for the outperformance of consumption-related stocks in China (a
trend which should be given a further boost by the renewed wave of financial deregulation in China). With its very undervalued currency, it is hard to not like Korea's
exporters and the overall Korean equity market. In Scandinavia, Switzerland and perhaps even the UK, we have governments with balance sheets that make sense or that
are in the process of improving, while local central banks will be forced to maintain very easy monetary policy if only to prevent gains against a Euro which, structurally,
should remain weak. From there, it is very possible to envisage an era of sustained outperformance of equity, bond and local currency markets. Undeniably, the overall
macro uncertainty is much higher than we would have expected at this point in the cycle. Nevertheless, this does not mean that the trades that made sense six months ago
no longer make sense today. There are alternatives to the sidelines.
...GaveKal
“Crowded trade?”... you bet; and, I have to admit I too am guilty of having a lot of cash currently. To wit, for investment accounts I have recommended having roughly

2. 20% in cash, while for trading accounts I have been pretty much on the sidelines since recommending selling all of the downside hedges in late-May and early-June. Since
then, while I have added some stocks to investment accounts, trading accounts have been relatively flat even though the McClellan Oscillator telegraphed the July rally.
That tepid trading strategy is driven by the fact my intermediate trading indicator has been in cautionary mode since the first week of May as shown in last week’s report.
Nevertheless, there are indeed alternatives to the sidelines. For example, last week one of our stocks was “bid for” as Intel (INTC/$18.91/Outperform) made an offer to
acquire computer security company MacAfee (MFE/$47.03/Market Perform). Interestingly, the same hedge fund manager that gave me MacAfee a month ago now
suggests the McAfee announcement potentially puts another of our stocks into play, namely Red Hat (RHT/$32.54/Outperform). Additionally, I was duly impressed with
how some of our stocks held up last week. Names like Walmart (WMT/$50.22/Strong Buy), Johnson & Johnson (JNJ/$58.74/Outperform), Allstate (ALL/$27.75/Strong
Buy), American Tower (AMT/$47.43/Strong Buy), etc. certainly resisted the stock market’s machinations. Yet, it is not just select stocks that afford an alternative to cash.
To be sure, I still like the idea of distressed debt. And this week I am off to Boston to meet with the good folks at Putnam, as well as a number of other institutional
accounts. Recall, I have been recommending Putnam’s Diversified Income Trust (PDINX/$8.04) for the past few months after spending an hour with Rob Bloemker, who
is the head of fixed income for the Putnam organization. With roughly a 10% yield, and duration of a little over 1 year, I think PDINX affords the potential for equity-like
return over the next few years. Surprisingly (at least to me), while Rob has his own money in PDINX, he is also buying individual stocks. He reasons that with the S&P
500’s earnings yield (earnings/price) at its widest spread to Treasuries in decades, the combination of PDINX and stocks is an attractive strategy. Obviously, I agree.
Reinforcing that strategy is this from Citigroup’s (C/$3.75/Strong Buy) Robert Buckland who found 10 prior divergences between global bond yields and stock prices. Six
times stocks were proven right, two times bonds were right. The other two times there was no clear winner.
Last week, however, participants shunned stocks, worried about the softening economic statistics as the Philadelphia Fed report was shockingly weak, while Jobless
Claims also negatively surprised. Accordingly, the S&P 500 (SPX/1071.69) failed to hold above the 38.2% Fibonacci level (~1080) I opined should hold. The failure
arrived last Thursday when the SPX fell roughly 19-points and in the process knifed through the aforementioned level. The action also allegedly triggered the second
“Hindenburg Omen” in the past two weeks. As a reminder, the five criteria (courtesy of Zero Hedge) of the Omen are as follows:
1) That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2% of total NYSE issues traded that day.
2) That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of
the 2.2% of the total issues.
3) That the New York Stock Exchange (NYSE) 10 Week moving average is rising.
4) That the McClellan Oscillator is negative on that same day.
5) That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however, it is fine for new 52 Week Lows to be more than double new 52 Week Highs).
This condition is absolutely mandatory.
The metric I keep having trouble with is the percentage of new 52-week highs and lows on the NYSE. Parsing last Thursday’s New High/New Low list, as well as August
12th’s (the alleged other Omen signal), shows the vast majority of “stocks” making new highs were interest sensitive closed-end funds, preferred stocks, or some other
kind of fixed income product, which by my pencil are not stocks. Therefore I’ll say the same thing I said two weeks ago, “I don’t think a Hindenburg Omen has been
registered; and even if it has, its track record is spotty.” What largely went unnoticed, however, was the Demark “buy signal” that was recorded by the SPX late last week.
In addition to the Demark signal, there are some other potentially encouraging developments. As stated, the McClellan Oscillator is approaching the oversold level of late
June, ditto the Capitulation Index, the SPX closed at the low-end of the Bollinger Bands that have contained decline for over a year, the NFIB Hiring Plans Index just
went into positive territory, and investors’ sentiment is bloody awful (read that as bullish). In fact, I have not seen retail investors so unwilling to talk about stocks since
the fourth quarter of 1974!
The call for this week: While in my view we have not had two Hindenburg Omen “sell signals,” we have indeed experienced two 90% Downside Days, without a single
90% Upside Day, over the past two weeks. Recall to qualify as a 90% Downside Day, down volume must exceed 90% of total Up-to-Down Volume, as well points lost
must be greater than 90% of points gained plus points lost. Nevertheless, I think it is a mistake to get too bearish here for the aforementioned reasons. I also think it is a
mistake to get too bullish. Indeed, I believe the equity markets will remain mired in the envisioned wide-swinging trading range I spoke of following the first Dow Theory
“sell signal” of September 1999. In such an environment, stock selection, combined with the ability to sell mistakes quickly, should be the key to portfolio
outperformance. Moreover, I agree with the insightful folks at GaveKal who suggest there are reasonable investment alternatives to the sidelines.