In his latest letter, Raymond James strategist says to stop worrying about the decline of the dollar:
Back in the mid-1970s, when I was just a “pup” in this business, I went to one of my mentors and said, “Lucien, it looks to me as if the dollar is going to go down. Should I be worried about stocks if that happens?” Lucien Hooper, sitting behind his desk, lowered The Wall Street Journal just enough so that I could see his eyes and said, “Don’t worry about the declining dollar because stocks will go up enough to offset it!” Sure enough, the 28% decline in the U.S. dollar was offset by a 30% rise in the S&P 500. And that appears to be what is happening again as the U.S. Dollar Index broke to new reaction “lows” the first part of last week (basis the December Future) and stocks rallied. Worth mentioning is that despite the media’s “beating of the dollar like a rented mule,” the Dollar Index still resides above the “lows” made back in the spring and summer of 2008.
Nevertheless, the dollar’s weakness has clearly been very positive for our “stuff stocks” (precious/base-metals, agriculture, energy, cement, timber, etc.), as well as stocks in general, and we have been bullish. Most recently, we have suggested, “that with credit spreads below their pre-Lehman bankruptcy levels there should be no reason why the equity markets can’t ‘fill up’ the downside vacuum created in the charts by said bankruptcy, as can be seen in the following charts. That gives the S&P 500 an upside target of 1200 – 1250” (we include those charts again this morning). One admittedly very bright Canada-based strategist, however, took exception to my statement in last week’s Barron’s magazine. The only problem was, he got my quote wrong.
As reprised: “Picking up on a pronouncement by a chief investment officer of an investment firm that ‘we’re still at levels that are lower than we were before Lehman Brothers [went belly-up]. We’re vastly better off than we were then.” After stating a bunch of economic statistics that are worse now than back then he concluded, “If this is ‘vastly better off,’ (I) shudder to think what ‘worst off’ would look like.” Now, I don’t mind ANYONE disagreeing with me. That’s what makes a market. But, at least get the quote right! I said nothing about the economy and certainly didn’t suggest that the environment is “vastly better now than it was then.” The word “vastly” is particularly disturbing to me because it was never used, which caused one savvy seer to remark, “Why should you be upset by a strategist that completely missed the March lows and has hence been bearish all the way up?!” Of course, while people that live in “glass houses” (like me) should never “throw stones,” if that strategist wants to debate the economy I offer the following.
As for the current market, Saut is sticking by his argument that with credit-spreads now back to pre-Lehman levels, there’s no reason stocks can’t get there, too.
The call for this week: Friday’s Dubai-induced selling was exaggerated by the limited audience so that sellers sold into a vacuum. Consequently, it will be interesting to see what happens the first part of this week when “The Street” returns from its extended holiday. Still, the shortened session turned out to be a 90% Downside Day. Such days are typically followed by a three- to seven- session “throwback rally” and then participants can determine if there is more to come on the downside. Yet as the keen Lowry’s services writes, “Over Lowry’s 76 year history, no major market top has formed without being preceded by at least several months of rising Selling Pressure. But, currently, Selling Pressure has been recording new lows in a downtrend dating from the Index’s peak in March. Therefore, absent a sustained rise in Selling Pressure, the probabilities are against the formation of a major top and favour the continuation of the primary trend higher.” That said, the divergences we have cited for the past month continue to mount. Most notable has been the lagging performance of the previously market-leading small/mid-cap stocks in favour of the large caps. This is what typically happens after a “run” like we have seen because portfolio managers don’t want to “bet” their jobs, which they are not when playing the large cap universe. Over the past few months we have suggested that portfolios be tilted toward large caps for this reason.