One on One with Jeff Saut, Chief Investment Strategist at Raymond James
Monday, October 23, 2006
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SUSIE GHARIB: Our market guest tonight also agrees that the Fed is on hold when it comes to interest rate policy, and he thinks the Dow rally will peak between now and the November election. Joining us to explain, Jeff Saut, chief investment strategist at Raymond James. Hi, Jeff.
JEFFREY SAUT, CHIEF INVESTMENT STRATEGIST, RAYMOND JAMES: Good evening.
GHARIB: All right. So tell us why you think the Dow is near the top and what is the top?
SAUT: Well, these things tend it take on a life of their own, Susie and clearly the Dow has taken on a life of its own when he broke out above the old high at 11,722. My technical analyst Art Huffbridge (ph) has had a price objective on the senior index of 12,200 for the past couple months. And that feels about right to me. Also, you need to keep in mind that most of the mutual funds are ending their fiscal year at the end of this month. So the performance anxiety is at a zenith right now going into the next week or so.
GHARIB: So we did a story on Friday saying that a number of market strategists are already looking to Dow 13,000 and that it could happen by early next year. I take it you are not in that camp.
SAUT: Clearly the markets can do anything. But I am not in that camp.
GHARIB: All right. What about looking at earnings as a catalyst? We're seeing that third quarter results have been coming in pretty strong, 73 percent of them, the numbers are better than Wall Street had been expecting. Won't that keep the bull market alive?
SAUT: If you can get a P/E multiple expansion. But I am not in that camp either. I think that you have and will continue to get a P/E multiple contraction. So despite the fact that earnings are improving, I don't think Wall Street will capitalize that improving earnings strain at the same P/E ratio that they have in the past.
GHARIB: Well, some of the rally that we have been seeing has been thanks to lower gasoline and oil prices. What role will that play in future market rallies? Isn't that a positive?
SAUT: You bet it is a positive. In fact, I have argued that the whole rally since the July lows has been kicked off by a silent crash in the gasoline price. And today I took the Nymex crude oil -- excuse me, the Nymex unleaded gasoline contract and overlaid it with the industrial average and there's roughly an 88 percent correlation between the crash in gasoline prices and the rally in the Dow.
GHARIB: Tell us a little about housing. Do you think that we have seen the end of the slide in the housing prices and housing market?
SAUT: My real estate team does not. And I put them up against anybody on the planet. I think what you need to understand, however, is historically real estate has been an affect and not a cause. Back in the '70s, the cause was a rise in crude oil prices with a concurrent rise in interest rates and the effects with a crash in real estate prices. Historically, real estate has not caused the economy to spill into a recession. And to believe that that is going to happen this time, you have to believe that real estate has become so entwined in the economic fabric of the U.S. economy that this time it is going to be a cause. And I'm just not there.
GHARIB: All right, so if that is the case, than why do you think that the Federal Reserve is on hold for the next couple of meetings? You would think that the Fed would have to cut rates.
SAUT: I think the economy is stronger than the official numbers suggest. I lived in and around the DC beltway for years and I think the government has a measurement problem. And one of the figures I have come to trust is tax receipts, because people do not pay taxes unless they're doing well in terms of income. And tax receipts are running north of 11 percent. And that just does not foot with a 2 percent GDP growth figure.
GHARIB: All right, thanks a lot, Jeff.
SAUT: My pleasure.
GHARIB: We've been speaking with Jeff Saut, chief investment strategist at Raymond James.
