New market thoughts from Raymond James’ Jeff Saut: “Secular Bull Market Redux” 12/01/17

“In secular bull markets most of the surprises come on the upside!”
. . . An old stock market “saw” from the early 1900s
It’s really kind of weird to google a phrase and have the phrase attributed to you. That’s what happened last night when I googled, “In secular bull markets most of the surprises come on the upside!” The prose that came back read:
“‘Morning Tack’ by Jeffrey Saut 6-2-17
‘In secular bull markets most of the surprises come on the upside’ is an old stock market ‘saw’ from the early 1900s. Having lived through two secular bull markets, in 54 years of investing and nearly 47 years in this business, this axiom has stood the test of time. So yesterday was another one of those bull market upside surprises. As readers of these missives know, last Thursday our short-term model ‘spoke’, suggesting the next few weeks of trading would be relatively flat as the stock market’s internal energy gets rebuilt for another leg to the upside. And, that ‘call’ looked pretty good up until yesterday’s rally. In [our] defense, we did write in last Friday’s Morning Tack, as well as communicate in our verbal comments, that: ‘Currently, we believe a trading high is due here with a subsequent ‘hover’ around the recent highs in the offing over the next few weeks. Following that, if correct, there should be another whole new leg to the upside. If our near-term sideways to marginally down ‘call’ proves wrong, it should prove wrong on the downside as the markets surprise everyone by extending the current rally.'”
I have been freaked out many times by such google searches and seeing things attributed to me, but in this case it remains a truism, “In secular bull markets most of the surprises come on the upside!” That has been the case since the second leg of this secular bull market began in February 2016, and it will be a truism in the third leg. It has been especially true since the S&P 500 (SPX/2647.58) broke out in the charts above its previous all-time high in mid-September of this year.
Take the past few weeks where the SPX has tacked on nearly another 100 points. Andrew and I wish we could say we “called it,” but we have been too cautious. We did, however, write that in the ebullient month of December, it is VERY difficult to put stocks away on the downside. It can happen, but it is pretty rare.
Meanwhile, while everyone is looking for the next great tech stock, I am pruning the most hated industry group out there, namely the midstream Master Limited Partnership (MLP). I have been too early on some of my purchases of the MLPs, but the story remains that they are cheap, have decent yields, and are a hedge against the inflation that is slowly building into the economic system. Speaking to this point, we had a conversation with our friend Jerry Sullivan, who is the portfolio manager of the Putnam Multi-Cap Core Fund (PMYYX/$22.85)*, yet another mutual fund that I own (as a sidebar, I own another fund that Jerry manages, as well). What Andrew and I found particularly interesting when we asked Jerry what he is buying currently was that he responded, “I am buying some of the midstream MLPs.” He noted that the cash flows in MLPs are strong, the yields are strong, and investors are puking them up in tax loss selling season. Indeed, the midstream MLPs are definitely the most hated asset class, which in our view makes them attractive. And guess what? Yesterday it looked like the Alerian MLP Index (AMZ/262.64) made a key upside reversal in the charts.
As our friend and arguably the smartest guy in the room, namely Jason Goepfert of the must-have SentimenTrader letter fame, writes: “Big rebound in MLPs. Master limited partnerships saw major buying interest on Thursday. The Alerian MLP Total Return index enjoyed a gain of more than 4%. Coming off of a 52-week low, one-day jumps of more than 3% have been a good sign for further gains, with an average return of more than 25% over the next six months”
Given that, we dialed up the best MLP centric PM we know, namely Eric Kaufman of VE Capital, to ask “What’s the current MLP ‘deal?’ His response was, “The hedge funds that have been shorting the midstream MLPs have decided to “cover” said shorts because the valuations of that group are ‘cheap’ and the end of November is when their clients have the ability to liquidate their accounts.” I continue to invest and trade accordingly and am having a pretty good year even though we have been too cautious since August. This morning, the preopening S&P 500 futures are off some 14 points at 5:11 a.m. on fears that Senators Corker and Flake will torpedo the U.S. Senate tax bill due to the deficit focused tax-hike “trigger” plan. The Senate intends to vote today.
*The fund mentioned is only for qualified institutional investors. Including, but not limited to, employee benefit plans such as 401(k), 457 or 403(b) retirement plans and fee based accounts. See prospectus or contact fund for additional details.

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