Eric King:  “Jeffrey, despite the pullback, I can’t help but notice that we still haven’t had 3 straight down days in the Dow during this entire run.”

Saut:  “That’s true.  In fact today marks day 112 in the buying stampede.  Previously, the longest buying stampeded chronicled in my notes of over 50 years was the 53 day march we saw to the upside in 2010.  So it’s pretty historic what’s been going on here....

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“The decline that we’ve seen from the May 22nd reversal to the 1,598 print low on the S&P, typically you would think the big winners would be the ones that have been sold for the year.  That’s not what happened.  It was the high dividend payers that have been sold.

The reason this has occurred, and it’s quite unusual by the way, is because a lot of the hedge funds in this country were borrowing at low interest rates in Japan, in yen, and then converting the yen to US dollars and buying the high dividend paying stocks on leverage.

You could buy some of these exchange traded funds that are levered 2:1 or 3:1 to the upside.  So when you buy those exchange traded funds on margin, you are actually levered 4:1 to 6:1 to the upside.  As long as the REIT’s and the MLP’s were going up, it was a double whammy.

These hedge funds were getting the appreciation of the US dollar vs the yen, and they were also getting the levered-up appreciation in the high dividend payers.  But when you got the downside reversal day on May 22nd in the equity markets, you also got an upside reversal in the yen vs the dollar.

As the yen started to rally and interest rates started to rise, these hedge funds that were levered into the high dividend payers were starting to show losses so they unwound those trades very quickly.  That’s why things like the Dow Jones utility average got hit for 10.4% in the month of May.”

Saut also added:  “If you go and look at the Barrons article that hangs on my wall dated December 17, 2007, they had the Abby Joseph Cohen’s of the world making stock market projections. 

There was a Dow Theory ‘sell signal’ on November 23rd of 2007, and yet these people appeared in Barrons the next month and Abby Cohen’s target was 1,675 on the S&P, with expected  S&P earnings of $95 by year end of 2008.  The S&P went on to close the year 2008 at 903 (a stunning 46% below her forecast), and the earnings were only $49.50 (about 48% below her forecast).

I only bring that up because my dad always taught me that if you get it directionally correct you are ahead of the crowd.  So when it comes to stocks, I believe that after the July/August swoon I am anticipating, I still think stocks will be higher by the year end. 

But I think it’s late in the game here and I’ve been raising some cash at this point.  So I am pretty cautious in the short-term and will raise more cash if we do see the rally in stocks extend higher.  It’s possible we may have already begun the decline in stocks, but I will say am more constructive in the intermediate-term to longer-term.”

Eric King:  “What about the gold market, Jeffrey?”

Saut:  “We rode the precious metals rally pretty hard (for seven years) into the Dow Theory ‘sell signal’ of November of 2007, and pared back rather dramatically on the ‘stuff stocks’ at that juncture.

But I think that with the carnage which has occurred in the precious metals complex that we are in the process of trying to make a low in here and stage a throwback rally.  But it’s possible that it may take a while to base-build in the precious metals complex before we see the next leg higher.”

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Eric King

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