Raymond James’ Jeff Saut offers his take on the recent market action:

As for the “here and now,” we have deemed the recent performance by the major
market indices to be somewhat “unnatural.” Markets typically go up, correct by
25%, and then re-rally if they are going to trade higher.

This, ladies and gentlemen, has not been the case recently as the averages have “unnaturally”
vaulted higher without so much as ANY correction. We have suggested this
phenomena was triggered by Goldman Sachs’ re-weighting of its much
institutionally indexed commodity index last July
. Why Goldman would
mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a
gasoline-centric economy, and stage those reductions incrementally right into
the November elections is a mystery to us, but there you have it.

Following that, the Department of Energy mysteriously said it would not add
to the Strategic Petroleum Reserve (SPR) until after the winter months, even
though the SPR was below prudent norms
. This is also a mystery to us, but once
again there you have it.

Then, when it looked like the equity markets were
set-up to correct (read: decline) in mid-October, the NYSE petitioned the SEC,
and was granted, a mysterious reduction in margin requirements for an already
over-margined hedge fund community. And that “mysterious surprise” gave the
major market indices another leg-up (read: re-rally). Again, why in the world
one would introduce more leverage into an already over-leveraged hedge fund
is a mystery to us!

Also mystical is why every time the equity markets
look like they are set up for a downside correction, do “buyers from Mars”
appear in the futures markets to prevent a decline? We have documented such
occurrences in past missives where those “mysterious buyers” have shown up at
6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22
points) in a mere two minutes, but that is a discussion for another time.

The current unnatural state of the equity markets continues to leave us
cautious; although we have learned the hard way it is difficult to “break” the
equity markets to the downside during the ebullient month of December.
Consequently, our sense is that the markets will consolidate here and then
attempt to trade higher into year-end. If the S&P 500 can vault above 1415,
with conviction, we can see near-term objectives into the 1440 – 1445 level.
While we are disinclined to play the indexes on a trading basis, we have
purchased some stocks recently in investment accounts. (emphasis added)

Jeff has been around a long time, has a great track record, and is a wizened Market observer. When someone like him says that market action is unnatural, its worth considering . . .


“Dr. Doom”
Jeffrey Saut
Investment Strategy
Raymond James & Associates, December 11, 2006

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What's been said:

Discussions found on the web:
  1. weezielovesmoonpies commented on Dec 12

    Ooooh, vast right-wing conspiracies everywhere…Really Barry, you’re usually one of the best finance bloggers out there, so I’m surprised that you buy into this bizarre GS commodity index re-weighting conspiracy. Shame on you.

  2. Barry Ritholtz commented on Dec 12


    Tell me what is inaccurate about this para:

    “We have suggested this phenomena was triggered by Goldman Sachs’ re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it.”

  3. Barry Ritholtz commented on Dec 12

    Also, Richard Bernstein has forever been a bear, and he is throwing in the towel on bear side today at Merrill.

    Is that more likely to be bullish or bearish ?

  4. ECONOMISTA NON GRATA commented on Dec 12

    Oh well I missed this rally and I’ll probably miss the next one as well… Conspiracy or not, I’ve been around the block a couple of times in this neighborhood and I do not like what I’m seeing. Who knows, perhaps those chaps that predicted “DOW 36,000” will be proven right.

    The only thing I am certain of is, that when the music stops I’m going to have a chair to sit on.

    Best regards,


  5. GerryL commented on Dec 12

    I have seen Jeffrey Saut on CNBC and he is obviously a very smart man. However, it seems to me that he has obviously been wrong lately and needs to explain to his clients why he was wrong. Everybody is wrong sometime.

    Also, wasnt all of this market levitation supposed to end after the election?

  6. S commented on Dec 12

    When Roubini throws in the towel, that will be the proverbial last bear turnubg bullish.

    It seems like I recall Merrill bagging a market strategist who had been bearish too soon before the bubble burst. Maybe Bernstein is thinking about job security.

  7. my1 commented on Dec 12


    Conspiracy theories are usually those that are all speculative without fact nor reasoning to back them up.

    These market manipulations however – epsecially derivatives – will come to light.

    I just finished watching “Enron: The smartest guys in the room”. Its a momentum game, it starts small and then gains speed until it is uncontrollable and will only collapse under its own pressure. Amaranth was just the warning.

    Once again, you can’t only cap the bottom expecting these “unnatural” markets to go on forver.

  8. tjofpa commented on Dec 12

    Some more for the list;

    -)The UnNat RECORD $115 bil net cap inflow in Aug.
    -)Which was used to buy up some MBS that nobody wanted heading into an obvious housing down turn.
    -) Which resulted in an UnNat 25% gain in FNMA
    -) and an even more UnNat gain in the Housing stocks

  9. Donaldo commented on Dec 12

    Weezie comes across as the type of person who paints anybody with a little
    skepticism as a conspiracy theorist. Let me remind you, a little skepticism is
    healthy and infact essential in any community. If we were a little skeptical
    collectively in march 2003, we probably wouldn’t be reading the baker-hamilton
    report today.

    Changing the weighting of the index might not be a conspiracy though
    it’s hard not to let that thought cross your mind. And changing it right into the
    elections does lend some weight to arguments about it being a conspiracy.
    But Goldman hasn’t explained why they did it. Did you notice their trading profits
    increased 50%?

    Btw did Richard Bernstein throw in the towel to make it a great contrarian call? :)
    I wonder if he’s also shorted stocks at the same time :) I’m sure he would disclose
    that. No suggestions of a conspiracy here :)

    Barry, can you post the link to Richard’s missive?

  10. Leisa commented on Dec 12

    I make it a point to read J. Saut. “However, it seems to me that he has obviously been wrong lately and needs to explain to his clients why he was wrong. Everybody is wrong sometime.” I think that in Saut’s letter he is pretty straightforward about his position–explanatory with an appropriate amount of contrition.

    What I’ve come to learn is that NO ONE knows what this market is going to do. Educated guesses. Yes. Complete certitude. Nope. What was the track record of the big houses on their investment picks? I think that it was in the 40-45% range.

  11. GerryL commented on Dec 12


    Where do you see contrition in his letter? I just see where he gave up and bought some stocks.

  12. Bob A commented on Dec 12

    Hey he also took off for vacation before the election confident the Republicans would remain in control of the House and Senate… However…. on the subject of the market… I’m in full agreement!

  13. vegaman commented on Dec 12

    This stuff about SPX minis jumping 22 points in Globex in two minutes is not a big deal, if you look at the chart the market settled right back down to where it started by the open, so it had zero market impact. What you must understand is that overnight (US Time) the order book gets really thin and it is a piece of cake triggering a stop, or an automated program makes an error ramping the market. The SPX minis are so thin in Europe its not uncommon to see market makers push it around to influence large orders in underlying US stocks. One of those probably happens in the electronic markets at least once a year, although they are becoming less frequent as participants put more error traps in their automated software. The other consiparcy stuff I refuse to comment on !!

  14. BDG123 commented on Dec 12

    Is Bernstein really throwing in the towel? I heard that along with the same statement about both him and Roach from a few people six or so months ago when all he did was take 10% of his allocation and split it with 5% going into two other allocations. I believe it was adding 5% to equities and 5% to cash from a reduction of 10% in bonds. Or maybe it was 5% equities and 5% bonds from a reduction in cash. Hardly bullish given his equity allocation at the time.

    Until I saw Bernstein’s own words that he had become exhuberantly bullish, I’d say people are misinterpreting anything he says/

  15. Mike M commented on Dec 12

    Merrill Lynch is calling for a 12% gain in the S&P for 2007. Sounds like everybody else: They anticipate poor economic growth leading to a rate cut, leading to higher multiples and profit margins, leading to economic euphoria, leading to another productivity miracle, leading to the end of all disease, pestilence and ill will towards Alan Greenspan.

  16. Vega commented on Dec 12

    UBS canned Gail Dudack not to long before the NAZ cratered.

    Barry, awesome site re-design.

    If anyone is interested, Piscataqua Research has an interesting piece on their site: “The Consumer Crunch.” Gotta register to read it, but the analysis is worth it.

  17. TJR commented on Dec 12

    I also follow Saut and appreciate his market insights, but I find this statement to be disingenuous. I read this as “I was bearish but the market went up. My clients underperformed and now they are angry. I now will buy stocks after a big runup. I was wrong but it wasn’t my fault.”

    His statement implies that it has only been through manipulation that the market has risen, ignoring rational and nonconspiratorial factors that have supported to the upside. This would include a massive amount of liquidity worldwide leading to gains in indexes around the world, and private equity buyouts that have just crushed shortsellers and upped expectations of positive equity returns.

    Regarding manipulation of the energy markets, GS’s explanation of their change in weighting is here:http://www2.goldmansachs.com/gsci/articles/gsci_060816200238.html. Take it for what its worth. It was released in JUNE, and at least some of its effects could and should have been anticipated.

    Finally, is it any surprise that political manipulation of the markets may have been attempted at this point of the Presidential cycle? Factors such as money supply, margin requirements, and SPR balances have been prone to manipulation in election years for decades. We don’t like it but it happens and it is necessary to prepare for it.

  18. DD commented on Dec 12

    this goldman re-indexing is really sticking. I read somewere that they were simply moving away from the old gasoline contracts into a new ethonal blended contract…if that makes sense…

  19. Leisa commented on Dec 12


    Contrition in broadcast. But don’t look for much, for I don’t think that he owes much.

  20. weezielovesmoonpies commented on Dec 12

    Sorry I wasn’t more specific about my objection…

    First let me state that I am in 100% agreement about the “unnaturalness” of this market. And it’s certainly likely that at least some of this unnaturalness arises from short-term manipulations by large players such as GS for their own gain.

    But Saut’s comments–specifically, that GS staged reductions “incrementally right into the November elections”–suggest a larger, more sinister political conspiracy, the type of thing I might expect to read about on the Daily Kos.

    This conspiracy theory was put forth by Tim Iacono and amplified in the Big Picture on 10/31/2006 as “intereference [sic] in the political process.”

    My point is that I don’t think we need to invoke Dick Cheney or Karl Rove to explain the “unnaturalness”…

  21. Cherry commented on Dec 12

    This isn’t a “impressive” rally at all. Nice 1000 point correction and you back below 2000(which we still are now in reality).

    Buy the myth, you become the myth. By the way, why would Roubini “throw in the towel”? He has been talking about this rally lasting in January when it turns.

  22. brion commented on Dec 12

    but it really doesn’t get much more unnatural than Dick Cheney or Karl Rove now does it? Does it?

    When Congress is bought (and paid for) by Corporate largesse and 90% of it funneled down the elephant’s maw….
    When we had the country so recently “improved” by ONE PARTY RULE….what do you expect?

    When you know what side your bread is buttered on, the mid term elections are THE time to make it all happen….What is so hard to understand about this?

  23. Fred commented on Dec 12

    “This isn’t a “impressive” rally at all. Nice 1000 point correction and you back below 2000(which we still are now in reality).”

    Oh my……denial isn’t a river in Egypt.

  24. Jim M commented on Dec 12

    Folks, remember what they said about people who thought there was “unnatural” action in the California energy markets in 2000-01? Right. A bunch of nutty left-wing conspiracy theorists.
    And then we heard the tapes.
    Grandma Millie probably isn’t a reader of this blog, but if she were….

  25. Barry Ritholtz commented on Dec 12

    This has been a VERY impressive rally, from the July lows to the recent peaks.

    Nasdaq: 2014 – 2467
    SPX 1231 – 1415
    Dow 10,701 – 12342

    I don’t see how you can look at those gains over only 6 months and describe them in any way other than impressive!

  26. alexd commented on Dec 12

    Why do I have to say it?

    Designate the time period your are refering to when you are talking about gains or losses in a market. Perhaps you could also indicate why you chose that time period. It is really easy to tailor the information to prove a point. The mututal fund companies do this all the time when they advertise, one way or the other they will find the set of results that optimize their appearance. I hope we do not have to rely on the manipulation of salient information rather than have an objective interpetation of the results by looking at the overall environment.

    Obviously the % up or down out of context can be illusive since the short term market could be folding while the 3 year results could look good. I do not think that most here would disagree that clarity on the trends in a market is desirable.

  27. Max commented on Dec 12

    “This has been a VERY impressive rally, from the July lows to the recent peaks.”

    And why you think this particular rally is important, and by extension – unnatural?

    There were no rallies like this before?

  28. Gary commented on Dec 12

    Seems like normal topping action for a bull that is very long in the tooth. Market sentiment has become extremely bullish after 6 uplegs, complacency is very high. This kind of action does tend to make investors feel like there can never be another bear. Wait a minute didn’t we all feel this way in March of 2000 also?

  29. my1 commented on Dec 12

    Funny, looking things over now together with everyone’s comments, it seems that the markets are natural.

    Once again, have a look at the Dow during the years 1969-1972. We had an amazing run from about 650 to 1050 (!) only to realize that it we were in a bear market since a much earlier 1965.

    Add in Rubini’s Pre-recession “Sucker’s Rally” theory and we have a perfect historical match.

  30. Gary commented on Dec 12

    My point exactly. For the last 3 1/2 years every time the S&P futures have reached an extreme short level a sell off eventually follows. We are at an extreme level at this time. Conversely everytime the futures have reached a fairly long position we have had a rally. The futures were long (in the context of the 6 1/2 year ongoing secular bear market) in Aug. Nothing mysterious about the action. When the big boys get long the market goes up, when they get short the market goes down. One caveat: Ever since March 2000 the commercials have had a negative bias other than a short time from Mar. 03 to July 03 which leads one to conclude that the smartest traders would tend to believe we are still in an overall secular bear market. As opposed to the positive bias they had from 86-00 which we all know was the greastest secular bull market in history. Now who would have thought that a secular bear market would follow a secular bull?????

  31. Mark commented on Dec 12

    Bernstein throwing in the towel is very bearish, look out below (eventually)

    and regarding those “mysterious” overnight futures buyers, i thought they were supposed to dry up after the elections or are they still up to their shenanigans? or was just a completely flaky premise to begin with

  32. Ivan commented on Dec 12

    Don’t know for sure whether this rally is “un-natural” or not. But I’ve selling stocks and going long on bonds for a few months now…

  33. blam commented on Dec 12

    Jeff Saut has done extremely well over the past three years I have followed him and is no cassandra.

    Sticking with the market over the past six months was the winning hand. Was it genius or dumb luck ? Only time will tell.

    Today’s crows may be tomorrows pigeons. I won’t be buying their stock any time soon.

  34. HerbieS commented on Dec 12

    The markets action is only unnatural to those that missed the rally and even more so to those that are short through this run. What i cant understand is why the CIA was bugging princess diana’s cell phone and do you really not think they might have been involved in that accident? This conspiracy dynamic is fascinating.

  35. HerbieS commented on Dec 12

    My wife asked me how I was doing in the market and I told her not very well since i was shorting the market all the way from August. He asked me how much our account was down and I told her. “But honey,” I said, “its not my fault, the market is being manipulated by the republicans, the fed and the treasury and by some mysterious overnight futures buyers.” I started telling her about all the GS ex-employees working in the Whitehouse and at the Fed NYC market rigging post…a guy named Dudley… She said, “Dear, I think its time you take a break.” I said, “What? what are you crazy? Don’t you understand?”

  36. Richard commented on Dec 12

    i’ve given up trying to use logic to dictate where this market should go hence earlier in the year i decided to play the diversification game and go 65% stocks, 10% bonds and 25% cash earning ~5% in 7-day commercial paper. while i didn’t do as well as if i was more weighted in stocks i’ve made decent returns all while protecting myself on the downside in case the bear shut his trap.

  37. My1 commented on Dec 13

    I’m no maven in futures markets, but wouldn’t an extreme short mean that many will still have to buy back their stocks soon, or will they wait till a down-trend and then we’ll see that spike that follows almost every major decline we’ve had in history. (Same question for extreme longs).

  38. Gary commented on Dec 13

    I tend to think that the commercials play the regression to the mean game while the spec’s are trend followers. So yes at some point the commercials will buy back their shorts. However they are very well capitalized and tend to add to positions as the market goes against them instead of covering. They also don’t trade on emotion unlike the smaller players so they are content to keep building their positions. At some point I suspect we will get the second leg down in this bear market and the commercials won’t cover their shorts but will continue to press the short side as the market drops. They will cover when the market gets totally washed out and everyone else is selling. That will be a tough time to buy but it will also be the right time to buy. Now is not that time.

  39. My1 commented on Dec 13

    Thanks, Interesting.

  40. jjr commented on Dec 13

    I’d like to correct a few fallacies that have cropped up here.

    Anyone throwing a criticism at Jeff Saut such as, “it seems to me that he has obviously been wrong lately and needs to explain to his clients why he was wrong,” obviously has not paid much attention to Saut. I’m not a client of his, but I have lingered and paid attention to what he’s had to say for the past few years. Anyone following his general themes would be hard-pressed to underperform in this market. I don’t pay too much attention to his specific picks, so I can’t vouch for the particulars. I do know that the “stuff stocks” as he calls them have been a fine multi-year investment. He’s been banging the drum on water (H2O) as an investment for years, and I fail to see how that is or will be a bad call.

    Secondly, there seems to be this misconception that there is some sort of monolithic block of “shorts” out there who lose money in general market rallies and make it in declines. Let me disabuse you readers of this notion right now. Perhaps there are some short-sellers who stick to the major indexes or their proxies. However, in my experience there are as many strategies for short selling as there are short-sellers.

    My own personal strategy is what could be called long-short. I have maybe a dozen long positions in decidedly undervalued (or at least they were when I was accumulating) stocks in strong sectors. These are counter-balanced by not quite as many short positions in grossly overvalued stocks in bad sectors. I’m pushing near my highs of the year right now, and have well over a 50% market return for 2006.

    I know other predominantly short-sellers who claim over 100% market returns in 2006, and I believe it. They’ve had to alter their strategies these past few months and make quick in-out type trades in highflying POSes like EFUT and such. Yet other short-sellers I know were pushing 100% in August, and have given back half their gains for the year since then.

    My point being that there is no generic short-seller, and smart traders alter their tactics to the market they’re in. Nevertheless, it has been possible to seriously outperform the indexes and put up dazzling numbers in 2006 completely from the short side. My anticipation is that it’s going to be a whole lot easier in 2007.

  41. Eclectic commented on Dec 13

    per Barry:

    “This has been a VERY impressive rally, from the July lows to the recent peaks.”

    …absolutely correct.

    However, it would be just as correct, philosophically, to subsequently congratulate a person that had been advised not to play Russian Roulette (even with just one bullet in the chamber), but instead had not taken the advice and had played anyway… and won.

    The question now for the successful Russian Roulette player is: “Now, what do you do for an encore?… spin again?”

    Put another way; when one rolls dice, after the fact do the dice care how they fell, and, in so caring, do they become intentioned to fall again in the same manner?

  42. Bill commented on Dec 15

    Repeat after me. The market is always right…

    Excuses and conspiracy theories are for losers. If you call yourself a trader or a market strategist or whatever, and you missed this entire rally (or even worse shorted into it), then you need to take a good hard look at what you are doing wrong and try to fix it, instead of complaing that the market is unnatural and whining about super-secret market manipulation crap. Really this nonsense sounds like something straight out of an Oliver Stone movie, not something I would expect to read on an A-list financial blog.

  43. Chris commented on Dec 18

    What did GS reweight into? How can a conclusion be made without knowing? Was it into corn oil. That would be different than, say, into iron ore or nickle.
    Cheers, Chris

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