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Jeff-Saut-Gleanings Powered By Docstoc
					                                                                                                     Investment Strategy
                                                                                                      Published by Raymond James & Associates

Jeffrey Saut, Chief Investment Strategist, (727) 567-2644,
Art Huprich, CMT, Chief Market Technician, (727) 567-2494,                        October 9, 2012
Scott J. Brown, Ph.D., Chief Economist, (727) 567-2603,

 A Monthly Chart Presentation and Discussion Pulling Together the Separate Disciplines of
 Economics, Fundamentals, Technical Analysis, and Quantitative Analysis
 •    The rally that began with Mario Draghi’s “put option” to do whatever is needed to bail out Euroland has
      paused. The question now is - is this the pause that refreshes, or the calm before the storm? Our sense is
      that this is the pause that refreshes, as more clarity will come following the presidential election, which
      has caused businesses to step to the sidelines until after November 6th. No wonder the economic
      statistics have stalled.
 •    The main reason for our overall equity optimism is the open-ended central bank’s “put
      option,” QE3.
 •    The Fed says it is targeting mortgage rates with QE3, but also has an eye on equity prices
      on the belief that rising home prices and equity prices will increase confidence and foster more consumer
      spending. We agree.
  Please read domestic and foreign disclosure/risk information and Analyst Certification beginning on slide 28.

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Jeffrey Saut

   The Fed is Targeting Mortgage Rates and, Unsurprisingly, 30-Year
 Mortgage Rates Have Declined to a Recent Generational Low of 3.38%
Before Experiencing a Slight Uptick. Obviously This is Helping Housing.

                                                                               Average Mortgage Rates: 1986 - Present




                                                                                                       26 Year Avg.
                            8.6%                                                                   Mortgage Rate = 7.3%
           Mortgage Rates


                                                                                                                                                                          Current Rates = 3.7%


                            5.6%                                                    Rates Trough in 1993

                                                                                                                   Rates Reach Cycle
                            4.6%                                                                                      Low in 2003



                                    '86   '87   '88   '89   '90   '91   '92   '93    '94   '95   '96   '97   '98    '99   '00   '01   '02   '03   '04   '05   '06   '07   '08   '09   '10   '11   '12

                                                                                       Recession                   1986 - Present                 Historical Average

                                                                                    Source: Raymond James Research

Jeffrey Saut

The 30-Year Mortgage-Backed Security Divided by the 10-year Treasury
 Spread Has Also Collapsed to Generational Lows, Suggesting Mortgage
       Rates Will Go Even Lower. Another Tailwind for Housing.
               % SPREAD

                          Source: Bloomberg and Raymond James research.

Jeffrey Saut

Plainly, the Aforementioned “Mortgage Duo” is Bolstering Annualized
Existing Home Sales, Which Continue to Accelerate. Reinforcing That
View is the University of Michigan “Good Time to Buy a House” Survey,
              Which Recorded a Nine -Year High Recently.






                      1989   1991   1993   1995   1997   1999   2001   2003     2005   2007   2009   2011
                                       Source: Raymond James Research/FactSet

Jeffrey Saut

    Pricing is Also Improving: Existing Home Prices: 1990 – 2012
                                                     (Trailing 12-Month Average)

                   $240,000                                                                                    25%

                   $220,000                                                                                    20%
                                                 Existing Home Prices Inching Higher
                   $200,000                                                                                    15%

                                                                                                                      Y/Y % Change
    Median Price

                   $120,000                                                                                    -10%
                   $100,000                                                                                    -15%
                    $80,000                                                                                    -20%
                             1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

                                       Source: National Realtors Association and Raymond James research.

    •              On a trailing 12-month basis, the existing home median price is up 1.0% y/y (depicted in chart).
    •              The data points continue to trend better. The median existing home sale price rose 9.4% y/y in July, due to
                   fewer distressed sales and higher demand from “move-up” and luxury buyers.

Jeffrey Saut

 With Housing’s Improvement, and a Friendly Fed Buying MBSs, Bank
Stocks Have Been on a Tear, as Reflected in the KBW Bank Index (BKX).
    PHLX KBW Bank Index (24 Leading Banks) (BKXK)
    Price (USD)





0                                                                                                                       30
      Oct          Nov          Dec              Jan   Feb   Mar   Apr   May   Jun   Jul   Aug         Sep
        PHLX KBW Bank Index (24 Leading Banks)
                                                                                                 Source: FactSet Prices

Jeffrey Saut

    We Think the Environment for Financial Institutions is Going to
               Continue to be Driven by These Metrics:

      1. Valuation - Group is at the low end of the valuation range looking at the last 20 years or
      so. The big reason is trust. Investors don't trust the earnings or the balance sheets
      (book). This is where the regulatory process comes in - it will improve trust over time.

      2. Balance sheet cleanup ongoing - All financial institutions are working hard to improve
      the quality and stability of their balance sheets. This means making good new loans and
      cleaning up the bad old ones. Eventually the entire balance sheet will be made up of loans
      that have been originated in the more conservative environment (last five years). This out
      with the old and in with the new effort will allow for more consistent and predictable
      earnings and book value growth.

      3. Residential housing is stabilizing - One of the most important developments thus
      far. The decline in housing created the recession and the improvement in housing will lead
      to recovery.

Jeffrey Saut

                    Our Fundamental Bank Analysts
                       Agree With That Premise

        “We expect the vast majority of banks to meet or beat the Street mean estimate
        for 3Q12; however, any EPS adjustments for 2013 will likely be downward due
        to continued net interest margin (NIM) concerns. Although we expect
        commercial loan growth, lower deposit costs, liquidity deployment, and debt
        refinancing to help mitigate some of the NIM pressure, we believe banks are
        quickly realizing most of these benefits as revenue growth headwinds persist.
        Assuming economic data and investor sentiment do not materially improve,
        low interest rates are expected to persist well into 2014. M&A activity remains
        a key wild card and this challenging operating environment, coupled with
        increased regulatory burden, should eventually drive a pickup in merger
        activity. However, in our view, a tepid economic recovery, uncertainty
        regarding capital requirements, and a wide gap between seller/buyer
        expectations have delayed what many anticipate will be a wave of
        consolidation.” – Raymond James Banking Team

Jeffrey Saut

   While There are Many Individual Bank Stocks in Raymond James’
  Research Universe With Favorable Ratings From Our Fundamental
Analysts (Consult Your Financial Advisor), One of My Preferred Ways to
      Get More Exposer to the Banking Complex is Using FBRSX

               FBR Small Cap Financial Fund (FBRSX). The fund employs
               a consistent fundamental, bottom-up investment process
               to identify small-cap financial services companies that
               meet the strict criteria necessary for inclusion in the
               portfolio. Emphasis is on attractive valuations based on
               traditional industry relative value measures. The net
               result is a diversified portfolio of financial companies that
               aims to provide shareholders with conservative exposure
               to the financial services industry. The fund is captained by
               David Ellison, who I met some 30 years ago. As testament
               to his expertise, David raised 40% cash in the 1Q08.
               Clearly, my kind of investor.

  Scott Brown

Inflation-Adjusted Consumer Spending (70% of Gross Domestic Product)
  Has Continued to Trend at a Moderate Pace, Supported by Job Growth.

 Scott Brown
     Replacement Needs (an Aging Fleet) and Easier Bank Credit Have
          Supported an Improving Trend in Motor Vehicle Sales.

  Scott Brown
Home Sales and Construction Activity are Up by Double-Digit Percentages
 From a Year Ago. Housing Has Turned the Corner, but a Full Recovery is
                           Still Years Away.

  Scott Brown
  The Decline in Home Prices Has Been a Drag on Consumer Spending
(Through the Wealth Effect), but Prices Have Begun to Turn Up This Year.
         Home Price Index Value

 Scott Brown

     Private-Sector Job Growth Has Been Moderate, Consistent With
       Population Growth, but Not Making Up Much of the Ground
                  That Was Lost During the Downturn.

 Scott Brown

     Based On Unemployment Insurance Tax Records, the Benchmark
     Revision to March 2012 Private-Sector Payrolls (to be Applied In
                 February 2013) Will Be About +453,000.

 Scott Brown

     On September 13, citing concern about the pace of recovery in the labor market,
     Federal Reserve policymakers:

     1. Extended its forward guidance on short-term interest rates (“the Committee
     anticipates that exceptionally low levels for the federal funds rate are likely to be
     warranted at least through mid-2015.”)

     2. Launched a third Large-Scale Asset Purchase program (“QE3”) – the Fed will
     purchase $40 billion per month in mortgage-backed securities with no set
     ending date and “if the outlook for the labor market does not improve
     substantially, the Committee will continue its purchases of agency mortgage-
     backed securities, undertake additional asset purchases, and employ its other
     policy tools as appropriate until such improvement is achieved in a context of price

     In his post-meeting press briefing, Chairman Bernanke said that these moves
     should put downward pressure on long-term interest rates. He added that while
     the Fed cannot solve all of the economy’s problems, it is obliged to do what it can
     to support economic growth and labor market improvement.

 Scott Brown
     The Fed’s Actions Should Help Keep Long-Term Interest Rates
       Low, Providing Further Support for the Housing Sector by
            Encouraging Home Purchases and Refinancing.

 Scott Brown
 Ex-Food & Energy, the PCE Price Index is Trending Below the Fed’s 2%
Target. Other Measures of Core Inflation Have Also Been Drifting Lower.

 Scott Brown
With a Large Amount of Slack in the Labor Market, the Widest Channel
for Inflation Pressure, the Underlying Trend in Inflation is Expected to
                         Remain Relatively Low.

 Scott Brown

     Economic Outlook: Real GDP growth of around 1.5% to 2.0% in the near term, but 2013
     depends on how much of the fiscal cliff is postponed.
     •   Economic Headwinds
           – Housing (negative wealth effect on spending, but easing as home prices rise)
           – Global slowdown (Europe, China)
           – Tight credit for some borrowers
           – Contractionary fiscal policy at all levels of government
     •   Economic Tailwinds
           – Accommodative monetary policy
           – Homebuilding
           – Autos
     •   Economic Wildcards
           – Gasoline prices
           – The election
     •   Economic Risks
           –   Europe
           –   Fiscal cliff (Bush-era tax cuts, payroll tax reduction, spending cuts)
           –   Debt ceiling (to be reached around the end of the year)

   Art Huprich
  Consistent With the Following Statement on Page 1 of This Report: “The Main Reason for Our
Overall Equity Optimism is the Open-Ended Central Bank’s ‘Put Option,’” QE3. We Can See That the
S&P 500 has Reacted Favorably During Previous Periods of “QE” Type Activity. While the Size of
    This Move May Be Different, Nothing Suggests the Direction (Higher) Will Be Different.
                                             Fed's QE & The S&P 500
                S&P 500

                                                  QE 1 Ends                                                               1,600

                                                                                                                S&P 500

                                                                       QE 2 Ends

                                                                                                           QE 3

                                                                                                                                  S&P 500

                                                          POMO &                                       Bernanke
                                                                                                     Jackson Hole         1,000

                                                                                                 Draghi w ill
                                                                                                 save Euro

                                                                                     Fed extends
                                                                                     Twist 6/20/12
                                QE 1

                          '08          '09                '10               '11                      '12
                                                                                                 ©FactSet Research Systems

                                               Source: FactSet Research System

 Art Huprich
Additionally, and While I View Seasonality Factors as Secondary Indicators,
  Behind Price and Volume Indicators, the “Calendar” Has Moved Into a
     Historical “Sweet Spot” Relative to the DJIA’s Price Performance.
               % of Change
                     % of Change

                                   Source: Bespoke

  Art Huprich
  Besides a “Bernanke Put,” as Defined by Global Quantitative Easing (QE), and the Favorable
Seasonal Factor Highlighted on the Previous Page, if the Election Year Cycle Plays Out Anywhere
Close to History, a “Performance Put” Will Exist, and Likely Back Stop Any Major Declines Going
                                        Into Year-End.

                                                                            Current Year % Gain
                   Historic % Gain

                                           Source: Bespoke

   Art Huprich
If I Combine the Following Statements From Earlier in This Report: We Think the Environment for
  Financial Institutions is Going to Continue... “ and “With Housing’s Improvement, and a Friendly
  Fed Buying MBSs, Bank Stocks Have Been on a Tear...” I Think the Charts on the Next Two Pages
                          Suggest Having Exposure in the Financial Sector.
               Financials vs. S&P 500                                             Relative Strength
               04-Oct-2011 to 04-Oct-2012 (Daily)








               Oct    Nov    Dec     Jan    Feb     Mar   Apr   May   Jun   Jul      Aug    Sep
                     S&P 500 / Financials -SEC
                                                                                  Source: FactSet Prices

 Art Huprich
Selective Exposure Within the Financial Complex Makes Sense, Given the Chart Below.

           iShares DJ US Financial Services Index Fund vs. Peers
           Indexed Price Performance                                                                          Price (Indexed to 100)









                Jan            Feb      Mar        Apr         May            Jun         Jul           Aug             Sep
                iShares DJ US Financial Services Index Fund        iShares DJ US Insurance Index Fund
                                                                                                                  Source: FactSet Prices

Art Huprich
 Consistent With Jeff’s Favorable Comments About the Housing complex and Scott’s Insights
Relative to Long-Term Interest Rates and Their Effect on the Housing Sector, Shown Below are
   Charts of the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones U.S. Home
Construction (ITB) – While Both Would Benefit From a Low-Volume Pullback or Consolidation,
                                 Each are Bullish Long-Term.
      Closing Price
      04-Oct-2005 to 04-Oct-2012 (Daily)                                                            Price (Local Currency)






                   '06                     '07        '08            '09             '10      '11                  '12
           SPDR S&P Homebuilders ETF             iShares DJ US Home Construction Index Fund
                                                                                                        Source: FactSet Prices

  Art Huprich
   Evidence Confirming Scott’s Comments That “Inflation-Adjusted Consumer Spending...Has
Continued to Trend at a Moderate Pace,” Can Be Seen Via the Bullishly Configured Price Trend of
                           the S&P Consumer Discretionary Sector.
               Closing Price
               04-Oct-2011 to 04-Oct-2012 (Daily)                            Price (Local Currency)







               Oct    Nov    Dec    Jan     Feb     Mar    Apr   May   Jun     Jul      Aug    Sep
                     S&P 500 / Consumer Discretionary -SEC
                                                                                     Source: FactSet Prices

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