Varying bouts of economic optimism, central bank taper talk, and interest rate jitters have combined to drive stock market values in recent weeks.
Now sequestration is about to re-enter the picture, reminding investors about the U.S. debt ceiling, and potentially stopping the U.S. stock market rally in its tracks.
That’s the view of Jeffrey Saut, the veteran Raymond James Financial Inc.
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) investment strategist.
“I have been targeting mid-July as the potential for the start of the first meaningful decline of the year,’’ said Saut during a telephone interview with Stockhouse.
“I had thought that we [the Standard & Poor’s 500] had a chance of getting up above 1,700. But I don’t think that is going to happen now.’’ “I think we are going to make a double top next week, midway between 1,650 and 1,687 [on the S&P].”
He says stocks will be driven lower by commentary about the U.S. debt ceiling and talk about sequestration, a term that refers to automatic federal government spending cuts that some believe are necessary to reign in out-of control spending.
“What you are going to start hearing before U.S. Congress recesses on August 8, 2013 is about how sequestration is starting to take a bite out of the economy. You are going to see rhetoric start to heat up about the debt ceiling and the continuing resolution.’’
In addition, U.S. Federal Reserve Board Chairman Ben Bernanke is set to testify before the Congressional House Committee on July 17. The following day he will testify before the Senate Finance Committee.
“I think that could rattle some markets,’’ he said.
In addition, Saut believes the second quarter earnings season will deliver some unpleasant surprises.
“In the first quarter, 58% of the S&P Composite 1,500 companies beat their estimates. But only 52% beat revenue estimates. In the second quarter, it could be under 50%.”
According to the Raymond James Managing Director, those factors will combine to drive stock valuations down as much as 12% from current levels, before a recovery kicks in, likely in the fourth quarter of this year.
Still, Saut is convinced that the world remains underinvested in U.S. equities. It is a message he has delivered in recent weeks to Canadian institutions in the Montreal and Toronto areas.
U.S. stocks he likes right now include Rite Aid Corp
. (NYSE: RAD
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), a company that Saut believes can benefit from Obama-Care and should generate over one billion dollars in cash flow by 2015.
“They have doubled their capital expenditures from $200 million to $400 million and they are refurbishing the stores they want to keep,’’ he said.
On Tuesday, Rite Aid shares eased 1% to $2.78 leaving the company with a market cap of $2.5 billion, based on 909 million shares outstanding. The 52-week range is $3.21 and 95 cents.
Saut also likes Walgreen Co.
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), the Deerfield, Ill., company, which ranks as the world’s largest drug store chain. He likes the company for the following reasons:
They have increased their dividend by double digits in every year for the past 10 years.
The company can generate as much as $5.30 a share in earnings by 2015.
“If you put a market multiple on that, the stock should trade at between $65 and $67,’’ said Saut.
Walgreen traded Tuesday at $46.45, leaving a market cap of $44 billion, based on 945 million shares outstanding. The 52-week range is $51.25 and $29.35.
“I want to be overweight in the U.S. because I think the U.S. is going to be better than anywhere else on the planet,’’ Saut said.
His most-things America stance is based on the expectation that the United States will regain energy independence as a result of new technology that is unlocking vast quantities of oil and gas reserves in regions like the Bakken formation in Montana and North Dakota.
However, he would avoid sectors such as utilities and consumer durables, areas where some investors have been hiding out due to their lack of conviction about the stock market rally. Stocks in that area include Proctor & Gamble Co.
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Meanwhile, Saut said he has been shying away from Canadian resource stocks, amid predictions from the Raymond James energy team that oil will be selling for an average of US$65 a barrel next year.
“I don’t think that bodes well for the Canadian oilsands. So I’m very light on Canada,’’ Saut said.
He is also pessimistic about the prospects for gold in the near term. “Longer term, gold is a viable investment. But I think it is going to take a while,” he said.
Meanwhile, Saut said any fears about the U.S. Federal Reserve starting to wind down its bond buying program – dubbed quantitative easing – are overblown. “I don’t think the Fed is going to do a damn thing on tapering this year,’’ he said.