Jeffrey Saut, the chief investment strategist for Raymond James, visited Salt Lake City this week for an investment strategy presentation. Raymond James is headquartered in St. Petersburg, Fla.; however, the company has a regional office in Draper. The company provides various financial services to individuals and corporations.
Q: With the Feds keeping interest rates so low, where should people keep their money if they want low risk?
A: I think dividend-paying blue chip stocks are fairly low risk. Valuations are still pretty darn good. The equity markets have been below their median P/E ratio for the longest period of time since the 1970s. I think the S&P. I am not of the opinion that the U.S. is going into a recession. I think we are in a self-sustaining recovery, and a weak one. The retail is still frozen like deer in the headlights because they didn't manage the risk. I told people to raise cash in March and April of last year. Nobody wanted to hear about it because stocks were going up. They peaked their stocks between August and September lows, which was actually when we were recommitting capital to the equity markets.
Q: How much potential growth is there for municipal debt? And for U.S. Treasuries?
A: I'm not a real big believer in fixed income right here. I take the Fed at their word, and that they're going to keep the short end of the interest rate spectrum down for as long as they possibly can because they are worried about spinning the nascent recovery in the housing and real estate complexes into another downside swoon. If you buy the fact that we are not going into a double-dip recession, then interest rates over a longer cycle only have one way to go. As the economy gathers steam, interest rates are going to go up. People have forgotten that you can lose money in a fixed income. I was in the business when the 30-year Treasury bond went from a 4 percent yield to almost a 15 percent yield. And if you owned those bonds at the time your principal got cut in half.
Q: Is investing in certificates of deposit a good idea? Is there a better alternative?
A: I think there are better alternatives than CDs. If you are going to be in CDs, you need to stay fairly short term because interest rates over the next couple years are going to trend higher. I wouldn't be going out five to 10 years because you aren't getting any return. The government tells you the embedded inflation rate is around 2 percent, and they lie. The inflation rate is higher than that in my world. I don't now how it is out here (in Utah), but I am living in a world where the University of Michigan tuition goes up 8 to 10 percent per year. It's a big number.
Q: A bill was passed in May allowing gold and silver to be used as an alternative to paper currency in Utah. Utah is the first state to do this. What are your views on gold? At this point is it still a valuable investment or good as a safe haven for people?
A: I have been bullish on gold since December 2001 when China joined the World Trade. I connected the dots and said per capita incomes are going to rise. When per capita incomes rise, people consume more stuff. I define stuff not just as oil, gas and coal, but base metals, precious metals, cement, timber, agriculture and fertilizer come right into that fuse. So I think with interest rates low and per capita income rising in the emerging and frontier markets, a lot of those people do not trust their own currencies. I think gold over the next two or three years trades higher.
Q: In your opinion, what equity sectors are you finding the most potential for? If you had $100,000 to play, where would you place it?
A: I think technology is undervalued. It has the lowest valuation it has had in the past few decades. It has highest return on equity of any of the 10 macro sectors. If you're watching the mergers and acquisitions that are taking place, companies like success factors. Smart money is buying knowledge and patents. I think technology, but again you have to be stock-specific. I think that energy makes a lot of sense. Again, as per capita incomes rise, I think there is a demand for energy. If you went to China 10 years ago, all you saw was bicycles. You go to the eastern provinces or coastal provinces now, all you see is cars.
Q: What will spur the most equity growth — lower unemployment, housing price data, etc.? How much does unemployment have to fall for us to see a 10 percent gain in the S&P 500? Or what else would have to happen to see that?
A: I think you are going to get high single-digit gains in the S&P this year. I think when you combine that with a 2 to 3 percent dividend yield, given the alternatives, I think it’s a fairly compelling case for a good quality blue chip dividend paying us equities. The world is profoundly underinvested in U.S. equities. I was in Europe for two and a half weeks and I couldn't find any accounts over there. And we are talking big accounts like UBSS and management that own more than 20 percent weighting in U.S. equities when their benchmark, which is the MSCI world index, has a 44 percent weighting. And even in this country, when you talk to endowment funds, they are only 12 to 13 percent weighted upon U.S. equities. Hedge funds are only about 44 percent long U.S. equities. So if we don’t talk ourselves into a recession, which is the way I think it is going to play, and if the economy at the margin grows at 2.5 to 3.5 percent, I think when you get to the backend of this year you are going to see a huge asset allegation shift out of fixed income and into U.S. equities.