Investment Strategy

Jeffrey D. Saut, (727) 567-2644, Jeffrey.Saut@RaymondJames.com November 16, 2009

Investment Strategy __________________________________________________________________________________________

`Tis the Season?

‘Tis the season . . . except in this case we haven’t quite yet entered the Christmas season. However, we have entered the best six
months of the year for the equity markets. Clearly, history demonstrates that the November through April periods have on average
shown superior stock market performance to that of the May through October half of the year. As our South African friend Dr.
Prieur du Plessis notes, “(since 1950) the ‘good’ six-month period of the year shows an average return of 7.9%, while the ‘bad’ six-
month period only shows a return of 2.5%.” This performance can be seen in the first chart on page 3.
In addition to the aforementioned seasonality, there are some equally compelling shorter-term metrics. To wit, over the past 12
years the DJIA has always shown a profit between November 11th and December 5th. Additionally, since 1976 the DJIA has posted a
positive return between October 26th and January 1st every year except 2007. As for those that suggest the markets have rallied
too far too fast, we offer these comments from the always insightful folks at “The Chart of the Day.”
“To provide some perspective to the current Dow rally that began back in March, all major market rallies of the
last 109 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the
Dow. As today's chart illustrates, the Dow has begun a major rally 27 times over the past 109 years which
equates to an average of one rally every four years. Also, most major rallies (73%) resulted in a gain of between
30% and 150% and lasted between 200 and 800 trading days (9.5 months to 3.2 years) -- highlighted in today's
chart with a light blue shaded box. As it stands right now, the current Dow rally would be classified as both short
in duration and below average in magnitude.”
To us the real question is not whether this is a counter-trend rally in an ongoing bear market, but rather is this the beginning of a
new secular bull market, or a bull market within the confines of the trading range we have been in for the last nine years? In past
missives we have often reminded participants that since 1900 there have been only three secular bull markets. They were from
1921 – 1929, 1949 – 1966, and 1982 – 2000. Following each one of those secular bull market peaks the DJIA has been “range-
bound” for a period of years. Using the 1966 bull market peak as an example, the Dow was mired in a trading range for 16 years
before embarking on the next secular bull market. Of course, those of us that lived through the 1966 – 1982 debacle know that
there were a series of bull and bear markets within the confines of that trading range. In fact, there were at least ten 20%+ rallies
and/or declines in that ongoing range-bound market. Accordingly, investors had to have a more proactive strategy for their
portfolios, much like we have had to use for the past number of years.
While NOBODY can answer our proposed question, what we can attempt to do is position portfolios in a manner that deals with the
current environment as we see it. To that point, since last April we have been using the stock market’s chart pattern from 2003 as a
template for this rally. Recall that the S&P 500 bottomed in March 2003 and rallied sharply into to June. From there it
flopped/chopped around for a few months, but never gave back much ground, and then it took off on the second leg of the rally,
rising into the first quarter of 2004. The first “leg” of the 2003 rally was driven by liquidity, much like 2009’s first leg (March – June).
The second leg of the 2003 rally was driven by improving fundamentals and earnings, just like 2009’s “July through now” rally.
To be sure, we have turned cautious a couple of times since the March “lows,” but we have never turned bearish. Most recently, we
wrongfully turned cautious at the beginning of October, worried that the July – September upside vacuum created by the melt-up
might get “filled” to the downside once quarter’s end window dressing was over. Obviously, that was wrong-footed because all the
markets have done is work off their pretty overbought condition at the end of September into a very oversold condition a few weeks
ago. We chronicled that oversold condition in our report of November 2, 2009, but regrettably didn’t act on it. Accordingly, we
corrected that cautious “call” last week by adding some “long” index positions to the trading account. While we would have felt
better adding those positions if the markets had pulled back, or if the S&P 500 (SPX/1093.48) had rallied above its potential double-
top of 1100, in this business you have to take what the markets give you. Whatever the resolution in the short term, we continue to
believe the major market indices will trade higher into the first quarter of 2010.
Plainly, we agree with the astute GaveKal organization in that the normal economic cycle is for corporate profits to increase, which
drives an inventory rebuild and subsequently capital expenditure cycle, and then comes employment expansion that revives
consumption. Currently, corporate profits are surging at their largest ramp rate since mid-1975. According to ISI, “profits have
Please read domestic and foreign disclosure/risk information beginning on page 4 and Analyst Certification on page 5.

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Raymond James Investment Strategy
increased sequentially for the past three quarters at an estimated +34.8% annual rate – a record for a recessionary environment.”
As of yet, however, the inventory rebuild has been muted. But with inventories plumbing record lows, we think the inventory cycle
is about to begin. If correct, the aforementioned sequence should play. Importantly, consumption comes at the back-end of the
cycle, not the front-end. Consequently, those arguing we cannot have a normal recovery until unemployment declines are like skiers
skiing downhill looking at the tails of their skis.
We think the normal economic cycle will play once again. If so, economic reports, fundamentals, and earnings should continue to
improve, putting even more pressure on underinvested participants (according to the latest surveys, hedge funds are only ~52% net
long). And, that pressure should buoy stocks into the first part of 2010. It is the back half of 2010 that begins to worry us due to
harder earnings comparisons, loss of the “sugar high” stimulus funds, higher taxes, an election year, increased government
regulation, etc. In fact, it is the probability of further government regulation of corporate America that worries us the most, and we
are not alone. As our energy analysts wrote last week:
“ENSCO International (ESV/$45.94/Market Perform) to pick up shop and head to U.K. After watching rivals Transocean
(RIG/$87.31/Strong Buy) and Noble Corp (NE/$43.28/Strong Buy) move to Switzerland, ENSCO has announced its intentions to re-
domesticate from Delaware to the U.K.”
ENSCO joins a growing list of companies, like Tyco (TYC/$36.50), that are moving offshore driven by worries of increased regulation
and taxes. I am old enough to remember the exodus of U.K. companies, and talented people, to America in the 1960 – 1970s for
similar reasons. Another example of governmental incursion came full circle last week when Pfizer announced the closing of six
Research and Development facilities. One such site is located in New London, Connecticut. It was four years ago when the
government used eminent domain to seize homeowners’ homes. The government (state/local) then spent $78 million to bulldoze
those properties to build condos, and offices, to enhance Pfizer’s nearby research facility. The “spin” was that the project would
create jobs and bring in more taxes. Now that land stands vacant, without any of those promised benefits. With Pfizer’s closing of
its New London facility that land will likely remain fallow. As The Wall Street Journal writes, “Economic development that relies on
the strong arm of government will never be the kind to create sustainable growth.”
The call for this week: In bull markets, be they secular or not, it is rare to get anything more than a 7% - 10% correction; while we
have been looking for such a correction for more than a month, time is running out. The trick then becomes to commit some capital
to areas that have good risk/reward metrics. By our pencil, the sectors displaying the best relative strength are Energy, Consumer
Non-Cyclicals, Basic Materials, and REITs (real estate investment trusts). Our REIT analysts just returned from the NAREIT national
conference and reiterated their Outperform rating on 3.5%-yielding Apartment Investment and Management Company
(AIV/$13.48). Another way to get at the REIT theme would be via the ETF iShares REIT (IYR/$43.19). On the energy theme, our
analyst upgraded American Superconductor (AMSC/$31.00/Strong Buy) this morning. As for Consumer Non-Cyclicals, the ETF that
makes sense to us is the Consumer Staples SPDR (XLP/$26.72), as does Wal-Mart (WMT/$53.20). And, we still like our previous
recommendations of Pfizer (PFE/$17.59) and Altria (MO/$19.26), which are both followed by our research correspondents.

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Raymond James Investment Strategy

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International Headquarters:
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Raymond James Investment Strategy

Important Investor Disclosures

Strong Buy (SB1) Expected to appreciate and produce a total return of at least 15% and outperform the S&P 500 over the next six months. For
higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over
the next 12 months.
Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12 months. For higher yielding and more conservative
equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the
dividend and expect a total return modestly exceeding the dividend yield over the next 12 months.
Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for
more highly rated securities.
Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.

Out of approximately 765 rated stocks in the Raymond James coverage universe, 47% have Strong Buy or Outperform ratings (Buy), 45% are
rated Market Perform (Hold) and 8% are rated Underperform (Sell). Within those rating categories, 26% of the Strong Buy- or Outperform
(Buy) rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 14% of the
Market Perform (Hold) rated companies are or have been clients and 11% of the Underperform (Sell) rated companies are or have been
clients.
Suitability ratings are not assigned to stocks rated Underperform (Sell). Projected 12-month price targets are assigned only to stocks rated
Strong Buy or Outperform.

Suitability Categories (SR)

Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.
Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, possibly a small dividend, and the potential
for long-term price appreciation.
Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings
and acceptable, but possibly more leveraged balance sheets.
High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues,
higher price volatility (beta), and risk of principal.
Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated
with success, and a substantial risk of principal.

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Company Name Disclosure
Altria Group Inc. Raymond James & Associates received non-securities-related compensation from MO within
the past 12 months.
American Raymond James & Associates makes a NASDAQ market in shares of AMSC.
Superconductor Corp.
Apartment Raymond James & Associates received non-securities-related compensation from AIV within
Investment and the past 12 months.
Management
Company

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International Headquarters:
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