Kass’s Summary of Bearishness
Doug Kass very publicly made a prescient bottom call in early March. He has now flipped Bearish, and explains why:
1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.
2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.
3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.
4. The credit aftershock will continue to haunt the economy.
5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.
6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.
7. Commercial real estate has only begun to enter a cyclical downturn.
8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.
9. Municipalities have historically provided economic stability — no more.
10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.
Doug points to the animal spirits in full force, shorts scrambling to cover, and a crowded bullish sentiment as additional reasons for the tactical shift. He believes a “self-sustaining economic recovery appears doubtful”
That fits in well with my 1973/74 parallel of the current market environment.
>
Source:
Kass: A Summary of My Bearishness
Doug Kass
The Street.com, 08/10/09
http://www.thestreet.com/story/10569021/1/kass-a-summary-of-my-bearishness.html
August 12th, 2009 at 8:36 am
I like Kass- he always keeps a cool head- the “calm in the center of the storm”- I guess my question BR- is what would be the reason for people to sell at this point?
what would be the catalyst?
I am thinking that leftback has described a good scenario where the treasuries have to be defended at the expense of equity values-
in the end I would think treasury yields have to increase- to better reflect the risk that our debt is simply unsustainable
August 12th, 2009 at 8:37 am
Doesn’t he disagree with that current parallel in the previous two paragraphs?
“The economic downturn of 2007-2009 has already been different this time in scope and duration. For example, unlike the other post-depressions/recessions of the last century, we have already witnessed two consecutive quarterly drops in nominal GDP. As well, the 20-month-old recession has resulted in a near 4% drop in real GDP vs. drops of between 2.5% and 3.0% in the mid 1970s and early 1980s recessions. The U.S. economy came out quickly from those prior downturns, with recoveries to new peaks in economic activity taking only three or four quarters.
My view is that it will continue to be different this time as the typical self-sustaining economic recovery of the past will not be repeated for 10 important reasons.”
August 12th, 2009 at 8:39 am
all valid points. fidelity published an article today stating people are increasing their 401k contributions. reading further you get these haunting statistics.
<<
Although enrollment is rising among those in their 20s, just 44 percent of plan-eligible workers in that age group are participating, Fidelity found.
“That creates a savings gap that is very difficult to overcome later,” David said.
Among those in their 30s and 40s, participation jumps to more than 65 percent, with those workers deferring an average 7.7 percent of their pay. But 23 percent of that group has one or more outstanding loans against their 401(k), and more than one in 10 started such a loan over the past 12 months, Fidelity said. Often, such loans are taken out to buy a home, save for children’s educations, or respond to a financial emergency.
<<
the 20 something group is understandable what is concerning are those in their 30’s or 40’s where almost 25% have an outstanding loan against their 401k’s while contributing half the allowable amount. generation Y and after are going to be working until they keel over.
August 12th, 2009 at 8:41 am
FYI he has been bearish since May and pressed his shorts button many times since then. I don’t think this really matters.
August 12th, 2009 at 9:00 am
I thought he was dead wrong when he made his March bull call, mainly because I am a newbie at this and did not realize how far markets can get it wrong. The psychology of crowds can be mystifying. In my mind the up move since March has been built on sandy ground – financial and government media propaganda, (How many times have we seen the journalist “reach” for any positive that they can get out of the financial numbers, only to anaylize them ourself to find misrepresentations?). No this up-move has been nothing but a fabrication by the power that be, and the jumping on the bull-train by techies. Of course we all know that the techies will jump off just as fast on the down-side.
August 12th, 2009 at 9:02 am
I agree, he started talking bearish two months after the rally began. He does run a short fund, so he is talking his book too.
No one ever talks about this, but the markets have played out exactly like the financial crisis of 1907. If that is the parallel, then the markets are headed way higher. I’d argue that the global markets are more similar to 1907 then the U.S. markets are today.
August 12th, 2009 at 9:02 am
Weren’t all 10 of those points even MORE true on March 9th? Sentiment is the key.
August 12th, 2009 at 9:06 am
11. Fed can’t lower short rates significantly and may have to raise them…weak dollar….inflation
August 12th, 2009 at 9:17 am
Those were the reasons to be bearish until March. Now he thinks investors should “re-discount” them into prices.
After a 50% move in 5 months, he should just say “too far, too fast”, overbought, valuations, excessive bullish sentiment, etc. as reasons to be bearish rather than recycle the stuff people were focusing on months ago.
August 12th, 2009 at 9:24 am
boy- bit off topic but comical- AIG must be a bit of pressure cooker that the new CEO has to start a vacation before he even starts his new job- from NC-
“Incoming AIG CEO Starts Tenure With Two Week Vacation”
http://www.nakedcapitalism.com/2009/08/incoming-aig-ceo-starts-tenure-with-two.html
August 12th, 2009 at 9:25 am
11. The big one. Taleb was on CNBC this morning and as he points out: THE DEBT HAS NOT GONE AWAY.
Since March, a lot of people have forgotten the psychological aspect of the market. Fear can replace greed once again, should this market begin to crumble. You can make an argument that technical, fundamental and sentiment factors all support a significant correction. How deep that correction becomes would depend upon the psychology of market participants. What if 401K participants see another leg down and finally bail? Few have mentioned this.
BTW, I agree with BR’s efforts to keep us focused on topic. A little discipline is good.
August 12th, 2009 at 9:32 am
JustinTheSkeptic Says: (Above)
Justin…. . .. Just a quick thought to share with you as you mentioned you’re fairly new to trading/investing. …. be careful about locking into the thought process that the markets are “wrong”. This thinking is why 97% of so-called traders fail. The markets are never right or wrong. They are what they are ….a daily pricing of supply & demand for a security. Never blame the markets for poor trading performance. While I enjoy BR’s site, the comments section is always filled with analysis on how wrong the market is (both bull & bear) instead of analysis ” how am I positioned and what could I do or have done to be more profitable. Ego is the absolute enemy of successful trading…..the market is never wrong (up or down). ….the only thing that is right or wrong is your p/l staement. That’s why there are a million investment strategists/commentators and so few crackerjack traders.
August 12th, 2009 at 9:33 am
“BTW, I agree with BR’s efforts to keep us focused on topic. A little discipline is good.”
agreed- what’s your read on my 9:24 post- out of line somewhat?- not on topic- but definitely related to the whole bailout fiasco-
wasn’t sure- BR has me a bit gun shy
~~~
BR: Discussing AIG as a reason to be Bearish — on a post titled Reasons to be Bearish — is fine.
But an absurd thread debating healthcare on a post on Housing Delinquencies and Underwater Mortgages is not . . .
August 12th, 2009 at 9:38 am
Ahab: I’d stay succinct and “on message” for a while.
August 12th, 2009 at 9:40 am
Insofar as another roaring economy, since we already allowed the consumer to lever against their largest asset (house) there is no comparable way to repeat that level of increased consumer spending power unless 1) employers start giving bonuses in the 100-400K range, or, 2) we get a government stimulus check for said amount.
Most people have not meditated on this fact. It’s going to be a long time before your lawn maintenance man is driving an Escalade and moving into the yuppie neighborhoods again …
I am not sure whether we can drum up enough fear to retest the lows, but I’d say it’s still a statistically significant possibility if we don’t have a V-shaped recovery …
August 12th, 2009 at 9:42 am
“wasn’t sure- BR has me a bit gun shy”
Feels like parochial school to me. I’m waiting for the ruler on the knuckles.
Oh yes, Kass. Yes, well, I agree. Thumbs up. Well said!
August 12th, 2009 at 9:43 am
Matt M Says-
“how am I positioned and what could I do or have done to be more profitable. Ego is the absolute enemy of successful trading…..the market is never wrong (up or down). ….the only thing that is right or wrong is your p/l staement.”
excellent advice-
long story short- I was having great returns on quick trades until a got cocky and bought a large position of QID – for a short trade- with no stop- which slowly ate all my profits- the whole while thinking any day that the market should turn-
market basically kicked my ass- so all my hard earned gains in small trades over a year’s time were wiped out in one trade-
lesson learned
August 12th, 2009 at 9:48 am
” I’d argue that the global markets are more similar to 1907 then the U.S. markets are today.”
I’d argue they’re more like 2007 than 1907:
1) Asset inflation (houses, commodities, stocks, bonds…virtually anything excess money can slosh into, and yes, houses are already reinflating–premature arresting of a fall in prices that would otherwise happen ex-massive amounts of government cash being funneled into the markets is inflation in my book);
2) The abandonment of prudent risk management (just look at the VAR for GS the last quarter);
3) The idea that everything is contained (legions of articles touting the saving of the economy by the Fed, et al, when all that has really changed is a massive assumption of risk by the government relative to private entities);
4) Bank/mortgage company failures continuing apace (Taylor Bean & Whitaker; Colonial Bancgroup, to name just a couple that have or are happening–and in an environment where the government is basically an endless fount of free money);
I agree with Cass that the central problem remains unemployment and the tapped-out consumer. It is the main factor distinguishing now from 2007, and bodes ill for the giddy optimism that all is contained now that the government proved Armageddon could be forestalled by massive money printing and risk assumption.
I’d also agree that this era rhymes fairly well with ‘73-’74.
August 12th, 2009 at 9:51 am
“I’d argue that the global markets are more similar to 1907 then the U.S. markets are today.”
Well even if you bought the bottom in 1907, you didn’t look too good at the bottom in 1932.
Is that what Kass meant by ‘generational low’?
August 12th, 2009 at 9:53 am
I’m not trying to be critical here, but comparing something to 1907???????
Let’s see, how many TV sets were out there?, how many cars? ipods? twittering devices? tattoos? professional sports franchises?
Very similar indeed.
August 12th, 2009 at 9:55 am
Of course, I meant “Kass”, not “Cass”
August 12th, 2009 at 9:56 am
“Workers are again embracing 401(k) plans after the market meltdown and ongoing recession left many unable or unwilling to set aside some of their paychecks for retirement, according to the nation’s largest workplace savings plan provider.”
The machine is working! Run the valuations up on light volume; rebuild the public trust; tell them: buy now or miss the low. They put money in the market… whoosh! Out goes the rug from under their feet. Ha ha ha ha, funny stuff.
August 12th, 2009 at 10:00 am
deadonarrival-
you are a funny dude- still waiting for the ruler-
re Ben- he needs to defend his post- didn’t understand this line- “I’d argue that the global markets are more similar to 1907 then the U.S. markets are today.”
???
curmudgeon-
thanks for the personal story yesterday- always good to hear about the kindness of others
August 12th, 2009 at 10:01 am
@tc
I’m not going to argue with anyone as to what this is similar to or not. On charts, there are many similarities.
But this is going to be totally different that anybody can imagine.
What’s holding things together, so far, is “notions”. The notion that the US has this mack daddy President that will just run the printing presses and bail out anyone who fails or can’t afford a large screen.
So go ahead everybody, take all the risks you want! I hope he ends up being a two termer. Long enough for the mistakes that are being made now to play out in a macro-economic sense, and on his watch.
Note: That shouldn’t read I want him to fail. Instead, it should read, may you live with what you create, & if it actually does work, then give yourself a pat on the back at the end.
August 12th, 2009 at 10:04 am
I am somewhat bearish as well, but I think it is going to be much more difficult to make money being short in the future than it was in 2007 and 2008.
I think a better investment going forward will continue to be gold, as it will benefit from all the govt money printing, or from a withdrawal of the stimulus, which would send the economy back into recession and create a very volatile and uncertain environment. For a further discussion on these issues and how they relate to the gold price, here is an interesting article: http://www.goldalert.com/stories/Deflation-Fighting-Gold.php
August 12th, 2009 at 10:05 am
Seems like a pretty comprehensive list to me. I started reading Kass back in ‘06 when I sensed something was amiss and I believe reading him led me to your site in a roundabout way. I wouldn’t take his calls lightly. He’s been pretty good. Often a bit early but still very good.
August 12th, 2009 at 10:07 am
Kass great call in March but has been wrong since his turnaround a few months back:
1. When a consumer buys a big screen TV is it sustainable? No. Americans are consumers and will consumer. That is sustainable.
2. Cost cuts give consumers cheaper prices so they can buy more
3. There is no evidence to suggest this level of debt is terminal. Debt is paid and those payments are someone else’s income or more credit ability for banks.
4. Saying, “The credit aftershock will continue to haunt the economy” is a rehash of other bullet points.
5. The Fed’s impact is always uncertain and low interest rates are almost always “good.”
6. We don’t need housing to grow much more than it has slowly in the past. It’s a small part of the economy
7. REITS are up 35% in a month and the TALF will be used to refi or the real estate will end up in strong hands. Commercial RE will be fine.
8. The public works component of public policy may not be muted, but may have a high multiplier as most prior studies show.
9. Municipalities have been bailed out, maintained their spending and with taxes coming back, they will contribute their small part.
10. Deficit spending always and everywhere is stimulative.
August 12th, 2009 at 10:14 am
[...] though, we’ve lost track of the number of times he’s “flipped bearish,” as Barry Ritholtz describes his latest [...]
August 12th, 2009 at 10:15 am
@VennData: “Commercial RE will be fine?” What planet are you living on? Can I move there?
August 12th, 2009 at 10:23 am
Here’s the problem with Kass here.
All the reasons he mentions are spot on- fundamentally. I’m sure there’s room for debate, depending on your bias- of course. But I’m not a fundamental analyst.
I tried playing fundamental analyst, using these very same reasons as justification that my short calls, which originated from technical factors in late May… were “Right.”
Wrong.
Kass said a month ago that he was “very short”… well, the market has moved substantially higher since he started pressing the short peddle down. In many ways, thats his job. But I cant imagine it feels any different to him than it did to me, down a hefty chunk on those shorts that I had to cover, because the market was proving me wrong, despite being right.
Whereas I agree with him in principle, many of us do not have the luxury to be flat out short… AND wrong… for as long of a time as Dougie can.
Sure, I could still be short from 930 here, if I had substantial capital to throw at it until I’m proven right.
Thats the difference, and its been an important lesson for me this year. You can be right fundamentally, and painfully wrong trading wise at the same time. It comes down to the ammo at your desposal, and your tolerance for being underwater, a substantially uncomfortable feeling for I-Man… who doesnt have much in the way of gills.
Quick OT: I apologize for being so indulgently OT yesterday afternoon, and I promise to try and uphold a higher standard.
August 12th, 2009 at 10:24 am
@Venndata
I completely agree with your points. The good in Kass’ points is that he recognizes that the recovery will be a long, difficult slog. The bad is that many of his points are inspired by a reversion to old right wing talking points. For instance, this little gem:
“There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.”
Herbert Hoover and Andrew Mellon said the same thing in 1929. They were operating on a view of poverty that has long been discredited: the view that the poor are poor because they’re bad people who deserve to suffer. They agreed with the Spencerian view of the poor that held that poor people only work if they have no choice, whether that is accomplished by starvation or the whip. Everything since the Great Depression has completely discredited Kass’ view. People work because they want to achieve, not because they have no choice. Nobody wants to be on unemployment. Nobody wants to be in a bread line. People just want work.
August 12th, 2009 at 10:24 am
-low interest rates started us on this carousel;
-deficit spending makes sustainable recovery more difficult because it sabotages future demand while laying a claim to future income;
-REIT prices are indicative of asset inflation caused by excess money creation;
-government spending does not have a multiplier effect in excess of private spending and is inherently less efficient at allocating resources;
-all of the price declines in consumer items incidental to the crash in consumer demand will be eaten up by increases in the prices of financed goods (cars, houses) accruing to the Fed’s easy money policy;
Things are poised for the next leg down, particularly now that everyone seems to think it’s all over.
August 12th, 2009 at 10:24 am
I think a lot of these guys are actually just closet technicians. But, in order to not be dismissed out of hand on TV, or in print, they come up with the “fundamental” reasons. Everything he lists here could have been cited 1 month ago, 2 months ago, 3 months ago, etc…
It’s humorous to me that when I see some price targets on indices, or oil, or whatever, from “gurus” like Goldman Sachs, etc, the targets they give always align with critical chart support/resistance, or Fibonacci retraces….
Congrats Doug Kass….you can observe sentiment/technical indicators well and realize that we’re approaching (or hit) a bullish extreme, the exact opposite as was the case into the March lows. You’re a genius.
August 12th, 2009 at 10:25 am
Matt M – Bravo. Spoken like a true matador!
August 12th, 2009 at 10:25 am
@Venn Data
Your comments remind me of that SNL skit with Steve Martin.
“Don’t buy stuff you can’t afford”. I tried to post a link but it got eaten. It’s a funny skit, and it plays into comments #3 & #4 by Kass.
August 12th, 2009 at 10:25 am
@f411: I believe that Kass is a Democrat. I’m quite sure if this, in fact. Is anyone who questions your hero’s policy decisions a “right winger”? Sure seems so in your simplified world.
August 12th, 2009 at 10:25 am
Joe Weisenthal is giving you a bit of shit for this one, Barry.
See: http://www.businessinsider.com/doug-kass-turns-bearish-again-2009-8
August 12th, 2009 at 10:27 am
“I believe that Kass is a Democrat” – Yes he is and I remember him expressing that on Kudlow report long time ago.
I am just expecting that the market rally will fizzle once Fed’s announcement comes in at 2:15 pm.
August 12th, 2009 at 10:31 am
@Andy T
I agree with you 100%. (Although some here may only agree with you 61.8% and are not doing the full FIBO.
I’m amazed at how many times these price targets tie in with technical numbers. It’s like, the market is bound and determined to fulfill these prophecies regardless of fundamentals. The fundamentals just provide the running narrative.
I’m glad you pointed that out.
August 12th, 2009 at 10:33 am
@Mannwich
There are plenty of right wing Democrats who were driven out of the GOP by its social positions. Look at Sens. Kent Conrad and Ben Nelson–30 years ago, they would have been moderates in the GOP. The New Right and its various litmus tests on social issues drove many out of the party and into the ranks of the independents or the Democratic Party.
At any rate, his partisan identification is not relevant to the argument he presents. His rhetoric is his rhetoric.
August 12th, 2009 at 10:33 am
@Mannwich
Kass is most assuredly a Dem. And he was a huge supporter of the plans early on. Probably still is for that matter. DK just keeps it real.
August 12th, 2009 at 10:34 am
manhattenguy-
so you’re fading today’s rally?
August 12th, 2009 at 10:35 am
@f411: So anyone who is a Dem but disagrees with your hero’s policy’s is a “right-wing Democrat”? I’ve heard Kass speak quite a bit and he comes across as no “right winger”, just a smart, thoughtful person. Just perfect. Far be it from any of us to actually think for ourselves. We should all just step in line with the agenda set by the elites and bow our heads in reverence. You kill me, man. Just brutal.
August 12th, 2009 at 10:39 am
@f411
You’d better hope Doug Kass is correct. If things get too bright and cheery out there, there is no crisis and therefore you need to manufacture one.
“You never let a serious crisis go to waste.”
Rahm Emanuel
August 12th, 2009 at 10:40 am
I am like minded. The market is wrong, however, it can continue to be wrong, much, much longer than I can stay solvent…… I see way too many open pips on the board way more than those listed above, the name of the game is patience, let this exuberance play it’s self out. Everybody is grabbing at straws and I’m fine with the disproportionate reaction in equity values induced by delusional perceptions of metric valuations.
The title to this story is going to be “The Little Train that Couldn’t”…….
“The news reports that the Little Train was derailed, were flagrant understatements, as the Little Train flew off the tracks, fell of a cliff and landed upside down in a ditch….. There were no survivors…….”
Best regards,
Econolicious
August 12th, 2009 at 10:42 am
@ahab
“manhattenguy-
so you’re fading today’s rally?”
FWIW – I’d like to see the dollar come back and fill a little here. If it does so successfully, then I might start fading. It may take a day or so. There’s still the 10y auctions, and the 30y auctions.
August 12th, 2009 at 10:48 am
you would think a college edumacated person like myself could spell Manhattan properly
August 12th, 2009 at 11:01 am
Not sure what the “fundamental” news is today, but I’m fading this move into a 62-66%. Sold 1005 on the Sep futures (~1007 cash). A break of 1011.5 (futures) would irritate greatly. A break of 1016 (futures) would put me back in the chair blowing raspberries like a little baby.
August 12th, 2009 at 11:01 am
http://paul.kedrosky.com/archives/2009/08/steinhardt_no-o.html
This is a summary from Kedrosky’s blog site that reinforces Kass’s general premise…this old shoes that have been around for a long time have an interesting message….
“No one I know is long term bullish”…..worth an eyeball…
August 12th, 2009 at 11:05 am
http://paul.kedrosky.com/archives/2009/08/steinhardt_no-o.html
A reiteration of Kass’s comments by fund managers….worth a look. Last post was eaten.
“No one is long term bearish…”
August 12th, 2009 at 11:05 am
@Andy T
You might like this article on the dollar, and how it plays into all the various scenarios described here.
http://www.thestreet.com/story/10571620/1/dollar-strength-is-all-relative.html?puc=_btb_html_pla3&cm_ven=EMAIL_btb_html
August 12th, 2009 at 11:07 am
@bruce: Don’t you mean “no one is long term bullish?”
August 12th, 2009 at 11:18 am
Yes, Manny. I did mean bullish..we are a little overwhelmed in the salt mine today…
August 12th, 2009 at 11:18 am
I would echo LB’s comment re: the debt, and I’m surprised that Kass didn’t make a direct reference to it. It is the ball and chain that will drag us down as it gets bigger and bigger. We’ve gone beyond the point where we can service it and grow out of it. We’re getting less and less for the buck in terms of GDP growth etc. for each additional debt dollar. Karl Denninger says it well about the debt.
A lot of Kass’ recent call and pounding of the table on the short side is actually based on sentiment (as Andy T referred to, I believe). As was his March bottom call. Of course that’s not included here; just a list of fundamental factors. He professes to not be a technical market reader at all, by the way. Who knows though, maybe he’s a closet chart and indicator reader. It’s hard to believe he’s not to some degree, given his success.
These factors are indeed nothing different than what existed back in March. The conventional wisdom is that it was discounting “Armageddon” and when the govt decided to fully back the banks that was averted. In my opinion, “the market” was staring at the true future as reflected in these factors and some others (e.g. debt) and the realization of that future was reflected in the prices, and there was some modest long term, though fleeting, value there.
But then it suddenly shifted it’s focus to the near term, suddenly tantalized by the notion of big bank “profits” for the second quarter and big earnings beats on the back of huge cost slashing (i.e. mass lay offs), regardless of the sustainability of them (or lack thereof). And a large dose of hope that once it lifted it’s head and looked out further that somehow the long term would have miraculously changed and a sustainable recovery would be credible. Now that the fun of cost cutting earnings increases is essentially over , the market may again start looking out further and focus on these things that have been there all along, having nothing shiny and fun to focus on in the near term. That, IMO, is what Kass is saying now. It’s all just ADD on a mass scale.
But who the hell knows, right?
August 12th, 2009 at 11:25 am
Matt M, thanks, I know where your coming from. I try to keep an open mind, but also try to establish how much bias is in the market relative to what the true picture is. Of course timing is everything. Plus realizing when you’ve jumped in to soon or out prematurely. Let’s come back a year from now and see that all the hype and stimulus has only prolonged the misery – death by a thousand cuts still leaves one dead.
August 12th, 2009 at 11:30 am
@OT
I think you said it all very well right there.
March ‘09 = Armageddon priced in
Aftermath = Hope for recovery priced in (fueled by oversold conditions, accounting changes, operational cost cutting, “some” inventory restocking, slower pace of decline, etc.)
The truth probably lies somewhere in between. But it’s still only mid-August. So there’s no reason the market can’t stay buoyant until some other reality of operational existence begins to meddle with it. (such as funding of the T auctions, and/or the reality that will start to set in when companies look at their 2010 order flows in September).
Then there will come the reaction. IOW – will an equity market correction strike another wave of panic into people?
Personally, I wouldn’t rest too easy thinking that everyone is now brave enough to tough it out. It’s going to be every man for himself. Deal with that!
August 12th, 2009 at 11:33 am
Kass’s newfound bearishness may well be vindicated. But as AT has pointed out (AT @ 10:24), Kass is probably not revealing his actual reasons for the change in viewpoint.
August 12th, 2009 at 11:33 am
Bruce
Indeed it seems that much of the market is not bullish in any kind of long term fashion. Those who are participating are just a bunch of momentum chasers who are shrugging their shoulders at the lunacy of the few true believers and riding the wave while it lasts (Barry and Fusion IQ are exhibit A, I believe). They are very weak hands (that’s not a pejorative, just a reflection of their long term commitment to holding), of course, and understandably, who will sell very quickly once the mo breaks, not having any faith in the sustainability of any recovery we get.
It’s hard to say what the numbers are in terms of true believers vs. momentum players, but this is what is reflected in the lack of price-volume strength that Hussman refers to, and the lack of buying power that Lowry’s refers to.
Of course in all this is the buy and hold crowd, who continue to dollar cost average into the market. They are the ones who get most hurt in this kind of run up (like the run up to ‘07) because they buy without regard to valuation and get burned when the mean reversion comes along again. The longer it takes to get to a typical secular bear market low in valuation, with large spikes like this one, the more they get hurt, by buying during these spikes at lousy values.
August 12th, 2009 at 11:33 am
Fat drunk and stupid is no way to go through life so.
http://theburningplatform.com/economy/american-idiots-1
August 12th, 2009 at 11:35 am
Shanghai got boot stomped almost 5% last night, the Baltic Dry Index dropped 17% last week and contineus to fall this week, Macy’s missed top line estimates, and people are falling all over themselves to buy stocks up 50% in 5 months.
Surreal.
August 12th, 2009 at 11:37 am
“Doug points to the animal spirits in full force, shorts scrambling to cover, and a crowded bullish sentiment as additional reasons for the tactical shift. He believes a “self-sustaining economic recovery appears doubtful”
Focus on the last three words of that statement. What is it that they always say the market hates?
Answer: Uncertainty.
August 12th, 2009 at 11:38 am
@Groty: Hopefully this is not too off-topic for BR (there’s a fine line but I hope we don’t totally stifle discourse here), but me-thinks Macy’s is going to be a fantastic shorting opportunity in a couple of months, maybe sooner. Could be the short of the year, IMO, although you could probably say that about a lot of retail stocks, or most stocks in general.
August 12th, 2009 at 11:41 am
@OT
“It’s hard to say what the numbers are in terms of true believers vs. momentum players, but this is what is reflected in the lack of price-volume strength that Hussman refers to, and the lack of buying power that Lowry’s refers to.”
You keep hearing about the famous “cash on the sidelines” waiting to take this market up another leg. Anecdotally, I’ve been hearing that quite a bit of that COTS are hedge funds who are basically sitting this one out (and have all along). They’re still worried about meeting redemption requests after the inevitable correction.
August 12th, 2009 at 12:00 pm
Doug Kass has been right 61.8% of the time, which isn’t bad.
August 12th, 2009 at 12:09 pm
“That fits in well with my 1973/74 parallel of the current market environment.”
I drew that conclusion some time ago. And what followed?? Many here were not around in those days and don’t remember that inflation was a global phenomenon.
August 12th, 2009 at 12:11 pm
If you can figure out what the government is doing you’re golden. I don’t have the hotline number.
Anybody?
Nobody long-term bullish means spx 1500.
I thought the thread yesterday was very interesting even though we didn’t color between the lines.
August 12th, 2009 at 12:19 pm
@Pat G
In 1973/74 much of the labor force (globally) was industrial manufacturing. Much of the inflation was due to wage demands.
Now, in a technological world, with some economies loosely based on the “service sector” to account for jobs (& otherwise fraudulent financial engineering), I’m not sure what inflation parallels can be drawn.
I’m not disagreeing with you, just bringing that sideline phenomenon into the mix.
August 12th, 2009 at 12:21 pm
IOW, Pat.
When I start to see labor strikes here in America again, I’ll assume inflation is imminent.
August 12th, 2009 at 12:22 pm
My 10.24 comment came across as too disparaging towards Kass. I actually don’t mind that guy at all, and if he’s right more than he’s wrong, then he’s in rarefied air compared to 90% of the folks who stroll on to set of CNBC.
My point is that his “bearish” points could have been made at any time in the last 12-18 months. So, there’s “something” else that goes on with good traders/investors that makes them get bullish or bearish at important inflection points. Most good traders simply have “intuition” and can feel when the herd is simply running too hard, too fast one way or the other.
I just think they feel compelled to put forward a “thesis” instead of just going on TV and explaining the truth: “Hey, it was way, way oversold into Feb and March. It’s seems way, way overbought now. Sentiment seems too extreme the other way now. Also, Sep and Oct are historically shitty months for the markets. So, I’m bearish.”
August 12th, 2009 at 12:28 pm
Remember P/E ratios ?
This blogger thinks the “E” in P/E ratios is still declining.
Conclusion: stocks are way too over valued and need a retracement before they become cheap again.
We’re all pundits, right?
Dump stocks now.
August 12th, 2009 at 12:31 pm
AT, got your resistance at SPX 1007.
So far, so good. LB is watching the Treasury market more than anything else today.
August 12th, 2009 at 12:32 pm
@Andy T
I don’t your (10:24) comments came off as disparaging. I think you made an astute observation.
You happen to be technically oriented in your viewpoints. I think that is a great way to cut out all the noise. And I’m sure that when the market hits your technical levels, you don’t just “kitchen sink” it.
The technical levels serve as guideposts. They’re the moments that one says “OK, we’re here, now how is the market reacting to this level”. That’s where you develop a better feel and/or intuition.
And many times, as you yourself have pointed out (as I’ve read your posts). The RSI numbers can stay skewed for a lot longer than people imagine.
Anyway. IMO, despite saying otherwise, I think Kass is a closet technician. You don’t just pull out phrases like “generational lows” without understanding fibonacci levels.
August 12th, 2009 at 12:32 pm
Don’t trade the FED. Trade the reaction to the Fed, right?
August 12th, 2009 at 12:40 pm
“Don’t trade the FED. Trade the reaction to the Fed, right?”
Exactly….
August 12th, 2009 at 12:40 pm
a helicopter drop from another source.. for NY, at least: http://www.soros.org/
Yesterday morning George Soros announced a 35 million gift to support low-income families across New York State. Back to School New York will help families buy supplies for the coming school year. A collaborative effort involving the State of New York and the U.S. Department of Health and Human Services, the new program will provide $200 per child to the families of the more than 850,000 children receiving public assistance or food stamps in New York State.
August 12th, 2009 at 12:44 pm
http://www.cnbc.com/id/32372863
Fed Is Unlikely to Raise Rates, But Could Boost Confidence
“The Federal Reserve most likely won’t be delivering any rate hikes at its meeting this week, but it can deliver something many investors are looking for: hope.”
Yep, that’s the job of the Federal Reserve, right? To keep investors hopeful and piled into the market….
WTF?
August 12th, 2009 at 12:45 pm
Interesting post, Karen.
Anyone who has visited small towns in upstate New York, Bushwick and the Rockaways knows that this is needed.
August 12th, 2009 at 12:48 pm
@karen
Does that mean Soros will be our next Treasury Secretary?
August 12th, 2009 at 12:49 pm
@ doa:
Are you new around here? You kinda remind me of someone who used to post here alot…
August 12th, 2009 at 12:51 pm
been lurking I-Man.
Pay no attention to that man behind the curtains.
August 12th, 2009 at 12:51 pm
@deadonarrival
An increase in oil prices was predominately the global problem in the early 70s. Costs were passed onto consumers around the globe. Today, global QE is the problem. Eventually, this excess liquidity will lead to higher prices to consumers around the globe as well. There are parallels; it has to effect everyone on the planet (be global) and it has to be something the entire planet uses (oil/money).
August 12th, 2009 at 12:51 pm
is anyone buying TLT here, or SDS??
August 12th, 2009 at 12:53 pm
Wait for the reaction Ahab…
I still have my SCO from last week… but just tightened up stops in anticipation.
This is one of those things that you dont play ahead of, like earnings, jobs numbers, crop reports, inventories…etc.
Like LB and AT mentioned… its the reaction that gives you the trade.
August 12th, 2009 at 12:57 pm
DOA-
you seem like just the type of person that has an overwhelming desire to hit the CAP LOCK key-
it’s all good-
also DOA & LB-
BR ok’d my post from the previous thread- those healthcare debates do get out of hand- and- everyone is always an expert as to what needs to happen-
and we can’t all be the expert- right? Why won’t people just listen to me;-)
August 12th, 2009 at 1:04 pm
[...] Kass is now bearish. (Big Picture, [...]
August 12th, 2009 at 1:07 pm
@Pat G
The increase in oil prices in the 70’s was due to an embargo (supply limitations).
Right now, the only inflation problem is asset price inflation. The barrels of oil are plentiful, demand is moderate at best. The inflation is due to too many dollars with nowhere to go.
It’s artificial. I think we agree on that.
The discrepancy regarding inflation will come down to attitude. Over the past decade, it was like the world was in a rush to get China & India online so as to create fresh capital markets. That buildout required raw materials. It almost succeeded (actually did for awhile). We’re still in the echo phase of that.
I simply think that China 2009 = US 1929. Overcapacity. When the world finally realizes that phenomenon, then the interest in bidding up commodity prices with excessive dollars will be over.
Inflation will eventually occur as it naturally occurs, when the pipeline is too small. When the actual demand exceeds the output. Not by bidding up prices with excessive currency all dressed up with nowhere to go.
August 12th, 2009 at 1:07 pm
Let’s just say another quiet prayer for our brethren who might be short sugar. Setting a new high right now….May be a good play to start swiping the free sugar you find in restaurants….
August 12th, 2009 at 1:12 pm
I was thinking going long calls in Splenda
August 12th, 2009 at 1:14 pm
@AndyT
cvienne is probably going to start growing sugar cane on his farm.
August 12th, 2009 at 1:17 pm
Note BR: Sugar commentary is market related. Two days ago Bloomberg claimed the Bovespa was rising on the back of the sugar rally.
http://www.bloomberg.com/apps/news?pid=20601086&sid=aBCFUuvZ3Eyo
August 12th, 2009 at 1:18 pm
DOA – re china. I agree that they’re much more like the US in 1929. Do you think they’ll survive their upcoming crash intact the way we did? I have a feeling they won’t.
August 12th, 2009 at 1:23 pm
@deadonarrival
From Wikipedia: “Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. The consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.”
I think we both can agree that this is occuring around the world. No??
August 12th, 2009 at 1:27 pm
@Thor
Central government planning [in China]. Who knows?
Notwithstanding Hoover, FDR, the Fed, I think a big factor that helped the US eventually emerge from the GD was the fact that Europe needed our oil & military hardware to fight Hitler.
I don’t want to go all on a rant about that (because it was only one of many factors). But the point is, at some point (re: points #1 – #4 Kass), somebody has to buy something and probably use real money to buy it because these promises to pay are getting tedious.
If China is going to lead us out of this, then it needs to sell it’s stuff. It’s probably too immature to expect domestic consumption to kick in there and have a real impact.
So who’s going to step up? Answer me that & I’ll start believing in roads to recovery.
August 12th, 2009 at 1:29 pm
PatG.
Your wikipedia entry is generally correct, but I would suggest that money supply is not growing faster than economic growth. Base money supply has grown a lot, about 800 bn. But, banks’ primary reserves have grown by nearly an equal amount, so the cash is actually not getting out there as M2 or M3, and it’s certainly not having an affect on the 50Trillion dollar credit/debble bubble bursting. This fact is driving Big B. nutso….
August 12th, 2009 at 1:30 pm
@Andy:
I noted my sugar spec trade 2 days ago (IPSU). It still looks good, but won’t buy for long hold until a correction. I am just trading for now.
August 12th, 2009 at 1:35 pm
@Pat
“Economists generally agree”. That statement alone should cause consternation in of itself.
Nevertheless. I’ll go with it.
Ask yourself this. What if gas prices, tomorrow, were $10 a gallon, a loaf of bread was $20, etc. etc.?
What do you think the Fed would do? Do you think they’d keep ZIRP in effect?
My point is, the situation likely will have to present itself before any action is taken on it. So one can speculate all they want. I see no indications as we speak that oil is going to $200 a barrel just because there are dollars around to chase it that high.
August 12th, 2009 at 1:38 pm
DOA – agree on all points. Don’t think we’re going to have any recovery help from China. Number 1. 2. and 3. from above are all going to kill China’s growth in the long run. The American consumer is not coming back anytime soon.
August 12th, 2009 at 1:43 pm
@manahattan. Yeah, it’s in mini-blowoff mode right now. I’m guessing sideways/lower congestion next several days in order to shake out new longs and get shorts pissed off for covering at 23+.
Ultimately, i think we see 29-31c/lb by Nov/Dec, but we’ll see how it goes.. The easy money has been made there…it will likely be grinding/choppy push higher from here.
August 12th, 2009 at 1:46 pm
@Thor
Re: China
I mean. Think of it this way. If anything, you could say the commodity price run-up in ‘08 was somewhat justified because it was “pre-crisis”. Then, in 2009, China could buy commodities on the cheap with a falling dollar, and because of a fear in US government debt.
But at this point, who is the marginal buyer of raw materials? How many empty factories does China need to build? To bid up commodity prices anymore, they’re basically bidding against themselves.
They’d be wiser buying dollars for the next six months, tank the commodity markets, and start the process all over again in 2010.
August 12th, 2009 at 1:51 pm
@dead: Maybe that’s the plan?
August 12th, 2009 at 1:51 pm
” buying dollars for the next six months, tank the commodity markets, and start the process all over again in 2010.”
Absolutely, my devious friend. If we have thought of it, you can bet they have also. Then we’ll get to see who has been swimming in crude oil without their shorts on.
August 12th, 2009 at 1:55 pm
That IS the Plan.
August 12th, 2009 at 2:02 pm
@LB
From the SPX highs in the fall ‘07 to July ‘08, commodities were a one way trade.
The stock market indicies were tanking (because of the looming financial crisis), yet commodities were rallying as everyone was piling into the one trade that was working. Many hedge funds were still solvent then, and applying leverage to that trade. It was also “pre” China Olympics.
Then, whammo! Olympics over, Lehman & AIG, deleverage city, commodities bitch slapped.
I’d say that at this moment there are not as many people interested in seeing high commodity prices, and surely the Chinese (who are probably the most interested marginal buyers), want to see them lower.
And at the same time, I’m sure they’d like to see their dollar & UST investments a little higher. Isn’t October 1st “national day” in China or something?
August 12th, 2009 at 2:07 pm
“because these promises to pay are getting tedious.”
Great line DOA!
August 12th, 2009 at 2:09 pm
DOA: Preaching to the converted, old chap. A few more hedgies will bite the dust this time, as well. Shorting gold seems to be the second most obvious trade of the year, as inflation and collapse fears are both overblown here.
August 12th, 2009 at 2:12 pm
@Andy T
According to the econoindicators website: Between 10-07 and 10-08, m1 climbed 7.6% and m2 climbed 7.4%. Now the FED stopped giving m3 numbers in 3-06 but you can bet based on the other numbers that it climbed as well. Economic growth in 2008 as measured by GDP was less than both of the money supply numbers. Hence; “The consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.” The money the banks are holding will eventually find a new home. It says nowhere in the Wikipedia article or anywhere else that I have read that a “dollar credit or debt bubble bursting” offsets an increase in money supply therefore; inflation. This fallacy is make believe.
@deadonarrival–”the situation likely will have to present itself before any action is taken on it.”
At that point, it’ll be too late and the damage will have been done. That’s the problem with the FED, they are reactive and always late. Look back over the past few years. Their record: they missed everything that’s come at them and been too slow to respond.
August 12th, 2009 at 2:14 pm
The envelope, please … (drum roll) ….
August 12th, 2009 at 2:15 pm
@LB
BR started an open thread on the FOMC statement.
August 12th, 2009 at 2:20 pm
@PatG
” It says nowhere in the Wikipedia article or anywhere else that I have read that a “dollar credit or debt bubble bursting” offsets an increase in money supply therefore; inflation. ”
Well, if it’s not in Wikipedia and you haven’t read about it, then it must not be be true. Carry on…and good luck to you.
August 12th, 2009 at 2:22 pm
I’m still of the mindset that this inflationary scare right NOW is going to end being the biggest market headfake of all time. I may be wrong, but I don’t think so.
August 12th, 2009 at 8:23 pm
When the blog responses on here start getting bullish, then I’ll start getting worried. This market is going way higher.
Per my 1907 statement, if you overlay a chart of the 1907 financial crisis markets with markets today, they almost line up perfectly. 87% correlation to be exact. I compare this financial crisis to 1907 because the banks were bailed out in this crisis just as they were in 1907 when J.P. Morgan bailed out the banks, trust companies, and brokers. While there are huge differences in the economy today, in how things work, etc. , the one thing that isn’t different is psychology. The psychology is very similar – it was during the crash and it is coming out. Don’t take my word for it though – there is a book on it.
http://www.amazon.com/Panic-1907-Lessons-Learned-Markets/dp/0470452587/ref=sr_1_1?ie=UTF8&s=books&qid=1250122968&sr=8-1
August 12th, 2009 at 10:01 pm
Longtime cycle work
with positive ROI
agrees with Kass and
trading positions
August 12th, 2009 at 11:26 pm
I truly do love Doug Kass. I think he is one of the brightest minds in the market with a fantastic track record. I also think he is too early on bearishness now. If I recall he was starting to get bullish back in the spring slightly early before the break of 750 down to 666 on the SPX, but in the end I’m sure he did fantastically well. The reason I think Doug is wrong now and the market will continue to be constructive is the disconnect between the Main Street economy and US corporate profitability. I think Kass is focused way too much on the domestic economy and neglects the profitability SP500 companies make from their international operations. Also, the second quarter was the kitchen sink of bad economic news and yet the ”beat rate” for SP500 companies was an all-time high of 75%. There is no question in my mind that with the very lean inventories now that we will see a better economy in the second half with very easy comps to earnings numbers from 2H2008. Will we see back-to-back-to-back 75% beat rates coming up?
I respect Kass so much I follow him on Stocktwits and he started posting bearishly back on July 22nd when the SPY closed at 95.50 – approximately 5% lower than here. I was quite surprised and it made me second guess my incipient bullishness but I went with my own instincts in the end. It’s been a really nice market since then on the long side.
Here is Doug’s post that day :
*
* DougKass Jul. 22 at 2:27 PM #
*
“My short book is larger than at any time since February now $$”
You can follow Doug Kass on Stocktwits here: http://stocktwits.com/u/DougKass
August 13th, 2009 at 2:21 am
Kass is no different than the other market prognosticators. He was right to call the bottom in March.
But none of the fundamentals he is using here to buttress his Bearish call are new. None of these factors have changed since March when he went bullish.
Kass is no more than a market timer. This is OK. He sees that the market has moved too far, too fast and now he is taking his money off the table, hoping for a major correction. But the fundamental factors he cites are nothing more than rationale to back up a decision he has made based on technical factors, namely that the market is overbought and due for a correction.