Doug Kass
As I have suggested for the past two years, investors should be looking less closely at put/call ratios and investor sentiment surveys and instead should be reading the investment books that intelligently put credit and speculative market cycles in perspective. They should be reading books like Roger Lowenstein's When Genius Failed: The Rise and Fall of Long-Term Capital Management, Charles Mackay's Extraordinary Popular Delusions & the Madness of Crowds and James Grant's Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken.
In our tightly wound and levered financial system, investors today might be advised to concern themselves now with return of capital; it is likely too early to be concerned with return on capital. Amazingly, in last week's credit crisis, equities ended the week higher -- even despite Thursday's schmeissing. And, even more surprisingly, is that the S&P 500 is flat on the month of August and still up by 2.5% on the year. (Of course, non-rigorous bullish market technicians, who never seem to find a sentiment indicator that doesn't shine positively for equities, will no doubt view this positive market performance as constructive.) With corporate profit margins vulnerable to a regression back to the mean, price-to-earnings multiples
still high -- until recently the median P/E on the S&P 500 was about 20 times -- and the many non-investment threats (political and geopolitical) enumerated daily on The Edge, the outlook for equities has turned sour.
We will have vicious rallies in the bear market that I envision, but they will be fakeouts. Buy on the dip? Not with my investors' money. Sell or short the rips, as (you can bet your bottom dollar that) "the sun will not come out tomorrow."
I see fire, and I see rain.
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