Kass: The Hardest Stock Market to Navigate Ever?

I have my own set of views; weigh them against some of the more positive (and rigorous) constructs, and make your own decisions.

I immersed myself in the fundamental risks a month ago in "A Brave New Investment World":

The next five years in the capital markets seem destined to be unlike the last five years. The most significant difference is that the egregious use, generation and packaging of debt will not be repeated -- and the consequences of that leverage will be adversely seen in areas of the world economies that we had never contemplated.

From my perch, the bulls continue to think very linearly and seem to be missing how significant the role of credit was to past growth and how significant a pullback in credit will be on future growth. Significantly, the markets continue to underestimate the consequences of leverage and are overestimating the prospects for corporate profit growth.

And I remarked about the worsening technical position back in late October in Barron's:

But that they're taking place at the same time doesn't mean they're otherwise equal. As Doug Kass, the redoubtable bear who runs Seabreeze Partners, points out, the bullish part of this hybrid bull-bear market has been restricted pretty much to a relative handful of high-steppers (a number of which, as it happens, are prominent components of the Dow and the S&P 500 averages). Since Doug views everything through some expensive designer glasses darkly, he points to historic instances as demonstrating that narrow bull markets end badly.

In support of his forebodings, he cites the Nasdaq 100's spectacular performance so far this year -- last we checked, it had shot up a cool 25%, or some 448 points -- as a startling illustration of how a few exceptionally strong stocks can give the impression of a big bull move. Of that roughly 25%, or nearly 450 points, gained by the Nasdaq 100, a whopping 230 points, or over half the index's rise, has come from just three issues: Apple(AAPL Quote) (135 points), Research In Motion(RIMM Quote) (60 points) and Google(GOOG Quote) (35 points).

No accident that each of that triumphant trio is part of the big, amorphous sector dubbed 'tech'. For, according to that perceptive observer referred to a few paragraphs above, the torrent of dough exiting the financial shares, which for so many years ruled the investment roost but lately have been feeling the effects of the credit chill, has flowed in gobs into techs, which has been largely out of favor for quite a spell.

No accident, either, he says, that Apple, Research In Motion and Google wear the growth label. For, he believes, the long dominance of value over growth in investor preference is in the process of changing, and, if and when the market regains its footing, growth will reassert its preeminence. The emphasis, though, will not be on current momentum favorites like Apple, Research In Motion and Google, but, instead, on that vast legion of growth stocks that have conspicuously lagged in markets ever since the dot-com bust.

By persuasion, our man is a technician, and as accomplished a practitioner of that mysterious art as ever studied a chart. He thinks there's still room on the downside here, noting there remains a mess of excesses, and he's also concerned that emerging markets, including those he's well-disposed toward, are 'overly extended,' or, to translate from the jargon, too pricey.

He feels the market will bottom temporarily next month and get a lift, temporary as well, from the usual year-end boosts. As to next year, leaning on the workings of the so-called presidential cycle, which translates usually into decent stock performances in the last two years of a president's term, he expects a middling stock market, neither especially weak nor notably strong. But comes 2009, he cautions, then possibly comes, too, the reemergence of the bear market, and it could be a big, bad one.

Good luck, and be careful out there.