Kass: A Market on the Brink

Other Concerns

There are other problems to worry about as well, mostly emanating from the last decade of overconsumption (i.e., the lack of due diligence in lending and the disregard of risk in borrowing) and the structured products that permeate the markets today.

• There is no quick monetary or fiscal relief that will fix the deeply rooted credit problems that have translated into assets of mass destruction orbiting within (and sometimes off) the balance sheets of many of our world's financial institutions.
• The largely unregulated derivative markets, the size and variability (read: mortgage ARMs) of consumer debt, the hedge fund (and fund of funds) communities and the world's housing markets grew too fast as common sense and due diligence were abandoned in the last credit cycle.
• Markets are beginning to accept the notion that the financial workout will take time and, in all likelihood, can only be relieved by the natural forces of a protracted recession.
• Technical conditions have deteriorated and seem to be confirming the aforementioned fundamental issues.

Too Volatile to Call

The outgrowth of the aforementioned variables suggests that corporate profit (and profit margin), business spending and personal consumption forecasts remain far too optimistic.

There are some offsets to my fundamental concerns, but they are principally statistical and/or sentiment-based. Most prominent:

• A relatively low trailing market P/E multiple.
• Historically low interest rates.
• Rising acceptance of many of my fears.

It has become increasingly difficult to gain an edge on the short-term market outlook. Quite frankly, anyone who thinks that he has one is lying to himself and to others. The near term is too unpredictable and too volatile and contains too many crosscurrents.

After spectacular successes, Bobby Knight ultimately left Indiana University and ended up coaching the Texas Tech basketball team -- a comedown of major proportions. After years of excellent investment returns, Mr. Market seems likely to follow in the storied coach's footsteps.

I remain more confident than ever in my intermediate view that a period of uneven and disappointing economic and profit growth augurs for substandard stock market returns.

From that context, the market is on the brink.