Investing
Kass: Merits of Market Agnosticism
03/25/08 - 01:02 PM EDT
Updated from 11:59 a.m. EDT This blog post originally appeared on RealMoney Silver on March 25 at 8:45 a.m. EDT.
"The stock market is a no-called-strike game. You don't have to swing at everything; you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'" -- Warren Buffett, 1999 Berkshire Hathaway Annual ReportI marvel at the conviction and the authority of opinion of the bulls and bears alike these days (actually all days!). But talk is cheap -- especially from the media and those who, regardless of the market's backdrop, inflexibly talk their own book with a degree of confidence that is typically unearned based on past performance. On The Edge, I attempt, through logic of argument and analytical dissection, to offer my current views on the economy, the market, sectors and on individual securities. (There is no reconstructing history as subscribers can easily see the imperfection of my views through the RealMoney archives.) I started the year with my underlying concerns being credit and the consumer, and with an expectation that the S&P 500 would drop by 5% to 10% in 2008. By early March, the markets overshot my forecast to the downside. As most subscribers are aware, I have grown increasingly more constructive into the recent market decline. A week ago Monday, into the teeth of the Bear Stearns BSC meltdown, I raised my short-term market rating to 7 (out of 10; 10 being the most bullish and 1 being the most bearish) in my opening missive. In that piece, I revisited the positives and negatives of my month-earlier column, and I wrote that "when I revisit these factors today, I can see the balance tipping over toward the positive ledger." I further outlined "some weighing (not voting) considerations that could buttress the markets and/or suggest that the current issues could be in the process of being discounted in the markets, forming the basis for the potential for a more constructive view in the days/weeks ahead after the panic subsides." These included the following:
- The curative and clearing process addressing many of the financial institution's capital issues, has been under way for months.
- We are bottoming, not yet recovering in housing.
- Corporate balance sheets are in great shape and should buttress the current credit issues.
- Sovereign wealth funds remain flush (though relatively uncommitted) and stand ready to commit opportunistically to shore up capital of some of the United States' largest financial institutions.
- The yield curve's steepening could, in the fullness of time, incent banks to take more risks.
- Corporate profit expectations, which were unrealistic until recently, are being pared quickly and are catching up to my downbeat projections.
- Over the last 50 years, job losses (a lagging economic indicator) have coincided with economic stabilization and a positive turn for equities.
- Stocks have declined by 20% within a six-month period for the fourth time in a quarter of a century (1990, 1998, 2000). In the 12-month period following the 1990 and 1998 corrections, stocks rallied by 34% and 39%, respectively.
- As I have noted previously, unlike previous bear markets, equities were not the subject of speculation at the top; commodities, residential and non-residential real estate, and private equity were.
- If corporate profits avoid a major slide in 2008, stocks are inexpensive relative to short- and long-term interest rates. Indeed, with a seeming bubble in the bond market, a broad reallocation of assets out of fixed income and into equities seems possible.
- With the speed and momentum of the credit crisis intensifying coupled with a continued weakening in economic activity (especially of a job kind), the negativity bubble now appears so inflated that it could be ready to pop.
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