Kass: Neither a Bull nor a Bear Be

This blog post originally appeared on RealMoney Silver on May 29 at 7:37 a.m. EDT.

Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

-- Polonius, from William Shakespeare's Hamlet

In Hamlet, Polonius advises his hotheaded son Laertes, who is about to embark for Paris for his gentleman's education. Throughout the play, Polonius wholesales a stockroom of aphorisms, the most famous of which is "neither a borrower nor a lender be."

There is little to argue with in Polonius's ungenerous advice. His logic is that lending money to friends is risky, because hitching debt onto personal relationships can cause resentment and, in the case of default, loses the lender both his money and his friend. Borrowing invites more private dangers: It supplants domestic thrift ("husbandry") -- in Polonius's eyes, an important gentlemanly value. It is interesting to note that, in the days when Hamlet was first performed, borrowing was epidemic among the upper class, who sometimes neglected husbandry to the point where they were selling off their estates piece by piece to maintain an ostentatious lifestyle in London.

My ungenerous advice is that, over the short term, I continue to see neither a bull nor a bear but rather, as I recently offered (see below), a sideways correction.

I am beginning to view the possibility of a sideways correction, in which market sectors "recycle" within the context of only a modest move lower in the market indices.

Some fundamental factors and sentiment considerations lead me to this conclusion.

Though the availability of bank credit remains too tight, most impressive to me has been the improvement in the credit markets (particularly spreads). Indeed, Libor as well other credit spreads and gauges are equivalent to their fall 2008 numbers, when the S&P 500 stood at approximately 1,040, almost 15% higher than current levels.

I am also impressed by the appetite, receptivity and the ability of the markets to absorb hefty equity offerings, which not only fills company financing gaps and provides capital for growth but it speaks volumes regarding investors' propensity to accept more risk.

Finally, from a sentiment standpoint, I have previously written that, unlike previous market "takeoff" periods in the 1970s and 1980s, the dire sentiment existing in early March has not been materially reversed towards bullishness, which another good sign. Anecdotally, my hedge fund cabal remains materially underinvested and skeptical about the recent "bear-market rally" -- and very frustrated!

Mr. Market typically does his best to harm the most investors, and a sideways correction would likely continue to keep the skeptics out of the market and poorly position those investors for the next leg higher

In this framework, a two-sided market becomes our investment reality, in which money can be made in "playing" the sideways consolidation (both long and short). This means that tactically I plan to be bolder in buying sector- and stock-specific ideas on dips, while continuing to short extended areas and stocks rather than waiting to buy on a sharp correction.

-- Doug Kass (May 21, 2009)

This week's action has been consistent with the sideways correction theme, with materials and financials on the ascent and retail and homebuilding weaker. I expect continued group rotation.