Kass: Delicious Dozen
By Doug Kass 06/18/12 - 12:00 PM EDT
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This column originally appeared on Real Money Pro at 8:35 a.m. EDT on June 18.
NEW YORK (Real Money) --
Scenario No. 4 -- Muddle Through (65% probability): The U.S. muddles through, with 1.50%-2.25% real GDP growth, and the European economies suffer a modest (but contained) business downturn. China's and India's economies grow in line relative to consensus forecasts. There is no further quantitative easing. Obama regains the White House, and the Republicans control Congress. The fiscal cliff is reduced by half (to $275 billion). S&P 500 profits for 2013 trend toward a range of $107-$109 per share as some modest margin slippage occurs (coincident with escalating inflationary pressures). Stocks, valued at 14.25x under this outcome, have 15% upside over the next nine months. S&P target is 1540. -- Doug Kass, "Time to Be a Bullish Contrarian"In April, I viewed the glass as half-empty in chronicling the "Dirty Dozen," 12 factors that could upend or be disruptive to the U.S. stock market. (I revisited the list in late May.) Today, let's view the glass as half-full and consider the upside that is contained in my scenario No. 4 above (S&P 500 target of 1540 with an associated 65% probability), which yields the potential for the major indices to advance by 15% in the next six months. (My fair market value, which melds my four possible economic/stock market outcomes, remains at 1455, for 8.5% upside from here for the S&P.) It is always important to exempt dogma from our relationship with Mr. Market. To many (both fundamentalists and technicians), today's opening missive will be construed as a truly ludicrous forecast -- nothing more than a Pollyanna's vision of our stock market future in an imperfect world of economic blemishes, questionable policy and broken charts. Perma bears will be resoundingly critical of this uncharacteristic and optimistic exercise (and to my list that follows) just as the perma bulls were critical when I published the "Dirty Dozen." No doubt, some will say that I have taken leave of my senses, that I have forsaken my roots, which started (chronologically) when I wrote a skeptical cover story in Barron's on Marvel Entertainment in 1992 and after The Wall Street Journal anointed me "the bear of Boca" in a "Heard on the Street" column in the mid-1990s. So be it! For as Jim "El Capitan" Cramer says, our job is not to make friends (or to be imprisoned by dogma); our job is to make money.
Investing and Trading Are Social Activities
Two underappreciated forces in financial markets are irony and paradox.... Investors are prone to be bullish at the top of the market when prices are high and bearish at the bottom when prices are low.... When a cynical investor hears that there are too many optimists in the market, he will begin to worry. By the same token, an overabundance of pessimists will give him courage. After all, he may ask, if everyone is already bearish, who is left to sell? -- James Grant, Minding Mister Market: Ten Years on Wall Street With Grant's Interest Rate ObserverFrom my perch, the "Delicious Dozen" is no more ridiculous of an outlier event than was my "Dirty Dozen" column written back in April -- particularly since many classes of investors have already de-risked in the face of widely known economic/investment issues. We should never be contrarian solely for the sake of being contrarian, as farsightedness is usually a quick trip to the poor house. But, my experience over several decades of investing is that often when the majority is so confident in their view (read: bearish and de-risked), it is likely that their concerns are materially reflected in stock prices and that the market is vulnerable to a surprise.