This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stock Under $10 that he thinks could potentially double or triple in the next 6 to 12-months. See what he's trading today with a 14-day FREE pass.

Kass: It's the Earnings, Stupid

This column originally appeared on Real Money Pro at 8:16 a.m. EDT on Oct. 23.

NEW YORK ( Real Money) -- The earnings cliff receives an exclamation point of concern as third-quarter 2012 reports flow. Goldman Sachs reported this morning that of the companies that have provided guidance, nearly 90% have been negative. This represents an "unprecedentedly negative level."

We remain in an investment backdrop in which the only thing certain is the lack of certainty, which does not warrant large commitment to stocks.

It does, however, provide a great backdrop to opportunistic trading -- something I am committed to over the balance of the year.

This morning I wanted to revisit the notion of "the performance chase" that so permeated conversation in the media recently and has been an argument used by many as a reason why the S&P 500 would rise to 1500 or more by year-end.

From my perch, it is a straw-man argument. It is bunk and represents a nonsensical reason to own stocks, as evidenced, in part, by the recent descent in stock prices.

Earnings drive stocks, not central bankers' money printing or a chase for performance.

Let me once again explain why the performance chase makes little sense as a reason for owning stocks.

Today there are four dominant investors:

  1. the individual investor;
  2. the mutual fund manager;
  3. the large pension plans; and
  4. the hedge fund manager.

Retail investors have shown no interest in buying domestic equity funds. They will not chase performance, as their disposable incomes are squeezed and they face employment insecurity. They are not likely to reenter the markets in the foreseeable future.

Mutual fund managers are as heavily invested as in any period of history. Their available cash reserves are miniscule.

The large corporate pension plans move slowly, so the issue of chasing performance is academic to them.

This leaves us with the hedge fund industry.

My view is that this idea (well represented in "Fast Money" and elsewhere over the last few weeks) is not true as it relates to hedge funds chasing in actuality for several reasons:

  • The hedge fund community is dominated by large players -- they have been the recipients of the majority of the fund flows in the last five years.
  • The general partners in these hedge funds (Omega/Cooperman, Greenlight/Einhorn, Pershing/Ackman et al.) have huge personal stakes in their hedge funds.
  • Their market views are established -- they will not change this because stocks are moving higher. That is not the way they think. They are disciplined investors who develop an investment opinion based on company and economic fundamentals, combined with the interest rate and economic outlooks.
  • Finally, and perhaps most importantly, these large hedge fund managers have too much respect for their personal wealth and for the money invested by their limited partners to chase the market up or down.

Late last month, I went back and forth with my friend/buddy/pal JPMorgan's Thomas Lee, who has been one of the more conspicuous endorsers of the notion of the performance chase as a source for propping up stocks in this year's final quarter.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Markets

DOW 18,088.01 +57.80 0.32%
S&P 500 2,091.31 +9.43 0.45%
NASDAQ 4,808.5230 +35.0510 0.73%

Our Tweets

Brokerage Partners

Top Rated Stocks Top Rated Funds Top Rated ETFs