This Day On The Street
Continue to site
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

Kass: On the Contrary

This column originally appeared on Real Money Pro at 8:03 a.m. EST on Jan. 29.

NEW YORK ( Real Money) -- Let's not lose sight of the fact that, to most investors, the trend is one's friend. Variant views are typically rare (particularly when the trend is as powerful as the last three weeks of market advances), as they can expose managers to not only investment risk but to business risk. At the same time, a variant view near inflection points can deliver alpha or excess returns -- see Apple (AAPL - Get Report).

The crowd usually outsmarts the remnants, and the comfort of the herd provides most investors with a security blanket.

Over the past several days the business media has been filled with talking heads who are partying like it is 1999, appearing more bullish than ever and likely disregarding or downplaying the fact that the S&P 500 has risen from 666 to 1500.

Below are the most common epithets I have heard appropriated to justify the talking heads' bullishness (and my quick response in parentheses). These glittering generalities are appealing words closely associated with concepts and beliefs that carry conviction without supporting information or reason:

  • "There is no alternative to stocks; bond money will flee equities." (Many classes of investors may remain risk-averse, as there are numerous secular issues facing global economic growth. Moreover, rising interest rates might attract new fixed-income money from investors.)
  • "Stocks are cheap relative to bonds." (This has been the case for three years; it's not a new observation. But monetary policy in the U.S. is in its final innings.)
  • "Money markets yield near zero." (This has also been the case for over three years.)
  • "The data don't matter." (Until they do.)
  • "Washington's inertia in dealing with the budget deficit doesn't matter." (Really? If our leaders don't address the burgeoning deficit and kick the can down the road, a price will be paid. At the very least, this will prove to be valuation-deflating.)
  • "The market wants to go higher." (Until it doesn't. Those who worship at the altar of price momentum will retreat from the markets in any meaningful market decline.)
  • "Central banks are printing huge amounts of money; it has to go somewhere." (Monetary easing in the U.S. has still failed to create a self-sustaining recovery. Fourth-quarter 2012 real GDP will likely be only +1.5%. Secular issues continue to weigh on growth and will for some time. If printing money was the sine qua non, every recession would be patched up by monetary expansion. There is a price to pay for excessive monetary growth.)
  • "Despite a relatively sluggish corporate profit outlook, valuations -- P/E multiples -- will expand." (We are at about the average multiple over the past five decades. Considering the aforementioned secular issues, why should valuations be above the historic average?)

To be quite direct, most of these are old, worn, simplistic and non-rigorous arguments, many of which have been in place since the S&P 500 stood at 666 in March 2009. And, for now, they are working in investors' favor!

As I like to write, though, price is what you pay and value is what you get.

Since these glittering generalities have been accepted by many as a rationale for the market advance, let me submit my own glittering generality: The market is failing to distinguish between economic progress and reality, ignoring countless factors (an earnings cliff, a spent-up consumer, etc.), and it is overpriced and ready for a fall.

On a more serious note, I have countered most of these glittering generalities over the last few weeks with objections through analysis.
At the time of publication, Kass and/or his funds were short SPY, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,769.77 -121.39 -0.68%
S&P 500 2,066.57 -14.86 -0.71%
NASDAQ 4,784.8210 -32.7730 -0.68%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs