Kass: The Big Picture Remains Cloudy
By Doug Kass 02/05/13 - 06:00 AM EST
TheStreet Premium Services
A complimentary preview
of Real Money
The Italian MIB Stock Index has fallen to a four-week low, and the yield on Italian bonds has risen to a one-month high.
Domestic ChallengesFortunately, for now, the inflation outlook is muted, and the Fed remains friendly. All this said, domestic economic growth (as measured by real GDP) is still is challenged, and +1.5% real GDP (2013) growth remains my baseline expectation. With modest inflationary pressures, nominal GDP growth looks to be in a range of +3% to +3.5%, providing a challenge to corporate top and bottom lines in a competitive world business climate. I continue to believe that the handoff between the consumer and corporate sectors is fragile (and uncertain), that the outlook for corporate profits is likely well below consensus and that the U.S. stock market has disconnected from many of the above economic realities. For now, investors are rejecting my concerns, as confidence in this handoff coupled with global money printing are contributing to growing bullish investor sentiment and an expansion in P/E multiples. Nevertheless, from my perch, fantasy and fundamental economic/profit progress are being blurred.
Turning Toward the Technicals
It might seem odd that a fundamentally oriented investor should write the foreword for a book devoted to technical analysis. After all, many fundamental investors view technical analysis as nothing more than fortune telling, and technical analysts as wizards who should be locked up and kept away from the children (and investors/traders who behave like children). But here I am, a fundamental investor, doing just that. The fact is that the business of investing is complicated. Think of it as a pyramid, with each angle of the pyramid representing a different approach -- you've got the fundamentals, valuation and the technical. It is the influence on equities called the "technicals" that Jeff Hirsch captures so eloquently and succinctly in The Little Book of Stock Market Cycles. Jeff's thoughtful book takes a cue from Winston Churchill, who once wrote that "the farther back you can look, the farther forward you are likely to see." As Jeff writes, the lessons of stock market history are invaluable. The study of patterns from the past makes future trends clearer, just as the avoidance of history makes them potentially lethal to your investment's well-being. Mr. Market is not an easy guy to get to know. Analysis of market history and the rhythm of financial cycles isn't a simple task and especially not the way Jeff does it. Determining the roles that human behavior. holidays, elections, seasons and the calendar play in influencing the stock market's direction requires careful observation and critical thinking. Even the role of peace and war is fair game in Jeff's analysis.... In The Little Book of Stock Market Cycles, Jeff presents a common sense message and invaluable lessons for how to take advantage of time-proven market patterns. Both individual and institutional investors should take notice. After all, those who cannot remember the past are condemned to repeat it! -- Doug Kass, foreword to Jeff Hirsh's The Little Book of Stock Market CyclesAway from the fundamentals, which are being interpreted as positive by most, investors seem to be equally enamored of the current technicals. Yesterday, my buddy/friend/pal Jeff Hirsch (the hard-working son of Yale Hirsch) came over to my Florida home for a visit. He and his dad are masters of technical patterns. (Note: I proudly wrote the foreword to Jeff's recent publication, The Little Book of Stock Market Cycles.) The January barometer was first mentioned by Yale Hirsch in 1972. Yale's hypothesis was that stock market performance in January predicts its performance for the rest of the year. Historically, if the S&P 500 rises in January, the trend will follow for the rest of the year. Conversely, if the S&P falls in January, then it will fall for the rest of the year. From 1950 to 1984, both positive and negative prediction had a certainty of about 70% and 90%, respectively, with 75% in total. After 1985, however, the negative predictive power had been reduced to 50% -- or, no predictive power at all. (Raymond James' Jeff Saut had a good rundown of Hirsch's observations in his morning commentary today, "The January Barometer.")