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: Why I Remain Bearish

The Line Between Progress and Reality Is Blurred

The gap between the rising U.S. stock market and the visible deceleration in the rate of global economic growth has been widening in a more dramatic and conspicuous fashion over the past several weeks, and my cautious market view is growing more bearish.

The weakness in the most recent U.S. March ISM release, the fall in consumer and small business confidence, disappointing March retail sales, a sharp drop in the Citigroup U.S. Surprise Index, worsening EU economies and/or any of a number of other factors affirm that global growth is slowing to a rate that will likely imperil the ambitious consensus for corporate profits. Other recent endorsements of the slowing global growth thesis include (most notably) the intensification in the drop in commodity prices (copper and gold, in particular). Also:

  • U.S. Treasury yields are falling;
  • the yield curve is flattening;
  • the high-yield credit market is no longer rallying;
  • the economically sensitive transportation index is faltering;
  • there has been a near-record percentage in the number of companies issuing earnings warnings;
  • the U.S. stock market leadership is focused on defensive high-quality consumer staple stocks (paying relatively high dividends) as opposed to aggressive, high-beta stocks; and
  • with the exception of the U.S. and Japan, many markets around the world are struggling.

All of the above conditions are indicative of moderating worldwide economic growth and have historically been associated with market tops -- or, at the very least, a more hostile environment for stocks.

Consensus Corporate Profits Expectations Are Overly Optimistic

If we distill my multiple concerns into one concern, it is the more difficult earnings backdrop that should become increasingly apparent to market participants in the near term.

Given that the growth in nominal U.S. GDP is trending at under 4%, corporations have little in the way of pricing power. And with profit margins at all-time highs and nearly 70% above the mean levels achieved in the last seven decades, earnings forecasts are threatened based on slowing top-line growth and a likely mean reversion in margins.

Though early in the reporting period, a chill in early first-quarter earnings is already visible (across many industries). Fastenal (FAST - Get Report), FedEx (FDX - Get Report), J.B. Hunt Transport Services (JBHT - Get Report), Harris Corporation (HRS - Get Report) and many leading technology companies have missed consensus forecasts and/or lowered forward guidance -- even during a first quarter in which the U.S. will likely exhibit +3% real GDP.

I remain fearful of what will happen to earnings when the rate of real growth in the domestic economy halves to around +1.5% over the last three quarters of the year.

An Extreme Short-Term Overbought

Up to now there is little question that investors are feeling the pressure of underperformance, chasing price strength and ignoring the warning signs of slowing global economic growth, a worsening profit outlook and expanding technical divergences (and low NYSE volume). Hedge funds are now at their highest net long exposure in some time, sentiment studies are uniformly bullish, and retail investors are warming up to stocks. As a result of these factors (and others), stocks are overbought -- maybe even dramatically so.

But I see it as only a matter of time until reality adversely impacts stocks. In fact, it is my view that this could happen momentarily.

The Bottom Line

It is for the reasons above (and others) that I am short of the market.
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 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs