Kass: Ignore the Macro? Not Me!
This column originally appeared on Real Money Pro at 9:21 a.m. EDT on May 14.
NEW YORK ( Real Money) --
"If ignorance is bliss, then knock the smile off my face."According to Merrill Lynch's May global fund manager survey (230 investors with $660 billion in assets under management) released last night, hedge funds are at their highest net long exposure in seven years. Clearly, this dominant class of investors (and others) is now dismissing concerns regarding the macroeconomic backdrop in the U.S. and around the world as poppycock. Many (on this site and elsewhere) are now saying that the tepid global economic growth is something that big-picture economists and strategists worry about, not stock pickers. They go on to say that the disconnect between world GDP and share prices is almost an academic argument. They almost suggest that it is a distraction for worrywarts, who would be better off analyzing company-specific or microeconomic data. While there is some truth to the bulls' arguments, I am less convinced that one should totally ignore the macroeconomic conditions. As I have recently written, slow nominal GDP growth represents a challenge to corporate profits -- the mother's milk of the stock market.
-- Rage Against the Machine, " Settle for Nothing"
Bright SpotsRecently, there have been some bright spots. Oil prices have slipped. Jobless claims have trended lower, and the outlook for employment has improved. The labor force is expanding somewhat, and temporary jobs growth has turned up but possibly for the wrong/bad reasons (related to Obamacare).
Negative Forces at WorkNevertheless, there are forces at work to suggest that first quarter 2013 will mark a peak in U.S. real GDP for the year. The last three quarters of this year will likely show a moderation of economic growth, producing weak nominal GDP that will fail to provide corporate pricing power, will jeopardize already-inflated profit margins and will deliver corporate profits well under consensus expectations. Housing: Hedge funds and other corporate and institutional investors have gobbled up homes for investment. This has served to prop up home prices, which, in turn, has served to turn away first-time homebuyers. I expect a pause in my anticipated durable multiyear recovery in housing. Jobs: While unemployment claims have begun to improve, this volatile series likely benefited from continued Superstorm Sandy reconstruction. Moreover, the improvement appears to be mostly in lower-paying jobs.
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