Kass: Flawed Case for a Bull Market
Slow Growth and a Challenging Profit Landscape Lie Ahead
My argument today might be rendered moot if global economic growth would begin to accelerate meaningfully -- in that case, corporations would achieve operating leverage -- or if interest rates would stay abnormally low.
These are not my core expectations.
The profit landscape remains challenged, and interest rates, in the fullness of time, will be rising.For 2013, I expect a below-consensus forecast of between $107 and $109 a share for S&P profits (the consensus is for full-year profits of $109 a share). For 2014, the consensus estimates that the S&P 500 will achieve profits of about $116 to $120; my base case estimate is for $112 to $114, a gain of under 5% (year over year), which, is, again below consensus. Slowing sales, a contraction in margins, the reduced influence/benefit from aggressive monetary policy and political uncertainties are some of the reasons why my baseline earnings expectations are for below-consensus 2014 S&P profits.
Optimism Swells With Higher Stock Prices
"Show me somebody who is always smiling, always cheerful, always optimistic, and I will show you somebody who hasn't the faintest idea what the heck is really going on." -- Mike RoykoThe strength in stocks throughout most of 2013 has been consistent and spectacular, and arguments such as what I have expressed in today's opening missive have fallen on deaf ears. The reality is that shorts have been a hedge against profits. That said, most people get interested in stocks when everyone else is, but the time to get interested is when no one else is. This is certainly not the case today, as investor sentiment and higher stock prices have turned almost universally optimistic these days. But a public opinion poll is no substitute for thought. Near the end of enormous upside moves such as we have experienced since the generational bottom in March 2009, analysis often goes unquestioned as new-era thinking is embraced, something I expressed in last week's "10 Laws of Stock Market Bubbles." We are beginning to hear new-era thinking -- a view of a long boom of self-sustaining economic and profit growth (and, importantly, profit margin stability) similar to what was offered in mid-1997 in what became a famously wrong-footed column in Wired. We all know how badly the dotcom/technology era ended a few years after the aforementioned misguided view of a long boom. My argument today is that using raw earnings to justify current valuations might be misplaced logic, as, from my perch, the irrational is being rationalized. At the least, the reward vs. risk remains unattractive in the U.S. stock market. At the worst, a Minsky moment may lie ahead in the not too distant future in which asset values drop following a lengthy period of prosperity and increasing value of investments.
This column originally appeared on Real Money Pro at 8:06 a.m. EST on Nov. 18.
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