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: From Generational Bottom to Cyclical Top?

Consider the comments in the March 2009 New York Times column, in which I debated legendary (and then bearish investor) Robert Rodriguez at First Pacific Advisors (who embraced the negativity of the period). His concerns were illustrative of the bearish meme back then:

What optimists do not understand, says Mr. Rodriguez, chief executive of First Pacific Advisors, is that the United States is being profoundly reshaped by this recession.

"We've crossed over into a new financial era," he said. "You don't know what the ground rules are. You don't even know what the shape of the playing field is."

Economic growth may be stagnant for years, even after the economy hits bottom. Corporate profits may not bounce back. And the high hopes for recovery that have helped drive stocks higher this month may yet crumble.

Stock markets rose 10 percent or more several times during the Depression, the early 1970s and other downturns, only to lose their momentum and give back months of gains. As bearish experts warn, market bottoms come only when investors give up hope of ever seeing a bottom.

"This rally that's going on may prove ephemeral," Mr. Rodriguez said. "I still think we have a very long, arduous journey ahead of us...."

"The stock market will be very volatile, and corporate profitability will be very volatile," Mr. Rodriguez said. "There are large segments of the United States economy that will never come back."

-- Jack Healy, " A Pitched Battle for Turf Between the Bears and the Bulls," The New York Times (March 30, 2009)

The Bottom Line

I continue to hold to the view that the S&P 500 is fairly valued at approximately 1650 (or about 10% below current levels) and that the expected range in the S&P for the balance of the year should be between 1700 and 1925. With the S&P now at 1850, the risk (150 S&P points) exceeds the reward (75 S&P points) by a factor of 2 to 1.

While I expect equities to be down by 5% to 15% in 2014, I am uncertain as to the timing of a potential downturn.

At best I view 2014 as a year of subpar returns.

At worst, a cyclical bear could lie around the corner.

For now I am positioned market-neutral, and I prefer being reactionary (rather than anticipatory), looking for Mr. Market's price action to give me some direction.

The major market risks include a downgrade in valuations (and P/E ratios), disappointing corporate profits (and profit margins), less vigorous global economic growth (which might be the message of the recent flattening in the yield curve) and the likely emergence of natural price discovery in the capital markets as the Fed begins to taper and ultimately raise interest rates.

The first quarter of 2014 is the first opening three-month period of a year since 2009 that the market has made no progress.

Market leadership is changing, often a worrisome signal.

Previously poorly performing large-cap conservative market sectors are strengthening just as the market leaders have slumped, which is reminiscent of the weakness in large-cap value in 1997-1999 and the firming up in early 2000 right before the market's schmeissing.

The upcoming reporting period might prove to be a market catalyst to the downside.

In terms of comparing the Marches (2009 and 2014), obviously generational bottoms occur only once a generation, but cyclical tops (and bottoms) are entirely other things -- they happen with frequency.

I conclude that stocks, which with the benefit of hindsight were at the generational bottom five years ago, might very well be mapping out a cyclical top in early 2014.

History doesn't repeat itself, but it sure as hell rhymes.

This column originally appeared on Real Money Pro at 9:13 a.m. EDT on March 31.
At the time of publication, Kass and/or his funds were long TBF/short TLT, 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 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs