Kass: Market in Limbo
This blog post originally appeared on RealMoney Silver on May 29 at 7:30 a.m. EDT.
Mr. Market generally does his best to hurt the most participants, but today it's tough to say what market movement would hurt the most.
On one hand, with a relatively cautious body of investors (especially of a hedge fund kind) and valuations apparently reasonable (against short- and long-term interest rates and against projected profits), stocks could move higher.
On the other hand, with inflationary pressures
mounting
, credit market and default swaps
renewed credit turbulence, the
Federal Reserve's
of moderating economic growth and rising inflation and an increased likelihood of a contraction in corporate profit margins, stocks could move lower.
From my perch, I
short-term conviction on Mr. Market's direction, but I remain troubled regarding the intermediate term.
Looking beyond the next few weeks, a period of "blahflation" (blah economic growth coupled with nascent inflation) remains my base economic expectation. Should the housing industry fail to recover (as I expect) and if the consumer is as weak as I anticipate, the U.S. economy could be entering a period reminiscent of the late 1970s, which was a precursor to the inflationary conditions that existed in the early 1980s.
This is a P/E multiple moderating environment consistent with substandard investment returns (at best) and a bear market (at worst).
Under the circumstances, traders and investors should err on the side of conservatism.
Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.