Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.
There Are No Dollars in Dogma
Originally published June 28 at 9:04 a.m. EDT
"Be fearful when others are greedy and greedy when others are fearful." -- Warren Buffett
The investment mosaic is complex, and the "rules" are ever-changing -- just consider what's happened to the S&P 500 in recent days.
The index nearly hit a new all-time high Thursday afternoon, then tumbled following the Brexit vote as markets around the world lost more than $3 trillion in just two trading days. And today, S&P 500 futures were up by some 24 handles in premarket trading at last check.
Let's look at how this complex mosaic and ever-changing market affect us as traders and investors:
The Complex Mosaic
For most of us, fundamentals, technicals, sentiment and valuation form the basis of our personal investment mosaics.
Mr. Market pays more attention to fundamentals at some times, while sentiment and emotion play the greater role at others. This keeps us on our toes, but it's one reason why I recoil when strategists, pundits and other "talking heads" express themselves glibly and self-confidently, as if they had a crystal ball that could see into the future.
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, [Berkshire Vice Chairman Charlie Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place away from children, and also from grown-ups who behave in the market like children."
The Ever-Changing Market
I've often written that our investment world is flat, networked and interconnected. As such, change can come swiftly -- and like dominoes, the domino at the beginning of the game can typically impact the domino at the end.
Similarly, risk and reward happen fast, so our opinions must be fluid rather than fixed. Exacerbating this swift change is the newest and most-dominant investor class of the past five years -- machines and algos that follow volatility-trending and risk-parity strategies (among other quant techniques).
All of this contributes to a market that's without memory from day to day.
The Value of Experience and a Level Head
Given all of the above, it's helpful for traders and investors to always maintain a historical perspective, keep level-headed and remain flexible in both their market view and positioning. It also helps to be emotionless in times of volatility (even when prices are plunging or surging).
This is particularly true for your portfolio's trading component. The shorter the timeframe, the more opportunistic we should be -- and the longer the timeframe, the more fixed in view we should be.
Taking the Dollars Out of Dogma
"The good news for the market is that we now have certainty surrounding the Brexit vote, coupled with a whiff of panic and more realistic pricing of stock. This could take off some near-term pressure and lead to modest trading opportunities to the upside.
However, the bad news (as I noted earlier) is that I only expect a sawtooth move lower towards my 1,900 fair-market-value estimate for the S&P 500 (vs. the index's current roughly 2,000 level). As such, stocks looks to me like they're still elevated and offer only limited near-term upside for any trading moves."
-- Doug's Daily Diary, Today's Trades (June 27, 2016)
I always try to make sure that flexibility guides my trading activity.
By contrast, consider what my Real Money Pro colleague Bob Lang wrote yesterday in Columnist Conversations with seeming certainty:
"Regardless of the (Brexit) decision, markets were destined to come down, the economy is not humming along at a level that is consistent with market prices. Nothing was going to stand in the way of falling prices."
-- Robert Lang, Brexit Was Just a Sideshow (June 27, 2016)
I have to ask: "How can anyone comes to such self-confident conclusions?" I mean no disrespect, as everyone is entitled to his or her own opinion (especially if it works for them). But personally, I try to avoid dogma and focus on delivering superior returns.
For example, I started the day yesterday by outlining a negative view of the Brexit's impact on markets (click here and here). Then I followed up with a strategic look at my expectations for the S&P 500 to see a "sawtooth move" lower to about 1,900 (my assessment of the index's fair-market value).
But at about 1 p.m. ET, I explained (in the thick of a monumental market decline's second day) why I was covering a lot of shorts and had moved to a slightly net long position on a trading basis. And a little later, I took an unpopular short position on bonds after the 10-year Treasury's yield had dropped by more than 25 basis points in less than two trading days.
Importantly, I expressed no certainty or sense of self-confidence in any of these moves. I simply thought that risk vs. reward had improved markedly from where the market had been on Thursday afternoon, and I recognized that panic had set in with many traders and investors.
I admit that I could be wrong on these trades, and I sized my positions small in recognition of the complex issues that investors face today. But that's how I play the game -- and I'll always use my diary to explain the "how, when and why" of my trading or investment moves.
Position: Long SPY (small), Short BRK.B (small).
Originally published June 28 at 12:37 a.m. EDT
Goodbye 'T.I.N.A.' Hello 'C.I.T.A.'
"This morning, [T. Rowe Price's Brian Rogers] mentioned 'T.I.N.A.' ('There Is No Alternative' to stocks).
Isn't cash an asset class and a means of protecting assets? Can't the global bond market be saying that a secular decline in growth lies ahead?"
-- Doug's Daily Diary, 6 Questions for 'The Sunshine Boys' (Oct. 14, 2015)
I've long felt that the concept of T.I.N.A. ("There Is No Alternative" to stocks) is inane -- a figment of the imagination for perma-bulls who rationalize sluggish economic growth and tepid corporate profits.
In fact, it should be abundantly clear -- apart from stocks' bounce today off of the two vicious losing sessions that following the Brexit vote -- that T.I.N.A. is B.S.
Personally, I endorse "C.I.T.A." -- "Cash is the Alternative." And that's regardless of the low interest rates that we're currently seeing in America, or even the negative rates available in Europe and Japan.
After all, cash is a legitimate asset class and performs the job of insulating our portfolios from wild gyrations and drawdowns.
So, I say that if the current rally runs it course over the next few days (as seems possible), traders and investors should consider using cash as a protective tool in these uncertain times and markets. And that's even after we bear in mind the puny yields that the world's fixed-income markets are offering.
The bottom line: "Goodbye T.I.N.A. ... Hello C.I.T.A.!"
Originally published June 28 at 8:57 a.m. EDT
Buying More TBT as Oil Rallies
TBT is a 2x inverse play on the Barclays U.S. 20+ Year Treasury Bond Index, and as I wrote yesterday, we should keep an eye on oil regarding this trade because higher commodities prices should buoy bond yields. That will hurt bond prices, boosting an inverse play like TBT.
Well, crude was up $1.23 at $47.56 a barrel at last check. That should lend credibility to not only our TBT stake, but also to the long rentals that I took out yesterday on the SPDR S&P 500 ETF (SPY) - Get Report and some individual stocks.
Position: Long TBT, SPY (small).
At the time of publication, Kass and/or his funds were long/short XXX, 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.