Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.
Late-Day Musings and Straight Talk on Fastenal
Originally published July 21 at 4:00 p.m. EDT
Late in the afternoon the market bent but did not break.
Here were Thursday's trades thus far in my portfolio.
Respectfully, I prefer to look at second-level thinking; the currently weak results and prospectively worsening fundamentals have disappointed twice on profits since I expressed my initial concerns -- something Paul might consider. To me, a markedly slowing and less-than-expected profit trajectory help to explain the contraction in valuation. Technically, Jeremy LaKosh and James Gentile (here and here) don't like Fastenal.
Apart from Fastenal, small losses were seen in some of my core longs -- DuPont (DD) - Get Report , Oaktree Capital Group (OAK) - Get Report , Twitter (TWTR) - Get Report and Hartford Financial Services Group (HIG) - Get Report .
I see a lot of individual stock "potholes" Thursday in a market that is looking a bit tired.
Bonds, much lower in the morning, turned higher in price and lower in yield this afternoon -- a key market feature. This is placing modest pressure on financials.
Position: Long DD, OAK, TWTR, HIG, SPY puts; short FAST, SPY small.
My Latest Trades (and Strategy)
Originally published July 21 at 2:17 p.m. EDT
I've added in a small way to the following shorts:
I'm chomping at the bit to get shorter in the market, but I'm going to stay with my stated strategy of waiting for some semblance of a market breakdown.
A downdraft could occur at any time, as volume has been low and trading is dominated by quant strategies that buy higher and sell lower.
Position: Long SPY puts, HIG; Short SPY (small), QQQ (small), GM (small).
Beware of CEOs Bearing Gifts
Originally published July 21 at 11:29 a.m. EDT
As Warren Buffett once famously said, corporate executives often "lie like ministers of finance on the eve of devaluation."
I'd add that investor-relations departments also frequently manipulate expectations, which helps to explain why each earnings season, some 70% of companies beat consensus forecasts. It's like Monty Python's "Twit Olympics," in which contestants jump over matchbook covers.
For example, Southwest Airlines (LUV) - Get Report is down some 9% Thursday morning after missing analysts' earnings expectations, but CEO Gary Kelly nonetheless went on CNBC's Squawk Box this morning to praise his company's results.
The morale of the story: Don't be an earnings twit -- and always be skeptical of CEOs bearing gifts.
Partisanship, Animus and Market Volatility All Lie Ahead
Originally published July 21 at 9:13 a.m. EDT
Thursday's unprecedented level of partisanship and division between Democrats and Republicans will likely set the stage for more market volatility ahead.
We're already seeing this division and vitriol at this week's Republican National Convention, and we'll probably see it at next week's Democratic convention as well.
In its extreme, this animus could continue to exert a headwind and stasis in fixed business investment, which is already weak. A consumer-spending slowdown could also develop -- in fact, we're already seeing one in high-end homes and expensive art.
I've written about the dangers that this poses for the markets in several missives recently, including:
- My Fellow Americans, More Volatility Lies Ahead
- Animus Infects Society (and Will Hurt Markets)
But it's not just the hatred between the two parties and their constituents that has me worried about the market. It's also today's valuations, fundamentals, technicals and unusually optimistic sentiment, as I've also noted in recent months in:
- The Case for Sitting on Cash in 2016 (parts one and deux)
- Money for Nothing
- Is Time Ticking Away on the Bull Market?
- Don't Trust This 'Goldilocks' Market
- Some Red Flags Amid Our Sea of Market Green
Nonetheless, many of business TV's "talking heads" are rationalizing the swift rebound that the S&P 500 has seen since the big drop that followed Britain's June 23 Brexit vote. They're saying that the "fundamentals are improving," or that central banks will keep interest rates "lower for longer."
But to be blunt, I think these market watchers are fugazis. I'd note that:
- Many "talking heads" have short memories. They all too often went on TV following the Brexit vote to declare that they "hated" stocks, even though the S&P 500 was some 150 handles below where they "love" equities today. These market watchers are simply "carpet sweepers" who forget or choose to ignore their previous concerns because stock prices have risen since then.
- Central banks are losing their effectiveness.
- We've likely seen a generational low in bond yields.
- The fundamentals aren't improving, Instead, we're seeing numerous signs of peaks in important segments of the global economy.
- Analysts' consensus forecasts for S&P 500 earnings have proven to be too high for a fourth consecutive year. So far, the level of "beats" for second-quarter earnings is running about average -- but much like Monty Python's "Twit Olympics," the standards are low. And all too often, investor-relations departments are manipulating the results, with the sell-side lemmings blindly following anyway.
The Bottom Line
At the very least, this year's election will likely serve as a market-volatility source over the coming months. And at worst, it will represent an albatross around valuations' neck and cause a hiatus in business and consumer spending.
In other words, those of us who worry about risk vs. reward should remember that risk rises and rewards decrease whenever stock prices go up. That's true even in our current market, where buyers live higher and sellers live lower in an investment world that's dominated by volatility-trending and risk-parity strategies that depend more on price action than company fundamentals.
Even hedge funds are increasingly dominated by a quant component that's governed by machines and algos who know nothing of balance sheets or income statements. This helps explain the absence of "downticks" during run-ups like the one we've had over the past two weeks.
However, all of these influences are rapidly moving our markets to the point where buying stocks will be as risky as picking up nickels in front of a steamroller. Still, I've decided to be more reaction-oriented than anticipatory in my strategy -- even though that means I run the risk of losing out on some profits by not being short in a major decline's initial stage.
Position: Long OAK, SPY puts, Short SPY (small).
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long FB and TWTR.