This post by Doug Kass appeared at 8:45 a.m. on May 10 on TheStreet.com's Street Insight.
"I deserve good things. I am entitled to my share of happiness. I refuse to beat myself up. I am an attractive person. I am fun to be with."
-- Stuart Smalley,
Saturday Night Live
Every morning over the past two months, I have woken up at 3 a.m. and looked at myself in the mirror. I say to myself, "Self, I am a worthy human being. Are stocks cheap enough, liquidity strong enough and, doggone it, interest rates low enough, for the stock market to continue to rise?"
Then I go back to sleep for maybe an hour. I get dressed in my yellow button-down shirt with a powder blue cardigan. Soon after, I start my day by writing my opening missive for "The Edge."
I typically stare at the blank document on Microsoft Word for a few minutes, and I think to myself, "If this advance continues forever, I'm going to die homeless and penniless. No one will ever love me."
And then I write what I believe to be a soundly structured fundamental argument that seems to differ drastically from those on the opposite pew -- the bullish cabal, who seem to have a total and complete grasp of the market.
I anxiously await 9:30 a.m. and the trading day to begin for my "Market's Daily Affirmation With Dougie" -- that is, with the expectation of some confirmation of my market view. The opening bell rings, and it doesn't take much time for me to be, shall we say, a wee bit disappointed these days....
With every data point of stagflation -- a weakening U.S. dollar, slowing economic growth, moderating retail spending and weakening housing -- my pulse quickens as if my general thesis is confirmed, but we see little confirmation in the market's immediate response to these downward-trending government releases or in the face of other recent earnings/economic warnings.
In the current one-way market, all problems are overlooked -- and rationalized. Here are some examples:
1. The price of gasoline rises to a new high, serving as the functional equivalent of a tax increase for the U.S. consumer.
2. Tech bellwether
U.S. business enterprise is weak, and guidance for aggregate sequential revenue growth (of +4%) is disappointing.
3. Other tech companies like
disappointed. The much-heralded release of Vista has failed to meet expectations (and has led to a buildup in PC component parts). DRAM prices fall by nearly 70% to below cash production costs.
guided lower, raising questions about the health of consumer electronics.
4. Multinationals offset end-market weakness in the U.S. by the effect of a weak U.S. dollar. More astonishingly, investors consider the foreign exchange gains as recurring.
5. The multiplier effect of the housing downturn hits many building materials companies like
whiff, but rumors of private-equity deals bail investors out. Housing forecasts are consistently lowered (even by the National Association of Realtors!).
6. The U.S. dollar trends lower and lower, and the likelihood of rising interest rates in Europe and in Asia suggests interest rate differentials will widen further (putting further pressure on our currency).
and others lower comp guidance as evidence of consumer weakness grows. This morning's retail comps are uniformly poor. The automobile industry continues its death spiral.
8. The plethora of mortgage resets -- the single most important factor pressing the U.S. consumer -- is dismissed. Mortgage equity withdrawals, the straw that has stirred the drink of consumption, slow to a crawl. Mortgage lending standards are tightened, serving to decimate the first-time homebuyer market.
9. The subslime mess is dismissed, despite growing evidence that the credit contagion is spreading to motorcycle securitizations, automobiles and elsewhere. Mortgage credit losses are expected to eclipse the early 1990s experience.
10. REITs trade above intrinsic value, and dividend yields are at all-time lows relative to another new paradigm. Development projects are beginning to raise supply and have started to hurt regional supply/demand.
11. Trucking and airline companies' results are worse than expected, and forward guidance is reduced.
12. Banks' net interest margins are threatened by competition (and industry saturation) and an unfavorable yield curve as credit losses rise.
13. Leading indicators fall for three consecutive months, and the household and payroll survey of jobs throws more caution to the wind. (Manpower's Employment Outlook March Survey and lowered guidance at employment companies
Robert Half International
confirm the trends in jobs.)
14. The popularity of the Republican administration hits new lows as the probability of a Democratic 2008 win increases, raising the specter of the politics of trade protectionism, a more powerful view toward antitrust and higher dividend and corporate tax rates.
15. Over there, speculation continues apace in emerging markets (especially of an Asian-kind). China becomes the epicenter of the world's speculation in equities.
Indeed just the opposite develops in the face of these headwinds. Shares move ever higher to the beat of the breathless enthusiasm of the business commentators (which can almost not be contained) and as Wall Street strategists routinely raise their
price targets to follow stock prices.
For now, the joke is on me as the market's momentum trumps any fundamental or rational consideration -- though justified as it might be -- as I do my misguided best to aid to the visibility and understanding of Mr. Market's machinations in my writings.
Well, today's a brand new day. And you know what? "I think this is the best opening missive I've ever done." And you know what? I deserve it! (Turning to the mirror.) Because I'm good enough, I'm smart enough, and doggone it, people like me!
"And ... that's ... OK." (You got it, Stuart Smalley!)
Does Doug Kass ever get depressed by his own bearishness? Check out the answer.
At time of publication, Kass and/or his funds were short Wal-Mart, although holdings can change at any time.
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. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box."
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