The self-proclaimed "anti-Cramer," Doug Kass, anchors
"The Edge," a diary about stocks and investing. As a dedicated short-seller, Kass can seek out the bear market in any environment.
This week, he discussed
why stocks won't break par
joy before the market storm
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Stocks Won't Break Par
Originally published on April 9 at 8:44 a.m. EDT
This year's Masters tamed the very best practitioners in the golf game; I have never seen so many triple bogeys and such high scores, and even Tiger Woods was humbled by the cold temperatures, whipping winds and lightning-fast greens.
It strikes me that economic and equity conditions for the balance of the decade seem likely to mirror this past weekend's tortuous goings on at Augusta National Golf Course. Consider the following:
Key segments of the economy -- the government and the consumer -- have never been more levered.
The consumer is spent up on prior purchases of consumer durables like autos and housing.
The bubble in credit availability, euphemistically called the "democratization of credit," has proven to be a double-edged sword, as subprime borrowers have learned over the last 12 months.
The subprime meltdown has begun to spread into other lending classes and this, in turn, has led to a tightening in credit.
The subprime mortgage resets have turned the American dream of homeownership into a nightmare that will have dire ramifications (especially) for the lower-end consumer who has already been squeezed.
The all-important housing sector is experiencing another down leg and will not likely recover until 2009 to 2010. The multiplier effect on the economy will be pronounced.
The dominant investor -- the hedge fund community -- has never been more levered.
The shareholder base of the dominant investor class -- the fund-of-funds industry -- has also never been more levered.
The growth in the unregulated derivatives market is out of control and vulnerable to a number of unexpected market moves in equities, commodities, etc.
The tightly-wound and levered ownership of financial assets will likely result in a stampede to the exits in any sustained decline -- we saw the first shot across the bow during Tuesday, Feb. 27's market meltdown.
Corporate profits remain vulnerable to cost pressures because of stubbornly high inflation, and lackluster top-line growth.
Business spending will likely remain lame.
Geopolitical risk remains keen.
The rising fortunes of the Democratic party raises the specter of rising tax rates on income and capital gains.
For now, the power of momentum in the stock market rules the day. Those who express skepticism and doubt are back to being vilified as Cassandras, and many of those who were scared when the markets crashed in late February are emboldened by the market's recent ramp.
Nevertheless, just as Tiger Woods showed his vincibility this weekend, the stock market also holds more bogeys (and double bogeys) than birdies in the next few years.
Joy Before the Market Storm
Originally published on April 12 at 8:38 a.m. EDT.
"Live by the harmless untruths that make you brave and kind and healthy and happy."
-- Kurt Vonnegut,
set the record straight yesterday and in a direct and succinct fashion emphasized its policy dilemma. Downside economic-growth risks "had increased in the three weeks since the January meeting ... and the latest information cast some doubt on whether core inflation was on the expected downward path."
A housing-induced slowdown (with all the attendant credit implications of a subprime meltdown) coupled with stubbornly high inflation spells stagflation, and stagflation is the recipe for contracting corporate profit margins and disappointing corporate profits. And, perhaps, lower stock prices.
Whether Wednesday's drop is the start of another market correction is unknown. But, it should be noted that a general feeling of euphoria often precedes violent moves downward.
And I am sticking with my analogy that the advance from the deeply oversold lows in the
Dow Jones Industrial Average
in 1932 to 1937 could resemble the current
(and DJIA) 2002 to 2007 run -- with a slight twist.
If you go back to a chart of the Dow Jones Industrial Average in 1937, you will observe that the market's breadth peaked coincidentally with the DJIA in March 1937, but lagged badly during the failing rally into August. The rally from late February 2007 -- which might now be failing -- had relatively good breadth.
So in order for this year's picture to resemble that of 1937, we probably would require a test of the early March low (or a new low) and then an ensuing rally with weak breadth and volume divergences throughout the early summer of 2007.
And, then, the market might decline dramatically, as it did from August 1937 into early 1938.
I have been fading away from the copious complacency and the growing and misguided view (at least before yesterday) that the Federal Reserve will cut interest rates.
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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