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Although my approach tends to be fundamentally based, I do notice that the bullish bandwagon of sentiment continues to get more crowded. The broad equity rally began in the early summer amid high oil prices, a collapsing housing market and concerns regarding seasonal fall weakness. It has now morphed into a blind optimism in which both good news and bad news are interpreted positively.
However, the party will come to an end, and accordingly I've been increasing my bearish bets.
Evidence of an increasingly crowded bullish bandwagon has been more manifest in sentiment surveys lately. Perhaps more importantly, according to The ISI Group, the hedge fund community, after appearing to doubt the rally in stocks, increased net exposure last week from 51.4% to 55.0% -- that's up from 49.6% two weeks ago.
Additionally, Rydex bear fund assets have had one of the steepest drops in three years recently. And
13,000 cover story two weeks ago appeared to be another bullish sentiment indicator in which the bullish view was shared by nearly two-thirds of those interviewed, up from 57% six months ago and 47% a year ago. (The
12,000 cover story of six months ago was published two weeks before the May high.)
Finally, over the past few weeks, we have mentioned a number of thin-reed indicators of rising bullish sentiment, like Pavlovian reactions to headline earnings (
, based on a willingness to buy and ask questions later,
ratings and after-market buying due to commentators' stock picks).
Meanwhile, several of the non-equity markets are changing in a way that seems consistent with an approaching recession. Most notably, the division between equity and fixed-income markets is getting more pronounced and stretched. Government bond yields are close to testing the lows. In commodities, the price of copper has broken below its June reaction low, and the price of crude oil is mired near its trading lows for the year. Finally, yield inversion is historically consistent with slowing economic growth.
yesterday that arguably, in markets, the outcomes are not always fair or fundamentally based, as sentiment sometimes overwhelms substance and analysis.
The fall of 2006 is one such time. We are in a period where disbelief has been suspended and fear and doubt have been driven from Wall Street. Performance anxiety is ruling the day in the face of unrelenting momentum upward in prices. (I vividly recognize that we have also been in an environment where being a contrarian has been costly.)
As the wise man once said, "This too shall pass," as fundamentals, not sentiment, will win out in the end -- hopefully sooner rather than later.
In the past week I have materially increased my short positions in
and selected equities (rollups, technologically threatened industries/companies and industrial cyclicals).
I believe investors face one of the least attractive risk/reward profiles in years as we move into a period of
in which corporate and investment managers will find it increasingly hard to navigate in -- and one of the best shorting opportunities in years.
At time of publication, Kass and/or his funds were short SPY and QQQQ, although holdings can change at any time.
Doug Kass is general partner for two investment partnerships, Seabreeze Partners L.P. and Seabreeze Partners Short L.P. 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." Kass appreciates your feedback;
to send him an email.