This column by Doug Kass was originally published on March 22 at 8:37 a.m. EST on Street Insight. It's being republished as a bonus for TheStreet.com and RealMoney.com readers. For more information about subscribing to Street Insight, please click here .
I believe we are entering an exquisite shorting opportunity, and that is precisely how I am gaming the market now. I recently made the observation that after the past market decline had concluded -- with a possible 5% to 10% drop -- equities could rally back to close to the old highs with meaningful breadth and volume divergences. After that, a more sustained bear market would commence.
advance over the last three days suggests that the blueprint of 1937 might very well hold in 2007.
In looking at the last century's four-consecutive-year rallies (out of oversold conditions -- 1932-36, 1957-61, 1982-86 and (possibly) 2002-06 -- the fifth year is almost always problematic, as witnessed by the crashes that occurred in 1937, 1962 and 1987.
I also felt that of all these fifth-year extensions, 2007 might well be deja vu, or 1937, all over again.
In 1937, the markets began a long four-year climb from deeply oversold levels and a poor economic backdrop. The market's initial drop (in early 1937) of about 10% was followed by a rally almost back to the top by August of that year, but with significant breadth and momentum divergences. And then the market crashed dramatically, bottoming out in the second quarter of 1938.
To be sure, the economic conditions in 2007 are far better than they were 70 years ago. On the other hand, in 1937 there was nothing like the tightly wound, debt-laden consumer, government and hedge fund community like we have today. In the 1930s there was also nothing like the sustained consumer buying binge that we have witnessed over the past decade or more.
Notwithstanding this week's strength, my view is that the markets will trace a pattern of developing weakness, like in 1937, that will be much more apparent in the months to come. Stated simply, I am looking for the technical footings (volume, price and breath) to evaporate under the pressure of well defined and emerging fundamental weakness.
sees a rough road ahead for the economy (read between the lines of their statement yesterday) and I certainly anticipate it. But, for now, the markets don't care in the slightest as a Bernanke "put" is viewed by most to have been put in place this week.
By contrast I believe the economic damage (particularly in cost pressures, housing and retail spending) is already in motion, and with it we will get disappointing corporate profit margins and profits.
And a Fed easing of interest rates will not reverse the adverse trends in place.
Finally, I learned belatedly that the Greenspan session on Monday was off-the-record, so I can't report on what he said and didn't get a chance to ask
the great questions submitted
. My apologies, but thanks for everyone's ideas.
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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