This blog post originally appeared on RealMoney Silver on Sept. 30 at 7:51 a.m. EDT.
I participated in
"Fast Money" last night.
My key bullet points on the show were as follows:
- Stocks look vulnerable both from a technical and fundamental perspective.
- Technically, the market is delivering a potentially toxic combination of low volume, weak breadth and a deteriorating financial sector. These are classical bearish signals. And once the price momentum stops, my friend/buddy/pal and technical maven Steve Grasso will be singing these lyrics to the tune of an old Joan Baez song: "Where have all the mo players gone? Long time passing."
- In early July, when the S&P 500 was breaking down under 1,040, I opined on "Fast Money" that the year's lows had been see. This has proven correct. I also suggested that the S&P's trading range over the balance of the year would be between 1,040 and 1,150, as the tension between cyclical tailwinds (monetary stimulation and a moderately expanding domestic economy) would conflict with secular headwinds (fiscal imbalances, populist policies such as higher marginal tax rates and costly/burdensome regulation, the absence of drivers to replace the strength of housing in the last cycle and the obliteration of the shadow-banking and securitization markets). We are now right at the top of the range that I previously forecasted. Look out below?
- Fundamentally, there is unjustified confidence on the part of market participants concerning the implementation and efficacy of QE 2. It is clear from the Wall Street Journal's Jon Hilsenrath and in three speeches over the past 24 hours by Fed Presidents of Atlanta, Minneapolis and Philadelphia that some in the Fed are hesitant to come out with guns a-blazin'. If QE 2 is ultimately implemented, unlike the "shock and awe" of QE 1, the new program will be characterized by shucks and aww. Meanwhile, a number of recent economic releases (especially in housing and confidence) suggest risk to the downside -- just as a number of Wall Street strategists have raised their year-end 2010 and 2011 S&P targets.
- Melissa asked me, Why has the stock market done so well in the face of the apparent Fed members' hesitancy on QE 2? I replied that the equity market has thrived in September in part because of the calendar trade (pressure to perform) and the predominance of momentum traders and investors and high-frequency-trading strategists, who have filled the void of a hedge fund community that has de-risked and a mutual fund industry that is experiencing no inflows. In other words, higher prices begat higher prices this month.
- Guy asked about the ramifications of our currency's debasement. Short term, a lower U.S. dollar helps to grow our exports and reduce our imports, so our trade deficit narrows. But intermediate term, a further, steep dollar drop could be disastrous. Massive monetary intervention ultimately encourages uneconomic activity, creates inflation and a misallocation of resources (as Dr. Bobby Marcin mentioned this week).
- Brian Kelly questioned my bond short. The contrarian in me says that the spread of domestic equity outflows and fixed-income inflows are a red flag and reminiscent of the flow experience in 1999-early 2000 that presaged a collapse in stock prices (particularly of a technology kind). In fact, the $240 billion of equity outflows and $635 billion of bond inflows is the widest gap in any 36-month period in history. Of course, bond yields continue to trade near their yearly lows as the Fed anchors short-term rates at zero, but this is a temporary condition, and the Fed's policy will change in the fullness of time.
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At the time of publication, Kass and/or his funds were long TBT, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.