This blog post originally appeared on RealMoney Silver on Feb. 28 at 7:33 a.m. EST.
The U.S. stock market's 10% rise from January's
market bottom has raised investment expectations and has reduced future opportunities.
My concerns are multiple:
- We are at recession's doorstep. The ECRI's leading indicators signal unambiguously that the U.S. economy is at the doorstep of a recession; the series is at the lowest level since 1980.
- Credit conditions are getting worse. The credit markets have not strengthened against the backdrop of improving equities. In fact, although the yield curve has strengthened, junk bond spreads and broker credit default swap spreads have worsened while the turmoil continues to move up the ladder of credit.
- The powers that be fail to address the housing depression. A timid and unimaginative Executive Branch and Treasury have failed to address the housing industry's woes. Meanwhile, the Federal Reserve is behaving like the "fool in the shower."
- Core inflation no longer remains well-anchored. Energy and food prices remain stubbornly high and, according to recent government releases, are beginning to seep into core prices.
- Profit margins are eroding. Corporate profit margins, the most mean-regressing series in finance, have begun to recede in the face of decelerating sales growth and cost pressures.
- Economic decoupling is proving to be an illusion. Increasingly, non-U.S. markets are feeling our domestic weakness (e.g., Japan.
- The U.S. dollar is in a freefall. Our currency seems to drop to new lows on a daily basis, putting pressure on European economies (and elsewhere), which could, in times, raise the specter of trade protectionism.
- The hedge fund Industry is beginning to contract. The dominant investor of the last decade, hedge funds, are contracting around the globe. Outflows could prove challenging to the demand/supply equation for stocks.
- There are threats on the political spectrum. The continued strength in Senator Obama's candidacy raises the increased possibility of higher tax rates for individuals and corporations.
- Technical signs are eroding. Despite the market's recent advance, market leadership is narrowing.
Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.
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.