NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Last week, Kass wrote about muni funds, naysayers' take on the markets and about the Institute for Supply Management's manufacturing index.
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If I was a trader and owned closed-end municipal bond funds, I would reduce my long exposure. (I generally agree with Jim "El Capitan" Cramer's observation about sector rotation after the jobs report.)
If I was an investor and owned closed-end municipal bond funds, I would add to my long exposure on the next 3%-5% drop (if it occurs). This is where I reside.
Here is the rationale behind being long the basket.
The Emperor's New Clothes
Originally published on Monday, June 30, at 7:35 a.m. EDT.
Today's markets represent a fairy tale.
"But he hasn't got anything on," a little child said.
"Did you ever hear such innocent prattle?" said its father. And one person whispered to another what the child had said, "He hasn't anything on. A child says he hasn't anything on."
"But he hasn't got anything on!" the whole town cried out at last.
The Emperor shivered, for he suspected they were right. But he thought, "This procession has got to go on." So he walked more proudly than ever, as his noblemen held high the train that wasn't there at all.
-- Hans Christian Andersen, "The Emperor's New Clothes"
On June 29, the Bank for International Settlements warned that global stock markets and financial conditions might be irrationally detached from underlying economic conditions, and it called on central banks to abandon policies that have stoked asset price excesses. The BIS argued that markets might be unprepared for a rate rise and implied that investors might be too optimistic in their faith in global central bank policy.
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I didn't need the BIS' two bits, as I have argued, and will continue to argue, that this is one of the most forgiving stock markets in history, as equity prices have debatably disconnected from the real economies.
The bullish meme has now morphed from the notion that the domestic economy will reach escape velocity and reaccelerate dramatically into the quarters ahead to the idea that the prospects for the expansion's length has improved.
After an outsize 2.9% drop in first-quarter 2014 real GDP, the promise of robust domestic economic growth has been quickly muted. Last week's economic data has resulted in Wall Street's strategists and economists lowering their growth projections, and the near-10-basis-point weekly drop in the 10-year U.S. note yield seems to confirm the muted economic expectations.
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No worries, argue the bulls, because the expansion cycle, though subpar and substantially less robust than previous forecasts and cycles, will make up for a lack of strength with the prospects for durability and sustainability. And not only does the Fed have your back but so do corporations (in the form of aggressive share buybacks and heightened M&A activity).
It is this thesis -- modest growth, reasonable dividends, continued share buybacks and eventually productivity enhancing capital expenditures -- that has been embraced by market participants. So, according to the bullish cabal, barring a black swan or adverse geopolitical event, a recession or any meaningful swoon in stock prices is years away.
The miserable economic and stock market experiences of 2007-09 are distant and nearly indistinguishable shapes in the rearview mirror today.
As evidence of this, many money managers (e.g., Legg Mason's Bill Miller) who had fallen (badly) have now risen like a phoenix from the ashes and have regained their reputations.
In other words, fear has been driven from Wall Street, and Garth continues to party on.
Nevertheless, in its extreme, today's markets, according to the naysayers (who see subpar and unsteady global growth, vulnerable profit margins, disappointing profits ahead and a general detachment of markets from the real economy), are a fairy tale and are more representative of Hans Christian Andersen's "The Emperor's New Clothes."
In this short tale, two weavers promise the Emperor a new suit of clothes that is invisible to those unfit for their positions or who are stupid or incompetent. When the Emperor parades before his subjects in his new clothes, a child cries out, "But he isn't wearing anything at all."
Over history the phrase "emperor's new clothes" has become an idiom about logical fallacies -- namely, pluralistic ignorance, which is defined in Krech and Crutchfield's Theory and Problems of Social Psychology as a situation in which "no one believes, but everyone thinks that everyone believes." In the tale, everyone is ignorant as to whether the Emperor has clothes on but believes that everyone else is not ignorant.
Parsing ISM Data
Originally published on Tuesday, July 1, at 10:33 a.m. EDT.
The Institute for Supply Management's manufacturing index for June came in at 55.3, just under expectations of 55.9 and pretty much in line with the May number of 55.4. The subindex that saw a gain was the new orders index, which rose from 56.9 to 58.9. Production fell back a bit from 61 to 60, while backlogs dropped from 52.5 to 48.0, and inventory and employment both remained constant at 53.0 and 52.8, respectively. The prices paid index ticked a bit lower to 58.0 from 60.0.
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The commentary from the survey participants was upbeat, with most noting a better outlook and another strong month. Overall, this was a relatively positive report, as it shows the manufacturing sector still experiencing solid growth. The two areas to watch, however, are the slowdown in backlogs, which moved into contraction territory, and the slight decline in exports along with the increase in imports, which could be a potential drag on second-quarter GDP.
For now, the markets are rising on pure price momentum and are not responding to the macroeconomic data.