NEW YORK (RealMoneyPro) -- 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.
This past week, Kass laid out his 2015 tactical investing plans and his views of Federal Reserve Chair Janet Yellen's cautious talk about stock valuations.
My Tactical Investing Blueprint for 2015
Originally published on May 4 at 7:25 a.m. EDT
I am negative on both stocks and bonds for numerous reasons, the most important of which is the likelihood that (for the fourth consecutive year) global economic growth and U.S. corporate profit growth will disappoint relative to expectations.
Secondly, the chasm between rising financial asset prices and the real economy is ever widening. Thirdly, with fiscal policy inert and uninvolved, the burden of engineering a more buoyant trajectory of growth has been placed on monetary authorities.
Unfortunately, zero interest rates and quantitative easing are now doing more bad than good, disadvantaging the savings class (which has caused consumers to hoard cash and reduce spending), encouraging malinvestment and retarding investment (capital expenditures) in plant and equipment.
I expect a negative return in stocks this year.
When the correction comes, it will probably be broad based. Especially vulnerable are social media stocks that incorporate unreasonable expectations for profit growth. In addition, numerous stocks are vulnerable to secular changes in the business landscape (typically caused by advances in technology).
On the bullish side, I remain positive on selected equities (especially banks) and with certain sectors (e.g. closed-end municipal bond funds). The latter group (funds) has cheapened coincident with the recent rate rise and I have expanded the size of my long exposure as prices have retreated. The size of the rate rise that I am projecting is not expected to be a hurdle to more fund capital gains (on top of hefty non-taxable yields) over the balance of 2015. On the other hand, the rate rise will be large enough to positively impact banking industry fundamentals.
Bonds -- in the U.S. and outside of the country -- are overpriced.
The core reason for my pessimistic view of the asset class is that the 10-year U.S. note yield is discounting an unrealistically low growth rate for real GDP domestic growth. In addition, signposts of a climbing inflation rate are growing more conspicuous and wage growth is beginning to accelerate, while energy prices, rents and other costs (of the necessities of life) are rising.
Outside of the U.S., bonds are particularly expensive.
But with the yield on the 10- year U.S. note having risen by almost 50 basis points in the last few months (to 2.12%), I would not be surprised if rates dropped back a bit over the summer.