Doug Kass: I Remain Respectfully Bearish
The advance in equities over the last month has materially changed the upside reward vs. downside risk for the S&P 500 Index.
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It's over and done but the heart-ache lives on inside
And who's the one you're clinging to instead of me tonight
And where are you now
Now that I need you
Tears on my pillow wherever you go
I'll cry me a river that leads to your ocean
You never see me fall apart
In the words of a broken heart
It's just emotion that's taken me over
Tied up in sorrow, lost in my soul
But if you don't come back
Come home to me, darling
You know that there'll be nobody left in this world to hold me tight
Nobody left in this world to kiss goodnight
Goodnight
Goodnight
- Bee Gees - Emotions (Original)
I am respectful of the market's extraordinary price momentum over such a short-term time frame, however, I plan to put a larger short stake in the ground. Going against the consensus grain and the herd is nothing new to me.
Why am I taking this stance? The advance in equities over the last month has materially changed the upside reward vs. downside risk for the S&P 500 Index. Currently, I view less than 5% upside compared to 10%-15% downside. This is an increasingly unattractive ratio of nearly three to one.
For the reasons mentioned in "Rethinking American Exceptionalism" and in this weekend's Barron's column, I remain profoundly bearish.
As I've said, political and geopolitical polarization and competition will probably translate into less centrism and in turn a reduced concern for deficits. This will create structural uncertainties, fiscal sloppiness and worldwide imprudence. It will also create the possibility that bond markets "disanchor."
This is happening while the foundation of the bull market is coming apart. The destruction of the bull market, however, is being ignored. Why? Market structure changes that have led to price momentum (read: fear of missing out) are favored over value and common sense. Even JPMorgan CEO Jamie Dimon's view that the corporate credit market is "ridiculously over-stretched" is not being taken seriously. Nor are his comments on the complacency.
Meanwhile, as I wrote in my column "Doug Kass: From Exceptional to ... Greece," investors are dancing like Zorba the Greek (1964), Citigroup's Chuck Prince (2007) and Prince (1999).
I, however, still see valuations and consensus expectations for economic and corporate profit growth inflated. So, look for the soft data to weaken into the hard data as the housing market slows and the vulnerability of the middle class is revealed. Expect below trend-line economic growth with sticky inflation lie ahead ("slugflation").
This commentary was orginally posted in Doug's Daily Diary on TheStreet Pro.
