Doug Kass: 'Liberation (From All Logic) Day'
As the Trump administration creates more chaos, we've got a plan and came in well positioned.
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We saw this coming: Wayward fiscal, tax and monetary policy were the foundation blocks to our ursine market view.
So, we had entered the tariff "Liberation Day" announcement well positioned (with lots of cash), as we have been strongly critical of the bullish mantra that lacked any critical investment process (like the "cash on the sidelines" argument and the new paradigm of higher valuations).
Indeed, for a while now wrong-footed fiscal and trade policy had been a concern of mine. We see from yesterday, the "not ready for prime time players" did not disappoint.
But we thrive on volatility and uncertainty -- trading and investing unemotionally with a calculator in hand (measuring for a "margin of safety" and reward vs. risk). In fact, as we went into the waterfall in equities throughout the evening, we aggressively purchased Index positions the S&P exchange-traded fund SPY and the Invesco QQQ ETF QQQ as the ratio of upside reward vs. downside risk has measurably improved in the last 12 hours.
And here we are: Now likely now at or near maximum pain stemming from the tariff proposal.
The only thing investors hate more than uncertainty, however, is chaos. The Trump Administration's tariff tax proposals underscored the likely chaos more than the continued uncertainty.
A small group of "not ready for prime time players" in the Administration have resulted in a (self inflicted) shot into the foot of the world equity markets. The impact on an already wounded consumer, worsening economic/profit expectations and the already broken technical bearings of the stock market were exacerbated and felt in the after hours yesterday, when, at one point, the S&P Index futures reversed lower by nearly 300 handles (or -5%) in a matter of 60 minutes. We now wait for a renegotiation phase between the U.S. and our trading partners. There will be a lot of telephone calls in the next few weeks. We believe the market's reaction has been extreme, as we do not expect a worsening in trading relationships as our baseline expectation.
Though the delivery of the tariff policy was extraordinarily simplistic and blunt, our core case is that trading nations get quickly to the negotiating table for fear of dire global economic ramifications.
I agree with Peter Boockvar, who writes this morning:
As the tariff presentation shown yesterday was not a serious attempt at accuracy as rather than show the actual tariffs placed on US imports, it instead reflected the trade deficit we have with that particular country divided by their exports, it's now obvious that the very high reciprocal tariff threats thrown out yesterday will all be negotiated to something much lower. Hopefully.
And once the administration begins to show signs of cooperation, equity markets will stabilize and likely rally back a bit.
I have expected a 2025 S&P range of between 10% to 15% to the downside and only about 5% to the upside. With the after-hours carnage, the S&P Index is down by more than 8% and the Nasdaq is approximately 13% lower.
Ergo reward vs. risk has become more attractive.
Tactically, I entered the tariff event very liquid, having sold all of my Index exposure and even much of my technology exposure into yesterday afternoon's free fall:
Bottom Line
Tactically, we invest and trade opportunistically without emotion. As the decline in the after hours intensified and reward vs. risk has shifted to better entry points -- I began to reestablish trading long rentals in the indexes:
Once again The Oracle of Omaha is on the top of the heap, with record cash reserves (of nearly $325 million) and having pared his largest investment holding, Apple AAPL, near its all-time high:
"Be fearful when others are greedy and greedy when others are fearful."
- Warren Buffett
I would also add something that another pal, Byron Wien, once mentioned to me:
"Disasters have a way of not happening."
- Byron Wien
Fasten your seat belts.
This commentary was originally posted in Doug's Daily Diary on TheStreet Pro.
At the time of publication, Kass was long SPY common L QQQ common L; short SPY calls M QQQ calls M
