Doug Kass On The Economy
Doug Kass of whom I pay particular attention gave a speech at a conference last week. Barron's ran a synopsis of what he said. I think it pays to listen to smart people so I decided to excerpt their article.
The Market's Formula: A Square-Root Rally
By RANDALL W. FORSYTH
LONG-TIME SHORT-SELLER Doug Kass shocked many of his followers by turning bullish at the beginning of March -- just before the stock market took off on a 40% tear.
Now, with the major averages up sharply from what he called at the time "generational lows," the skipper of Seabreeze Partners sees the road ahead to higher ground strewn with potholes.
Speaking at a conference presented by Barry Ritholtz {on 6.3.09}, the money manager and author of the popular Big Picture blog, Kass recalled that when he made his bullish call in early March, stocks had been through their second-worst bear market ever in terms of price and multiple compression.
Price-earnings multiples had fallen to levels consistent with 6% inflation, while 46% of the Standard & Poor's 500 stocks paid dividend yields exceeding the Treasury 10-year note. Other valuation measures also were rock-bottom; stocks traded at 90% of replacement value while the market's capitalization was just 78% of gross-domestic product.
After the subsequent sharp advance, however, Kass says the market now has to face up to its limitations, including a synchronized world recession; the increased cost and burden of government regulation; the impact of the obliteration of the "shadow banking system;" greater government role in the economy; potential protectionism; continued aversion to risk; the impact from deleveraging.
Indeed, the economy could face a double-dip starting late this year or 2010, he adds. Weak job growth, heavy consumer debt and higher taxes could take their toll. The transmission of credit remains clogged with corporate bond yields remaining high even after their drop, he adds.
As for the market, Kass sees an uncomfortable rise in optimism. The latest readings from Investors Intelligence found the lowest level of bears among advisors since January 2008, he notes. "The same talking heads who were scared witless in March have turned back into perma-bulls," he adds.
At the core of this newfound optimism is the expectation of a revival of corporate profits, but Kass sees that as disappointing. In the first quarter, he notes about 63% of S&P 500 companies missed their revenue targets, but 67% beat their profits forecasts. Cost cuts -- notably job cuts -- accounted for that feat. But falling employment and income and rising saving rates are keeping a lid on spending.
It all adds up to a "square-root sign shaped rally," says Kass. He originally called for a move up to 890-950 in the S&P 500 (from its infamous intraday low of 666 in early March), which has been achieved. Then could come a break-out and a last gasp as institutions such as pension funds reallocate assets from fixed-income securities to equities. And that will be it, he says.......
..... In addition, 110 S&P 500 companies said in the first quarter they would stop matching employees' 401(k) contributions, a major source of funds for the asset managers.
Kass, who describes himself as the "anti-Cramer," says most people like to rationalize reasons to buy stocks when prices are going up. Now Kass is looking toward doing the opposite of the crowd -- just as when he was buying ahead of the March lows.
Now, with the major averages up sharply from what he called at the time "generational lows," the skipper of Seabreeze Partners sees the road ahead to higher ground strewn with potholes.
Speaking at a conference presented by Barry Ritholtz {on 6.3.09}, the money manager and author of the popular Big Picture blog, Kass recalled that when he made his bullish call in early March, stocks had been through their second-worst bear market ever in terms of price and multiple compression.
Price-earnings multiples had fallen to levels consistent with 6% inflation, while 46% of the Standard & Poor's 500 stocks paid dividend yields exceeding the Treasury 10-year note. Other valuation measures also were rock-bottom; stocks traded at 90% of replacement value while the market's capitalization was just 78% of gross-domestic product.
After the subsequent sharp advance, however, Kass says the market now has to face up to its limitations, including a synchronized world recession; the increased cost and burden of government regulation; the impact of the obliteration of the "shadow banking system;" greater government role in the economy; potential protectionism; continued aversion to risk; the impact from deleveraging.
Indeed, the economy could face a double-dip starting late this year or 2010, he adds. Weak job growth, heavy consumer debt and higher taxes could take their toll. The transmission of credit remains clogged with corporate bond yields remaining high even after their drop, he adds.
As for the market, Kass sees an uncomfortable rise in optimism. The latest readings from Investors Intelligence found the lowest level of bears among advisors since January 2008, he notes. "The same talking heads who were scared witless in March have turned back into perma-bulls," he adds.
At the core of this newfound optimism is the expectation of a revival of corporate profits, but Kass sees that as disappointing. In the first quarter, he notes about 63% of S&P 500 companies missed their revenue targets, but 67% beat their profits forecasts. Cost cuts -- notably job cuts -- accounted for that feat. But falling employment and income and rising saving rates are keeping a lid on spending.
It all adds up to a "square-root sign shaped rally," says Kass. He originally called for a move up to 890-950 in the S&P 500 (from its infamous intraday low of 666 in early March), which has been achieved. Then could come a break-out and a last gasp as institutions such as pension funds reallocate assets from fixed-income securities to equities. And that will be it, he says.......
..... In addition, 110 S&P 500 companies said in the first quarter they would stop matching employees' 401(k) contributions, a major source of funds for the asset managers.
Kass, who describes himself as the "anti-Cramer," says most people like to rationalize reasons to buy stocks when prices are going up. Now Kass is looking toward doing the opposite of the crowd -- just as when he was buying ahead of the March lows.
posted by CR English at 6:41 AM
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