market folly

Noted shortseller and Seabreeze Partners hedge fund manager Doug Kass has had impeccable timing recently. Market timing is a b*tch, but Kass has flipped that statement upside-down and made the market his b*tch. Back on the March lows, Kass was calling 'the bottom' and buying when everyone else was calling for the end of the world. This time around, he's calling for a top in the market for the year and has been assembling a short position. His contrarianism is the polar opposite this time around as he writes, "To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices. As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons."

We first noted Kass' bearishness a few weeks ago and he has since deepened his stance. He brings up great points and it really has all the elements of another great contrarian call. Time will tell and we'll wait and see. Back in the beginning of March, we penned a piece entitled, Ranting, Raving & Contrarian Signals to highlight the extreme bearish sentiment as if the world was imploding. We have been considering penning a piece again on this topic, only in reverse. Looks as if Kass has beat us to it and we'll gladly let him take that honor.

His point about mutual fund inflows is exactly what we were recently looking at as well and we tweeted about these inflows. Many a contrarian will say that when the retail/'dumb' money rushes in, it is time to get out. Another interesting statistic was the fact that hedge funds have had high net long exposures for the first time in forever. And, as we also tweeted about, hedge funds were *buying* financials hand over fist the past few quarters. Today, we also saw a unicorn and bigfoot; that's how crazy things have been getting.

In order for the market to truly recover, many fundamental problems must be addressed. Kass outlines his signs needed for a market recovery and it's a great reference to have. But in the mean time, he lists 10 things that will weigh on the economy:

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability -- no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

He ends this list by stating that he is looking, "over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed."

Now that you've seen the rationale for Kass' shift in sentiment, we now want to turn our focus to a timeline of Kass' sentiment as compiled by our friend FirstAdopter. We've mentioned our 'tweets' a few times in this article and we further want to highlight the utility of Twitter as it pertains to financial markets. The rest of this article is a guest post by FirstAdopter, whose blog and twitter we've been following for some time now.

Doug Kass is widely regarded as the guy that called the exact bottom in March by Barrons, New York Times, and CNBC anchors. Here are some tweets from his Twitter Feed. I will let them speak for themselves:

SP500 August 26th 12:17PM: 1027

SP500 August 10th: 1007

SP500 August 5th: 1003

SP500 July 28th: 980

SP500 July 22nd: 954

SP500 July 2nd: 896

SP500 June 19th: 921

SP500 May 8th: 929

SP500 April 29th: 874

SP500 April 16th: 865

SP500 March 26th: 833

SP500 March 18th: 794

Actual Low Close of SP500 March 9th: 677

SP500 February 26th: 753

SP500 February 18th: 788

SP500 February 12th: 835