While we haven't covered the musings of Doug Kass in a while, we found his latest piece on TheStreet.com to be timely and insightful. Some of you may remember that Kass, noted short-seller and manager of hedge fund Seabreeze Partners, was very bullish back in March and essentially nailed 'the bottom' as a great trade. Our hats off to him as that was an excellent market timing call. He seems to zig when others zag and this occasion is no different. While bullish sentiment is reaching highs and everyone seems to think that risk has abated from the markets, Kass thinks otherwise. He is bearish now and points out many signals telling him to be so, writing
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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 the 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.
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Insightful stuff from Kass and it will be interesting to see if he can time the market so perfectly yet again. We wouldn't doubt it, as we've been noticing much of the same rampant bullishness amidst a still tepid economy. When everyone is headed one direction, tides almost always find a way to change. We also note that Kass joins prolific hedge fund manager Paul Tudor Jones in the act of calling for a pullback. Last week, Tudor noted that he thought the current market euphoria is a bear market rally.
Kass posted up his 'signs needed for a market recovery' back in February and it's interesting to look over them again. While some of them have partially come true, there is still plenty of room left for improvement. For those of you interested in more of Kass' thoughts, we posted up Kass' model portfolio update back in the middle of June. We'll check back in on Kass' bearish call in a few months, but our guess is that he'll be right on this one as well.
Source: TheStreet
