This commentary originally appeared at 8:03 a.m. EST on Jan. 29 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
Let's not lose sight of the fact that, to most investors, the trend is one's friend. Variant views are typically rare (particularly when the trend is as powerful as the last three weeks of market advances), as they can expose managers to not only investment risk but to business risk. At the same time, a variant view near inflection points can deliver alpha or excess returns -- see Apple (AAPL).
The crowd usually outsmarts the remnants, and the comfort of the herd provides most investors with a security blanket.
Over the past several days the business media has been filled with talking heads who are partying like it is 1999, appearing more bullish than ever and likely disregarding or downplaying the fact that the S&P 500 has risen from 666 to 1500.
Below are the most common epithets I have heard appropriated to justify the talking heads' bullishness (and my quick response in parentheses). These glittering generalities are appealing words closely associated with concepts and beliefs that carry conviction without supporting information or reason:
- "There is no alternative to stocks; bond money will flee equities." (Many classes of investors may remain risk-averse, as there are numerous secular issues facing global economic growth. Moreover, rising interest rates might attract new fixed-income money from investors.)
- "Stocks are cheap relative to bonds." (This has been the case for three years; it's not a new observation. But monetary policy in the U.S. is in its final innings.)
- "Money markets yield near zero." (This has also been the case for over three years.)
- "The data don't matter." (Until they do.)
- "Washington's inertia in dealing with the budget deficit doesn't matter." (Really? If our leaders don't address the burgeoning deficit and kick the can down the road, a price will be paid. At the very least, this will prove to be valuation-deflating.)
- "The market wants to go higher." (Until it doesn't. Those who worship at the altar of price momentum will retreat from the markets in any meaningful market decline.)
- "Central banks are printing huge amounts of money; it has to go somewhere." (Monetary easing in the U.S. has still failed to create a self-sustaining recovery. Fourth-quarter 2012 real GDP will likely be only +1.5%. Secular issues continue to weigh on growth and will for some time. If printing money was the sine qua non, every recession would be patched up by monetary expansion. There is a price to pay for excessive monetary growth.)
- "Despite a relatively sluggish corporate profit outlook, valuations -- P/E multiples -- will expand." (We are at about the average multiple over the past five decades. Considering the aforementioned secular issues, why should valuations be above the historic average?)
To be quite direct, most of these are old, worn, simplistic and non-rigorous arguments, many of which have been in place since the S&P 500 stood at 666 in March 2009. And, for now, they are working in investors' favor!
As I like to write, though, price is what you pay and value is what you get.
Since these glittering generalities have been accepted by many as a rationale for the market advance, let me submit my own glittering generality: The market is failing to distinguish between economic progress and reality, ignoring countless factors (an earnings cliff, a spent-up consumer, etc.), and it is overpriced and ready for a fall.