This commentary originally appeared at 9:07 a.m. EDT on Sept. 7 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
It was a fun session with Melissa Lee and the "Fast Money" gang last night on CNBC.
In today's opening missive, I will expand on my responses that I gave to the "Fast Money" team last night (and incorporate some of my writings from this week), as, given the swift line of questioning typically characteristic of the show, there is usually only time for relatively brief responses and sound bites.
Melissa Lee first asked me if my top call of two weeks ago was still valid.
I said that I remain cautiously pessimistic. I am net short but not yet over my skis short the market. I am bruised but unbowed, and I am unyielding in my concerns.
I am long some one-offs such as Avon Products (AVP), which is hopefully still the apple of Coty's eye, but I find that few stocks meet my standards of value.
I was obviously wrong about the near-term market prospects discussed a few weeks ago on "Fast Money." I had expected a top at 1420-1425 for the year, and we have overshot that by a few points (so the book may not yet be closed). I continue to view us at or near the top end of the trading range for this year, and I see problems aplenty as we move toward the end of the year.
What made stocks ramp on Thursday were the words "without limit and no cap" by Draghi, but I would remind all that the ECB has not spent a single euro yet words alone over the past two months have reduced the Spanish three-year yield to 3.5% from 7.4%, the 10-year Spanish yield to 6% from 7.4% and the Italian 10-year yield to 5.2% from 6.5%. (Now that is a heck of a lot of moral suasion and jawboning!)
I know that the gang last night, many of whom are moved by price, was optimistic on the technicals, but I say that there is only so far that central bank policy can take stock prices higher when a host of fundamental issues plague us.
Let me pass on several other brief bullet points that suggest to me that the bulk (if not all) of the market's advance and upside might be over.
- President Obama seems likely to win the November election. (He has risen to a multiyear high of 58.7% on Intrade.) A Democrat win will be seen as business- and market-unfriendly). Despite the odds of a Democratic presidential win, the election appears to be a cliffhanger -- the closer the vote is, the greater the animosity between the parties and the steeper the fiscal cliff might be.
- Third-quarter 2012 earnings will be challenging (probably down 4%) -- guidance has been cautious -- and profits will likely decline for the first time (year over year) since third quarter 2009. For the full year, earnings in 2012 should be up 6% or 7%, but next year the gain will be between zero and 5%. So, we need P/E expansion for the S&P 500 to make further progress, and I don't see it. (Note: Intel (INTC) warned this morning.)
- I remain uncertain about the U.S. fiscal cliff, debt ceiling, dividend, capital gains and tax policy.
- I remain uncertain about the eurozone's economy, banking union and fiscal integration.
- A Chinese economic slowdown not only threatens world economic growth and commodity prices but implies less demand for the purchase of U.S. Treasuries.
Hedgeye's Keith McCullough asked me how an investor deals with the storytelling and low volume.
My response was that in a market with no memory day from day, it ain't easy!
My biggest concern is that investors are not being entirely traditional in their investing; they are looking less at the real economy, and instead they are depending on and are guided by their reliance on effective policy (and a global easing put).
To me, risks are high of policy disappointment and/or missteps in policy implementation. I believe that the eurozone will fail to address the formidable and persistent cyclical and structural economic growth concerns, similar to failures in the U.S. with QE1, QE2, Operation Twist and its extension.
As I wrote yesterday, while Draghi's plan will temporarily aid the transmission of monetary policy, we can look at the massive doses of monetary stimulation in the U.S. as a template. Despite unprecedented easing, we are now more than three years after the Great Recession of 2008-2009, and the domestic economy is growing (in real terms) at only 1.8%. Given the more dire state of the eurozone (accelerating inflation, decelerating economic growth and rising unemployment), how will it be possible for Europe to grow out of its debt problem? The answer is that it won't be able to without the heavy lifting and unpopular policies that could encourage growth by cutting expenditures and balancing trade. And I am concerned that Europe's wave (and deteriorating growth prospects) will crash on our shore in the year ahead, rendering vulnerable consensus forecasts for 2013-2014 corporate profits.
Keith went on to ask whether the U.S. economy and stock market stand today in a similar manner relative to 2007 or 2008.
I thought so, as, just like in late 2007, we are now witnessing a broad deceleration in global manufacturing activity that will adversely impact U.S. export growth.