Since Wednesday stocks have climbed by integers.
It is obvious that my market view has been wrong over the last week -- very wrong.
Nonetheless, I want to highlight the foundation of the bear case so all of you can weigh it against the positive action and make your own conclusions with regard to your trading and investing.
Many of my uncertainties remain grounded in the familiar and long standing concerns reflected in the following three questions -- that I ask myself every day -- the answers to which are increasingly worrisome and could prove to be valuation busters in the fullness of time:
- In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
- In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
- With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
My Concerns Are Multiple:
* Consensus global economic and corporate profit growth forecasts are too high.
* The world's economy seems destined to be moving towards "slugflation," sluggish growth and persistent inflation.
* Citigroup's Global Inflation Surprise Index has risen to the highest level since 1999.
* Citigroup's Global Economic Surprise Index has turned negative and has fallen to levels historically associated with an economic slowdown/recession.
* Inflation and supply chain dislocations are not likely transitory -- these factors will likely lead to profit margin pressures (see Procter & Gamble's (PG) earnings report Tuesday morning).
* Interest rates -- which are heavily weighted in discounted cash flow model calculations -- are rising.
* Our country's deficit and debt loads represent a governer and headwind to future domestic economic growth.
* Geopolitical risks abound and the world appears less safe today than at any time since the Berlin Wall came down.
* Individual and corporate tax rates will increase in 2022.
* Valuations are high, and at nosebleed levels, by almost every traditional metric.
* The most important driver of worldwide GDP growth, China -- representing about 30% of marginal global economic activity -- is .dering
* The heavily leveraged property market in China is deteriorating rapidly -- sowing the seeds of economic contagion into other regions.
* Reflecting leadership issues and a deteriorating economy, China has become a threat to global harmony.
* Globalization has led to shared interests but localization/nationalism is leading us back to an us vs. them mentality.
* The reversal of globalism, continued supply chain problems and rising inflation are threats to corporate profit margins.
* COVID has widened the cracks and has exposed the fragility in global just in time supply chains.
* The pandemic has also pulled forward demand for many companies and industries -- comparisons will grow more difficult.
* Political partisanship and wealth/income inequality are both at an extreme -- posing numerous social and economic threats.
* Global central bankers may be about to withdraw liquidity -- this possible pivot toward tighter money could reduce system liquidity.
* Liquidity and volatility are inversely related, so less liquidity means more volatility and less predictability.
* Market structure has changed -- the dominance of passive products and strategies represent a market risk rarely discussed -- as so many players are on the "same side of the boat."
* Bullish investor sentiment is bloated and few are fearful of a major market decline.
* Individual equity exposure as a percentage of total household wealth is at a 70-year high.
Weighing against these concerns are end-of-year FOMO (fear of missing out) and the overall level of interest rates, which remain lower than almost any time in history.
Low interest rates have been supportive of the notion of TINA (there is no alternative) and, as documented last month, have resulted in enormous flows into equity funds, elevating FOMO, limiting market declines and producing a valuation reset higher.
With the proliferation of now dominant, and momentum-based, passive investing products and strategies -- which know little about value but everything about price -- stocks have enjoyed strong underlying support as the recent momentum has been the breeding ground for more momentum. The quants are conditioned (like Pavlov's dogs) of buying the dips -- that dip buying has been a repeated market feature.
While I am still of the continued view that an important market top may now be forming (tops are processes, bottoms are events) my confidence has been dented by the magnitude of the advance and the brief time the recovery towards new highs has occurred since the middle of last week.
I am maintaining my short exposure into the recent strength as my assessment of the upside reward against the downside risk is growing more unfavorable as stock prices rise.
(This commentary originally appeared on Real Money Pro on October 19. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
