"In this tournament, I guess, I have definitely turned a different zone... I'm not sure if I can articulate what zone that is."
-- Serena Williams on her win over Elina Svitolina Thursday night at the U.S. Open Tennis Tournament
Over the last few days Mr. Market has done its best to look like Mrs. (Serena) Williams -- with another series of breadth breakouts as the S&P Index barrels towards its old highs (and through the upper end of my projected trading range).
While Serena is a natural, unaided by steroids, I can't say the same for the markets, which are being buoyed by the momentum chasing quant strategies and the plethora of ETFs (see Ben Hunt's and Mike Burry's comments on the bubble in passive investing).
Thursday's modestly better-than-expected high-frequency economic data does nothing to reduce my concerns expressed daily this week:
There are numerous fundamental reasons for my ursine market view -- the lack of appreciation that the Fed is pushing on a string, growing evidence of an "earnings recession," a broadly slower trajectory of global economic growth and corporate profits than the consensus expects (see yesterday's weak economic data), hastily crafted policy conflated with politics, a likely extended trade impasse between the U.S. and China (with both countries possessing different objectives and timeframes), the absence of cooperation and coordination by the world's leading economic powers (in an increasingly flat and interconnected world) and a highly partisan Washington incapable of addressing our deficit and debt loads (which will only grow more partisan leading up to the November, 2020 election).
Surprisingly all of the S&P's gains in 2019 have been valuation based (read: higher P/E multiples) as profits have stalled. This raises another risk, particularly since most traditional valuation metrics are in the 95th percentile.
There is basically one reason that first level thinkers like the market -- and that's a 1.50% ten-year note yield. While the risk premia (the difference between the earnings yield and the risk free rate of return) have expanded with lower rates, the reasons for the near-generational lows in rates should concern second level thinkers -- and even the Bulls, now.
-- Kass Diary, Minding Mr. Market (this week)
In case you left early Thursday my market skepticism (and short book) rose with an elevated market:
It is remarkable to me that the many that hated stocks a large percentage ago (when some of us were buying in the face of a more favorable reward vs. risk) are now bullish and buying. (See Helene's quote above!)
Investors and traders seem to want to believe.
They want to believe that the trade talks between the U.S. and China will be real this time.
They want to believe that there is no "earnings recession" even though S&P profits through the first half of 2019 are slightly negative (year over year) and that S&P EPS estimates have been regularly reduced as the year has progressed.
They want to believe that stocks are cheap relative to bonds even though there is little natural price discovery as central banks are artificially impacting global credit markets and passive investing is artificially buoying equities.
They want to believe that technicals and price are truth - even though the markets materially influenced by risk parity and other products and strategies that exaggerates daily and weekly price moves.
They want to believe that today's economic data is an "all clear" - forgetting the weak ISM of a few days ago, the lackluster auto and housing markets, the U.S. manufacturing recession and the continued overseas economic weakness.
They want to believe that, given no U.S. corporate profit growth, that valuations can continue to expand (after rising by more than three PEs year to date).
They want to believe though that the EU broadly has negative interest rates and Germany is approaching recession (while the peripheral countries are in recession) - that the Fed will be able to catalyze domestic economic growth through more rate cuts.
They want to believe that the U.S. can be an oasis of growth even though the economic world is increasingly flat and interconnected and the S&P is nearly 50% dependent on non U.S. economies.
I am not a Cassandra.
I am not a recessionista - I am a realist.
I don't know with certainty where the markets will be three or six months from today.
But I do know that, given the recent rise in the stock market, that the reward vs. risk is vastly diminished and less favorable compared to other opportunities that existed since December, 2018.
I am now more aggressively on the Don't Pass Line.
As the Day Began
S&P futures continued the tear of the last two days - at 5:40 am they were +10 handles.
Bonds were up another 2-3 basis points in yield after an outsized 11-12 basis point rise yesterday. (Financial stocks, which are rate sensitive, were upside market leaders on Thursday.)
Gold continued to mean regress and is lower by -$12/oz after Thursday's -$33/oz schmeissing.
Finally, China's central bank has cut its reserve requirement ratio.
On a tactical basis I am shorting this "overshoot" relative to my anticipated trading range especially given the propensity for "buyers (machines and algos) to buy higher" (over the short term) - and in the belief that we are not starting a new Bull Market leg, given my calculus and view that the downside risk now dwarfs the upside reward.
Dueling Market Views: I would end by noting that you have two distinctly (and I believe thoughtfully and analytically determined) different market views to assess on our site -- my negative view and Jim "El Capitan" Cramer who endorses buying this rally (Jimmy was retweeted by the President last night -- so he has that going for him which is nice!)
My strong advice is for you all to do your homework -- read both Cramer and the anti-Cramer (me) and ponder over the weekend. In doing so you will make more solid and analytical investment and trading decisions during this critical period based on your risk profile/appetite and time frames.
(This commentary originally appeared on Real Money Pro on September 6. 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.)