January 20, 2014

Why Doug Kass is downbeat on 2014

There are numerous reasons for my downbeat theme this year. Below are a few (in no order of importance):

-Corporate profit margins (70% above historical averages) are stretched to 70-year highs, so earnings are exposed.

-Second-half 2013 strength in domestic economic growth has been boosted by nonrecurring inventory accumulation. Some more recent signs (e.g., automobile sales, retail spending and housing data) suggest a deceleration in growth may lie ahead.

-The baton exchange from Helicopter Ben to Whirlybird Janet could be unkind to the markets. On average, a change in the Fed chair has resulted in about a 7% drop in the major stock indices.

-Quantitative easing may not be a continued tailwind for stocks. As Peter Boockvar wrote, "QE doesn't create a safer world, it is just a temporary high and the danger always comes on the flip side as previously seen.... QE puts beer goggles on investors by creating a line of sight where everything looks good, but the Fed's current plan is to end it by year-end."

-Sentiment measures are elevated to historically bullish levels. This is seen not only in the disparity between bulls and bears (in the popular surveys) but also manifested in the third-highest margin debt to GDP in history.

-Valuations (P/E ratios) rose by nearly 25% in 2013 vs. only 2% annually since the late-1980s.

-The Shiller P/E ratio is at or near historic highs (excluding the bubble of the late-1990s).
According to JPMorgan, the S&P 500 is now more expensive on a forward P/E basis than it was at its previous peak in October 2007.

-Interest rates might pose more of a threat than is generally viewed. The rose-colored glasses being worn by investors might be cleared in the year ahead, as the withdrawal from QE and low rates might be harsher.

-A year ago, market enthusiasm was muted. Today there are no cautionary forecasts for the S&P for the next 12 months.

via- http://www.thestreet.com/story/12210901/4/doug-kass-15-surprises-for-2014-part-1.html