September 28, 2015

Stocks to end in negative this year

Stocks seem about fairly valued today, but it's my view that any changes in the months ahead are more likely to be negative than positive.

Problems could include a government shutdown, fiscal inertia by Congress, an accelerated drop in China's growth, a monetary policy mistake or an unknown "Black Swan" like the current Volkswagen scandal.

Any of those could contribute to weaker markets that fall below -- maybe well below -- my baseline expectations.

That's why I'm currently positioned in market-neutral territory. I simply have too much respect for the money I've earned for my investors to take on too much risk in such an uncertain climate.

With that in mind, here are my current expectations for the market:

-    I don't expect 2016 to be a positive year for stocks. The main indices won't likely eclipse the major top they established in 2015's first half any time in 2016.

-    The S&P 500 (SPY) has likely successfully tested the capitulation low of about 1875 reached in late August, when the index hit four standard deviations below its moving average. That bottom produced new 52-week lows in 1,335 individual stocks -- the greatest since 2008. (New highs only averaged about five per day last week.) While this test has been successful, several additional tests seem possible over the next few months.

-    The market has been reset lower as reality set in. After some more testing, I expect the S&P 500 to spend the next six months or so in a broad range of 1850 and 2025.

-    Unless fundamentals change, there's an equal upside reward and downside risk at current market levels.

-    I estimate the S&P 500's full-year return will come in at a high-single-digit decline (between a 5% and 10% loss). That's in line with my beginning-of-the-year expectations.

-    The contrarian view would more likely be a leg lower than a leg higher.


September 21, 2015

Market expectations for growth is too ambitious

The Federal Reserve failed to hike interest rates ....and Fed Chair Janet Yellen's press conference afterward underscored the anemic outlook for global economic growth that I've been warning of for months.

Among other headwinds, Yellen cited credit-spread concerns. When Yellen said that any rate-rise decision would take into account the U.S. stock market, quant buy programs were quickly triggered and the markets immediately soared. (The S&P 500 made a 20-handle move in a matter of minutes.)

But as the wise man once said, "sic transit Gloria" -- stocks collapsed by over 30 handles when Yellen said the Fed "does not have to fully meet its objectives to tighten." This shifted the programs into reverse and back into sell mode. The two-year U.S. Treasury note dropped by the greatest daily amount (in yield) since the Fed announced Quantitative Easing 1 six years ago.

While faith, low interest rates and liquidity buoyed markets coming out of the recession, the "aha" moment now seems at hand.

For too long, our markets have been slaves to the largesse of monetary policy.

Since the 2009 Generational Bottom, U.S. stocks have risen based on extraordinary doses of liquidity injections and growing confidence that global easing will trickle down -- improving confidence, lifting job growth, buoying economies and propelling corporate profits to records.

But after six years, monetary policy has lost its ability to catalyze domestic economic growth. Indeed, zero interest rates and massive infusions of liquidity may already be having a negative impact on growth as the savings class is disadvantaged, forced to hoard cash and reduce personal expenditures.

Moreover, with the time value of money being negligible, there's little incentive for companies to expand plant, equipment and payrolls.

Even more importantly, monetary policy has pulled forward sales and taken away from future growth over the last few years. 

Compounding the Boom-and-Bust Cycle

The extended period of zero interest rates has produced and introduced a significant amount of excesses -- in valuations and in the degree of malinvestment across several asset classes. It's also accentuating a boom-and-bust element of our economy that up until recently had been dismissed by a consensus view that a self-sustaining recovery was in place.

The problem is that our fiscal and political leaders have abandoned policy under the influence of unprecedented partisanship, which will only get worse in a few weeks as another budget confrontation and government shutdown looms.

In the absence of reforming our tax code, reducing expensive regulatory burdens and improving our country's infrastructure, we're now hostage to both fiscal inertia and the impotence of "more cowbell" as a byproduct of present monetary policy.

Moreover, as confirmed by the Fed chair, we are now vulnerable to structural economic problems that reside outside of the United States.

Much like The Princess Bride, Yellen has revealed the notion of America as "an oasis of prosperity" to be a fairy tale told by Wall Street strategists and "perma-bulls" to market to innocents.

    "The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets. Developments since our July meeting -- including the drop in equity prices, the further appreciation of the dollar and a widening in risk spreads -- have tightened overall financial conditions to some extent. These developments may restrain U.S. economic activity somewhat, and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching."

    -- Fed Chair Janet Yellen, Sept. 17 press conference

True, those gains were abetted in part by quants who know nothing of balance sheets, income statements or the intrinsic value of equities. But I believe those machines, algorithms and levered ETF's have broken the market's mechanism and converted Wall Street into a giant casino of price-chasing momentum and news-based stock prices -- producing awkward, bizarre and unpredictable volatile moves like yesterday's.

Consensus global economic and corporate-profit growth projections -- consistently too ambitious for the last three years (but ignored as valuations and "animal spirits" ever rose) -- still remain too optimistic.

The bottom line: Sell stocks.

Position: Short SPY


September 17, 2015

QUANTS maybe a danger to the markets

Call me old-fashioned, but in Season of the Glitch, I outlined why more volatility will emerge from our broken markets and in the past I have been adamant in my view that we should KILL THE QUANTS BEFORE THEY KILL OUR MARKETS.

There have been a number of factors that have conspired over the last decade to produce the current environment, which resembles less of a stock market than a casino -- providing fertile ground for the disruptive influences of quants, risk parity and other strategies that pay little heed to balance sheets and income statements:

• Regulation: Volcker Rule, Basel III, Dodd Frank prevented dealers from providing their classical role of ensuring market liquidity and stability -- in part because of lowered allowable leverage and, in part, because of a mandated reduction in proprietary trading activities.

• The elimination of the uptick rule in 2008: This will go down as one of the dumbest regulatory moves ever.

• The proliferation and popularity of ETFs: These weapons of financial destruction (which rebalance during the day) have taken a much larger share of trading activity as retail investors have moved away from individual stock picking and toward the use of "these baskets." (As evidence, a disproportionate amount of stock trading activity occurs in the first 30 minutes and last 30 minutes of daily trading, when ETFs "rebalance.")

• The decline in retail investor involvement

• The electronization of the NYSE: This has eliminated the stabilizing impact of market makers and specialists. In the past, human beings have used common sense; today, emotionless machines rule the day and have recently proven disruptive to our market system.

• The steady drop in commission rates, which gave brokerages less incentive to take the other side of a trade.

There are some easy near-term solutions to the adverse impact of our Brave New Market -- including the adoption of a tax on financial (stock) transactions and/or the reimposition of the uptick rule.

Unfortunately, the SEC is asleep at the switch and, for now, we have to play the hand we have been dealt.

So, get used to spending more time in a trading mode and less time in an investing mode -- and given the rise in volatility, keep an eye on your portfolio's value at risk (VAR).

My cousin Sandy Koufax controlled his destiny with his golden left arm.

However, to an important degree, we -- as market participants -- have lost control of our markets and our investment destinies.

It's a sad state of affairs that is not likely to be resolved any time soon.


September 15, 2015

Increasing long exposure to YAHOO shares

The Internal Revenue Service said late yesterday that it was unwilling to provide a letter that assures Yahoo! a tax-free spin off of the company's stake in Alibaba.

Tax rules are complicated and have specific context depending on the transaction, so I don't believe this is over yet. But my guess is that the ruling could pressure Yahoo! to put itself up for sale, as CEO Marissa Mayer is under renewed demands to perform after years of poor acquisitions and weak core-operation results.

As a result, I plan to add to my Yahoo! long at under $30/share. I'll also have more to say about YHOO in the coming days.

Other stocks Doug Kass is buying

I'm adding to the following longs: Ford , General Motors, Potash Corp, Radian and Yahoo).

Position: Long GM, F, YHOO, RDN, POT 

Originally published on September 9, 2015 via

September 14, 2015

Shorting the market for a trade today

September 9, 2015

Observations on the market

-    A pattern of "lower highs and lower lows" remains in place.

-    There's a clear demarcation line between the business media's degree of enthusiasm today vs. previous periods.

-    I personally can't feel as glum as they do, nor can I continue with my previous level of ursine view in light of the 200-handle S&P 500 drop that we've seen over the last seven weeks.

-    Monday's U.S. market holiday -- combined with the fear of open Chinese and Japanese markets then -- has likely led to investor angst today and could be exacerbating trading weakness.

-    Most commentators are downbeat now, with only the perma-bulls remaining bullish. I view this positively.

-   The risk-vs.-reward quotient for stocks is improving -- perhaps measurably -- coincident with lower prices. Values could be finally emerging, but the technical and price damage has been immense.

September 8, 2015

Some large cap stocks looking attractive

I wrote months ago that I had completed research on a number of large-cap stocks that I would find attractive at the right price.

Well, several of those companies are finally moving into my buy zones -- most notably Goldman Sachs  and Morgan Stanley today. And there will probably be more if we see any further market weakness.

Am I generally bullish? Not really, yet -- but the first move toward turning more bullish is to turn less cautious and start to accumulate value.

My advice is that we should all try to be emotionless, particularly given the 200-point-plus drop in the S&P 500 in recent days.

I find that some who were previously bullish (particularly in our comments section) are now very glum and bearish. I differed in view both then and now, although I might be wrong.

Remember, my approach to investing is virtually indifferent to charts. Instead, I pay close attention to upside/downside ratios and risk vs. reward.

Above all I subscribe to Warren Buffett's adage: "Price is what you pay, value is what you get."

Stay tuned.

Position: Long GS, MS, SPY 


September 2, 2015

Lessons learnt from the recent market volatility

1. The world -- socially, economically and in terms of our capital markets -- is flat, interconnected and networked.

2.    You pull your own trading and investment levers. Make independent, thoughtful decisions and judgments in part from accumulated input from analysts and financial advisers that you respect, are rigorous in analysis and utilize common sense.

3.    The investment mosaic is complex. Attempts to simplify it into sound bytes based on over reliance on price action, dependency on monetary policy, etc., can be hazardous to your investment health.

4.    Ignore those perpetually bullish market commentators who talk fast and are self confident, as many are three miles wide but only an inch deep in market and company knowledge. Many of them are blind to the reality of headwinds and changing structural developments.

5.  Ignore those perpetually bearish market commentators who talk fast, are self confident, offer a Cassandra-like view and see all market breaks as the beginning of the end of the world. Many of them ignore favorable conditions and advancements -- and, they, too, are maybe three miles wide but only an inch deep in market knowledge.

6. In other words, take the middle road, not the extreme and dangerous one.

7. Wall Street is inhabited by many who've made one great call in a row.

8. The remnants sometime outsmart the crowd -- especially at important inflection points.

9. Always consider the downside and weigh the negative factors, even when others ignore them during a market upswing.

10. It often pays to anticipate rather than react, as risk can happen fast.

11. Always evaluate risk vs. reward, as it's the centerpiece and foundation of successful investing. ("Price is what you pay, value is what you get," as Warren Buffett puts it.)

12. "T.I.N.A." ("there is no alternative") is B.S. -- and a non-rigorous reason to be in equities.

13. Cash has a purpose and can provide protection in perilous or overvalued times.

14. Wait for the right pitch. Keeping the bat on your shoulder and not making investment swings can often make a lot of sense.

15. Always ignore leverage. Invest with your head, not over it.

16. Know your timeframe.

17. Know your risk appetite and profile and don't be tempted to stray from it.

18. Keep your emotions in check.

19. History rhymes. To better understand it, read as much as possible -- particularly from those legendary investors who delivered excess investment returns in the past.

20. Finally, "be fearful when others are greedy and greedy when others are fearful." (Another famous Warren Buffett line.)