June 13, 2016

George Soros has taken bearish positions on the market

I outlined my negative market outlook in no uncertain terms earlier this week, writing:

"With the schism between rising U.S. stock prices and a weak real economy growing ever wider, profits are no longer growing and valuations have advanced to a nose-bleed 25x GAAP earnings.

Nonetheless, stocks stand near an all-time high this morning in a market that's dominated by machines and algorithms, which have little taste for assessing private-market value or the quality and/or size of balance sheets. Rather, they rely almost solely on price momentum.

You've all read for months about the rationale that underscores my ursine view. I remain steadfast in my bearish outlook, and my portfolio's skew is an expression of my concerns."


Admittedly, I measure my investment time-frame in months rather than days or weeks. My risk profile is conservative, but to achieve my objectives, I often trade around my core long and short positions.

However, I always remember that there's no certain truth over the near term in a market that's dominated by quants. And I never lose sight of the fact that despite the protestations of many "experts," the only certainty on Wall Street is the lack of certainty.

So, I've slowly added to my short exposure on the market's recent ramp-up. I've also diversified my short exposure by:

-    Adding Country Risk. I've shorted the iShares MSCI United Kingdom ETF (EWU) and the iShares China Large-Cap ETF (FXI) .

-    Expanding Sector Risk. I've added shorts of the Consumer Staples Select Sector SPDR ETF (XLP) and the Financial Select Sector SPDR ETF (XLF) .

-    Boosting Individual Shorts. I've recently expanded my list of individual-company shorts. I did this in part because the bulls' B.S. has risen proportionately with the market advance.

Stocks' recent advance has dissipated a lot of the bearish banter, drowned out by the chorus of Everything's Coming Up Roses by pajama traders and others who see nothing but today's prices ahead of them.

Shorts are becoming an endangered species -- in fact, the bulls have begun to ridicule the ursine crowd. Complacency, defined as little concern that the market has any meaningful market risk, is spreading quickly as the fear leaves Wall Street.

Several Wrong-Way Corrigans that I know have gone "all-in long" with confidence and even arrogance, in defiance of the idea that any substantial market draw-down is next to impossible. (Their constant refrain is: "The charts look good!")

But given my investment time-frame, I don't typically react to such short-term trends (with the exception of limited trading activity).

Instead, I evaluate risk vs. reward -- and I recognize that the investment mosaic is complicated and can't be simplified into a single chart or one or two independent factors. Rather, it's a distillation of sentiment, valuation and fundamentals (the economy, interest rates, inflation, etc.).

I understand financial history, so I pay attention to what the fixed-income markets are saying when the 10-year U.S. Treasury yield is at 1.66% and much of European and Japanese sovereign debt has negative yields.

And I can see today's artificiality of stock prices, spawned by machines, algos and an obtrusive Federal Reserve. I also get the secular economic shifts that are adversely impacting large swaths of America's "Old Economy" (e.g. retail).

Similarly, I know what the iPhone's completed product-cycle upgrades mean for its future growth at Apple. And I'm aware of the profitability pressures that banks face, along with the proliferation of non-GAAP accounting that's a negative for stocks.

Additionally, I recognize the poor forecasting records of the Fed and other organizations and economists. They've been way off in their projections for four consecutive years as central-bank policy has lost its effectiveness.

But lastly (and most importantly), I admit that I might be wrong -- even over an extended period of time.

The Bottom Line

My advice is that we all pay less attention to the "perma-bulls," who (like the "perma-bears") are attention getters rather than not money-makers.

Also ignore the odd-lotters and other business TV "talking heads" who worship at the altar of charts and price momentum. Those people often flip-flop on their views, but will rarely if ever admit when they were wrong or simply don't know what's going on.

Instead, I suggest paying attention to George Soros, whom I view as the second-greatest investor of all time (trailing only Warren Buffett). Soros recently adopted a negative market view.

In my view, downside risk substantially exceeds upside reward given the fact that stocks have been rallying despite slowing real economies and reduced profit expectations. To believe otherwise is to believe that valuations will continue to expand for here, which I fundamentally disagree with.

Personally, I'm staying the course with my net-short exposure. I expect to profit mightily from it over the balance of 2016.


via thestreet.com/story/13604486/1/apple-facebook-and-ishares-china-large-cap-etf-doug-kass-views.html

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