September 26, 2016

Not very interested in being long stocks

With a small net short position, I am not fighting the Fed in a sizable way, the seeds for a bear market are being put in place; however, the timing of that drop remains uncertain. 

Several questions and observations regarding the Fed and the market's reaction come to mind:

- What does the Fed know? We started 2016 with a consensus view of four interest rate hikes by the Federal Reserve (though I suggested there would be none!). Despite a halving in the unemployment rate and that the real level of core inflation has been running at about 2% for nearly a year, the Fed to date has balked at any rate increase this year.

- Who cares what the Fed knows? I and others have chronicled the remarkably poor forecasting record of the Federal Reserve. For four consecutive years that august body of more than 100 economists has been among the worse prognosticators extant. For now we are prisoners of the Fed's views with its pretense of knowledge.

- In all likelihood the Fed will find a way of not doing anything over the next year on the rate front.

- The Fed and other central bankers have encouraged the greatest distortion and speculative bubble in fixed income in centuries. This glorious bubble in bonds, when it bursts, will substantively slow down financial engineering that has buoyed our markets, produce the largest amount of investment losses and risk-off moves as the carry trade is reversed in history, and will likely bankrupt numerous large banks, especially of a European Union kind. .

- The Fed has turned its back from reality with a straight face and has lost its effectiveness and is soon likely to lose investors' confidence. It's the Ah Ha Moment.

Of Algos and Men

While numerous investors, particularly those that base their trading and investing on volatility and price-trending statistics, have rejoiced in the decision to hold rates and the Fed's dovish rhetoric, a Minsky Moment is likely at hand sooner than later.

This is what happens at inflection points in the market: The most obvious signposts of risk are dismissed because, after all, stock prices are advancing.

But greed is also rising coincident with rising stock prices and with the price/earnings ratio of projected 2016 S&P 500 GAAP earnings at nearly 25x and more than 18x non-GAAP earnings.

I have little interest in being long equities. The consensus view of 2017 S&P EPS for the fifth consecutive year is probably too high as profit margins are now clearly mean reversing in a period of subpar global economic growth.

Finally, political and geopolitical risks have never been greater.

The winter of our discontent may lie ahead.

Position: Long SDS; short SPY, TLT

via thestreet