March 20, 2018

More downside risks to the market

Top 10 reasons Doug Kass thinks the market may be headed lower and is net short at the moment. Excerpt below from RealInvestmentAdvice.

1. A Presidency of One: Trump’s behavior may finally matter to the capital markets as the Administration’s disorganization, revolving door and impulsive policy actions may soon intersect with market valuations.

2. The Outcome of the Mueller Investigation Could Be Market Unfriendly  

3. A Blue Wave in the Mid-Term Elections Could Also Be Disruptive to the Markets and the Trump Agenda

4. The Expectations of a Synchronized Global Economic Recovery May Be Wrong: Though many are focused on the big upside reported in last Friday’s jobs market — I would emphasize that employment data is a notoriously rear view or lagging economic indicator.  Several high frequency economic data points now suggest that the much anticipated acceleration in the rate of US economic growth may disappoint investors. And, even in the EU, several economic prints have stumbled recently.

5. The US Lacks Fiscal Discipline: The recently enacted tax bill will exacerbate risks associated with a rising debt load and expanding fiscal deficit. The Fed’s $4 trillion balance sheet is problematic and $2 to $3 trillion of newly issued Treasuries will likely place pressure on interest rates.

6. Inflation Pressures Are Building and Interest Rates are Heading Higher On rates, few appreciate that it took only a thirty basis points increase in the ten year US note to blow up a trillion dollar global short volatility trade.  And, from Peter Boockvar this morning: “Another 2.4 bps rise in 3 month LIBOR on Friday to 2.20% brings the year to date gain to 50 bps. It is now up 105 bps over the past 12 months which of course is greater than the pace of Fed rate hikes and thus the LIBOR/OIS spread keeps widening. It’s been a topic of discussion for the past month but regardless of what’s causing it, the impact grows on the trillions of dollars of LIBOR based loans.”

7. Trade Wars Seem More Likely – Threatening World Trade: Recent policy moves force us to unfavorably answer question, “Am I a Clever Man (Westley) or a Fool (Vizzini)?” 

8. With Their Growing Dominance, Facebook (FB) , Alphabet’s Google (GOOGL) and Amazon (AMZN) Face the Existential Threat of Regulations and More Legislation:  FANG is the center piece of the decade old Bull Market. For one year I have been fearful of their increased market dominance and horizontal acquisition strategy which is disrupting industry after industry – and having a consequential impact on those industries, their employees and, even the real estate markets. 

9. Expanding Individual Investor Optimism: Recent fund flows are at record levels – often seen as a contrarian and bearish signpost. From Barron’s over the past weekend (H/T Randy Forsyth): “Following the stock market’s brief but violent drop in February, investors came roaring back with record purchases of equity funds in the most recent week ended on Wednesday. According to EPFR data cited by Bank of America Merrill Lynch, some $38.3 billion was poured into mutual funds, including the exchange-traded variety.” 

10. Global Central Bankers are Pivoting Towards Tighter Money: In marked contrast to the last nine years, the Fed is no longer our friend.