Wednesday, August 12, 2009

More bears turned bulls turning bearish...

Perhaps the most famous market call in the past 9 mths was Doug Kass' call to cover shorts and get long in Mar 2009. Mr. Kass had been a famous bear and this was cheered by many as a reason to buy, buy, buy!!! His call (and Citigroup's famous - we've been profitable for a couple of months - press release) really lit the fuse under the market that led to a 40% 5 mth run.

Well, Mr. Kass has flipped back to being bearish and here are his reasons:

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

His prior call was more of a trading position - things were oversold and were due to bounce - this message today speaks to all of the fundamental flaws with our domestic economy and how none of them will be solved with quick fixes. I'm not sure it moves the market today or tomorrow, but with two leading forecasters predicting a return of the bear market it's worth watching closely.

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