Stocks: Is everyone too bearish?
Hedge fund manager Doug Kass of Seabreeze Partners in Florida writes some entertaining commentaries on financial markets, and isn’t afraid to go out on a limb with his predictions.
He got it wrong in spring 2009, when he warned of a possible double-dip recession by the end of that year.
But early this year Kass again warned that the economic recovery looked feeble, and he turned out to be right. He also predicted that partisan politics in Washington would weigh heavily on consumer and business confidence by mid-2011, a call that was dead-on (think: debt-ceiling brinkmanship).
Now, with global stock markets down sharply since late July, Kass argues that “everyone is too bearish,” and that the market is more likely to be bottoming than getting ready for another cliff-dive.
Early Tuesday he said he expected the Standard & Poor’s 500 index (charted at left) to bounce after “testing” the 1,130 to 1,150 range. The S&P surged 38.53 points, or 3.4%, to close the day at 1,162.35.
In a note to clients Tuesday, Kass wrote:
"Fear is pervasive . . . and even pros are acting like amateurs. How else to explain my dinner at Nick and Toni's last night in East Hampton with my friend/buddy/pal, Joe Zicherman, who, when active professionally, was an enormously successful stock broker to the stars in Hollywood? At last night's dinner, Joe and I stupidly positioned his iPad on our table as we fixated on the CNBC application and watched with bewilderment every $0.50 change in the S&P futures and every $5 change in the price of gold.
"These sort of idiotic things don’t happen at or anywhere near market tops; they occur at or near market bottoms," he says.
Kass listed 11 “buffers” that he believes are likely to keep stocks from plummeting from here, and make for a good environment for bargain-hunters:
--- There will be no double-dip recession (the “negative feedback loop” is hurting business and consumer sentiment, he says, but other hard economic indicators don't signal a recession).
--- Short-term interest rates are anchored at zero.
--- Inflation and inflationary expectations are contained.
--- Corporate balance sheets are strong, and earnings growth has been, too.
--- Valuations, such as stock price-to-earnings ratios, are reasonable, he says.
--- 55% of the all S&P stocks now yield more in dividends than the 10-year U.S. Treasury note.
--- Risk premiums (the difference between stocks’ earnings yields and corporate bond yields) are near record levels, which favors stocks over bonds.
--- Investors' expectations are limited.
--- Hedge funds have "de-risked," meaning they've already bailed on the market. The ISI Hedge Fund Survey reports the funds’ net exposure to stocks is down to 45.8%, the lowest level in two years.
--- There has been a “wholesale abandonment” of the market by the individual investor -- $30 billion withdrawn from mutual funds in the last two weeks alone, Kass notes. That's a contrarian argument in favor of buying.
--- The possibility of a large reallocation out of low-yielding bonds and into stocks.
Just one man's opinion.
-- Tom Petruno