• Was it a last gasp?

"One more thing."

-- Lt. Columbo

The question I ask myself after today is whether this session was a blow-off rally, a last gasp rally.

• Check out the BMW i8.

"One more thing"

-- Lt. Columbo

The Internet is buzzing with BMW's new product designed to compete with Tesla (TSLA).

First look, the i8.

• Thanks for reading my diary.

Did I mention that the market has no memory from day to day?

I am outta here early.

Thanks for reading my diary, and I hope it was helpful and additive today.

Enjoy the evening.

And God bless Uncle Vinnie.

• At $14.89.

I covered half of my Bank of America (BAC) short at $14.89.

• Run, don't walk to watch Dr. Nouriel Roubini on Bloomberg Television.

The war in Ukraine could tip "fragile" and "uneven" Europe back into a recession.

I would say the last thing that the eurozone can afford and needs right now is another shock coming from an increase in gas prices and/or even a cut off of supply of gas coming from Russia to the Western European economies. That would tip the European economies back into a recession if that were to occur....

[I] would say the other big tail risk is the one coming from China. I spent many days in Beijing just last week, and I would say that while the consensus believes that China's going to have a soft landing, growth above 7% the next few reads, my reading of the data is that because of the build up of leverage, because of the need to rebalance the economy from fixed investment to consumption, they'll have to slow this excessive credit growth.

-- Dr. Nouriel Roubini

He's back!

Nouriel Roubini, that is, on Bloomberg Television.

Here are some of the highlights:

On whether Ukraine represents the single biggest risk:

Certainly among the global tail risks, the one coming from Ukraine is the most important one. There is the beginning now of a new cold war between the West and Russia, and this cold war could actually become a hot war if it's possible Russia were to effectively destabilize and invade the eastern provinces of Ukraine, in which case things would escalate. You could have another episode of global risk aversion. If this were to become a real war, even a situation in which the supply of gas to Europe may be cut off from Russia. The European economy is barely now recovering from a recession. That could tip back the eurozone into a recession.

On how concerned he is that things could get catastrophic:

Well today I would say the risk is around 7 [out of 10] and raising because the situation is (inaudible) one in which Russia seems to be really very aggressive in Ukraine. They want to try to take over Ukraine, and therefore an escalation is likely to occur.

On the possibility of a 'hot war':

Suppose that Russia at this point decides to effectively either to destabilize, invade the eastern province of Ukraine. Two things will happen. The stance (ph) of the West will have to become more Russia and Russia could have (inaudible) going as far as limiting the supply of gas not just to Ukraine but also to Western Europe. Secondly, the NATO, even if they're not going to have a military intervention, they'll have certainty provide some military support to the government in Kiev. And that means that this war could escalate for quite a while. And therefore from a financial market point of view, there may be contagion deriving two (ph) advanced economy's financial market, especially in the eurozone....

[T]he situation is such that even if he wanted to use force there (inaudible) first of all. Secondly, he's not going to invade all of Ukraine. And you don't know for how long a military conflict of this sort is going to continue, especially if the US and Europe were then to support militarily the government in Kiev. This war could continue and last for a while. So I'm saying this is not my baseline, but there is certainly downside risk that that will happen. But even a baseline (inaudible) remains lingering for a while, at some point investor may become worried about it.

On what it means for the European economy:

Well the eurozone right now is recovering. There's been a severe recession. There's the beginning of an economic recovery, but this is a recovery that's fragile, it's anemic, it's uneven, especially in the periphery of the eurozone. I would say the last thing that the eurozone can afford and needs right now is another shock coming from an increase in gas prices and or even a cut off of supply of gas coming from Russia to the Western European economies. That would tip the European economies back into a recession if that were to occur.

On whether it makes sense that Spain is selling bonds at record low yields:

Well given the whatever it takes speech by Draghi, given the OMT, given the ESM, given the additional easing of monetary policy will occur by the ECB, given the beginning of an economic recovery, beginning of a banking union, it's not surprising that the tail risks of the eurozone have receded. The tail risk of a break up, of Italy and Spain losing market access, now given the spreads investors coming back into the eurozone, what can the (inaudible) the eurozone recovery could be a shock coming from Ukraine.

On what he is most concerned about:

Well, I would say ¿ leaving aside the issue of Ukraine, I would say the other big tail risk is the one coming from China. I spent many days in Beijing just last week, and I would say that while the consensus believes that China's going to have a soft landing, growth above 7 percent the next few reads, my reading of the data is that because of the build up of leverage, because of the need to rebalance the economy from fixed investment to consumption, they'll have to slow this excessive credit growth.  And that implies that this year growth is going to be barely 7 percent, next year 6.5, the following year probably 6 percent of lower. It's not a true hard landing if you think about the financial meltdown with great at 3, 4 percent, but it's a bumpier and much rougher landing than the 7.5 percent that the consensus says about China. That means that if there one thing that is not priced in financial markets, it's a slowdown of China as sharp as I do expect in the next couple of years.

On why others aren't talking about the 'unexploded bombs' in China's shadow banking system:

Well people are starting to talk about it. You have a huge amount of bad assets in the shadow banking system and also plenty of bad assets in the formal banking system. And now the Chinese authorities are telling us they want to crack down on the moral hazard coming from the shadow banking system. They want to led some institutions to fail. But without despite insurance and without any other types of guarantees, if they're serious about moral hazard, you could have a (inaudible) against the shadow banking system that has to be the beginning of unraveling of the Chinese financial system. I don't think that they ¿ they underestimate the risks that are coming from Iran on the financial system if you are really serious about cracking down on moral hazard and imposing market discipline by having defaults.

On what situation we have seen before is most comparable to what China may face:

Well in East Asia for example in the 1990s, there was a booming fixed investment. From 30 to 37 percent of GDP was excessive (inaudible) East Asian financial crisis. In China, fixed investment was already in 2008 something like 42 percent of GDP, much higher in East Asia, and it went all the way to 50 percent of GDP. No country in the world can be so productive. You take every year half of your GDP. You invest it into real estate, infrastructure, excess capacity you're not going to go down the line first of all a hard landing of that fixed investment, a large surge of MPLs (ph) in the financial system, and three, a major surge of private and public debt. That's the risk that China is facing today.

On Janet Yellen:

She's doing a very good job. What I'm pointing out is that while she's on the dovish side of the FOMC, there are now 12 members of the FOMC. The FOMC today is a collegial democracy. It's not the monarchy it used to be under Alan Greenspan. It changed under Bernanke. She's also collegial, and the entire FOMC has changed. Out of the seven members of the board, four are gone. (Inaudible) and Elizabeth Duke, Jeremy Stein and Ben Bernanke.  There are two new members that are going to be confirmed later (inaudible) two new have to come in. Most likely the new members are not as dovish as Janet Yellen. And of the new voting members of the FOMC among the regional presence of the Fed, there are three new hawks. There's Plosser, there's Fisher and there's the new head of the Cleveland Fed who used to be the adviser of Plosser at the Philly Fed. So there's a shift towards I would say a less dovish composition of the FOMC. That means that the Fed might hike sooner and faster even if Janet Yellen personally is probably more dovish than the average FOMC member.

On how he expects the Fed to handle reversing unconventional monetary policy, shrinking the balance sheet:

Well it's a bit of a delicate knife-edge situation for the Fed. Either they exit soon or too fast and there is a bond market rout and they have a hard landing of the economy, or if they wait too long and there is a risk they're going to wait too long and exit too late because the economy's still weak, unemployment is high, inflation is low. Think about it. They're not going to be done with tapering until the end of this year (inaudible) until the middle of next year. It's going to take them three to four years to normalize from zero to four. There is already frothiness in financial markets, in parts of the credit market, in parts of the equity market. A year from now or two years from now we've still (ph) policy that's very low. The risk is actually (inaudible) asset bubble. An asset boom and bubble eventually like 2007, '08 can lead to a bust and a crash. It's not the risk for this year, but I would say the risk is that the Fed exits too little, too late and we're going to recreate the same kind of frothiness or bubble we saw a few years ago followed by a bust and a crash.

On the overall world economy:

Well I would say overall the global economy is recovering. The average advanced economy is going to grow 2 percent this year rather than one, better than that in the US and Canada and UK, less than that in Japan and the Eurozone. It has been a bumpy period of time for many emerging markets, but on average they're going to still grow 5 percent. So there is a recovery of the global economy, but I would say there are a whole bunch of risks. China is one. Ukraine and Russia is another one. And certainly about what the Fed is going to do is another one. Whether the eurozone's going to truly recover is another one. So there is a recovery. That's a positive, but then a bunch of tail risk and fragility.

• More musings from Sir Arthur Cashin.

Drag of Nasdaq continues ¿ seems to be wearing away at the Dow as feared.

It has also pulled the S&P down for another test of its 50 DMA (circa 1858/1859). Traders will make support 1855 and then somewhat more important 1847/1851.

• There is nothing like the prospects for ending QE and taking the beer goggles off!

Both the Russell and Nasdaq indices are breaking through key technical support areas.

• 'Time to Make a Withdrawal' bears another look.

Here is a reminder of my negative views toward the banking industry expressed on March 25.

• I would continue to avoid the shares.

"The only internet-related thing I'd consider buying is Amazon's diapers so I can hand them out to the incontinent bulls when they discover they have no valuation net to save them and their plan to all get out first was a pipedream, just as it was in 2000 and 2007."

-- Fred Hickey, The High Tech Strategist

In an earlier post, I mentioned the risks associated with high-beta, high-octane stocks.

Today Twitter (TWTR) is down 4.2%, Facebook (FB) is down 4.4%, Zillow (Z) is down 5.2%, LinkedIn (LNKD) is down 7.2% and Netflix (NFLX) is down 5.8% after last week's thrashing.

An analysis of one such stock, Amazon (AMZN), should be worrisome to investors -- it is the template for the speculative edge and overvaluation that exists in our markets.

The theme in Amazon's quarter was healthy but not heady sales growth, accelerating capital spending (and depreciation) and little or no free cash flow.

Amazon is minimally profitable, using conventional accounting and is investing in businesses such as food distribution that are usually not valued anywhere near the 37 multiple on trailing 12 months that the market generously accords Amazon shares. The stock seems less worshipful of Jeff Bezos, and some of the markets in which Amazon participates are getting more competitive (e.g, cloud and streaming media).

First-quarter revenue grew 23%. The law of large numbers is catching up with Amazon as sales will clearly exceed $70 billion this year. Earnings before interest, taxes and depreciation grew 31%, but more than 100% of this was due to the increase in depreciation. Nearly all of the $4.3 billion of EBITD Amazon generates is simply depreciation.

Amazon makes very little profit but builds a lot of stuff and makes life miserable for its competitors who have to show cash flow and/or profit to investors.

Trailing 12 months capital expenditures are $3.6 billion and running at a $4.4 billion rate. There is clearly no free cash flow at the company except for what sometimes appears when vendors are pressured. Reflecting this, interest increased over 33% in the quarter, and share count increased slightly as well. Net income did increase $26 million, but there was a $78 million swing in equity earnings.

To be fair, book taxes increased $91 million.

All this resulted in EPS of $0.23 in a seasonally slow quarter.

To put it mildly, Amazon is a bit expensive on an EPS basis.

I would continue to avoid Amazon and its ilk!

• This market is risky and unpredictable.

Again, for emphasis: This market is risky and unpredictable.

I see no reason for having large exposure (either short or long) and every reason to have hefty cash reserves.

The volatility and loss of memory (from day to day and hour to hour) combined with the change of leadership are technical reasons to be cautious.

On a fundamental basis, the market has moved away from fundamental moorings for well over a year.

• Here are his morning musings.

Early commentary from Sir Arthur Cashin:

Risk profile appears to have fallen.  Gold down, Treasuries down (yields up) and stocks higher.  Market tested and retested in first hour, making a series of mildly higher highs.

Nasdaq still the potential weak link and its path will be watched closely, especially after Europe closes.

Run rate later.

• I'll be on Bloomberg Television today at 11:30 a.m. EDT.

A heads up: I will be on Bloomberg TV with Kathleen Hays at 11:30 a.m. EDT today.

• Bad call selling Apple.

Boy, did I screw up by selling Apple (AAPL) several weeks ago!

• What does it mean?

One of the points I made in this weekend's Barron's magazine interview is that we are witnessing the sort of rotation that has marked the tops in prior stock market cycles. (Note: Jim "El Capitan" Cramer delivers his view of the rotation issue in his opener today.)

Shifts in leadership and/or a bifurcated market typically occur in a maturing bull market and often are part of the topping process.

The two classic examples of this were in 1972-1973 when the Nifty 50 growth stocks were massive outperformers while the broader market petered out and in 1999-2000 at the end of the Internet/tech stock boom.

Today's bifurcation is not as extreme as the two examples above, though it could fit with the notion that we are in a late stage of the cyclical advance -- "From Generational Bottom to Cyclical Top?" made this case.

As a friend mentioned to me over the weekend, Mr. Market doesn't have enough Apples (AAPL) and has too many Amazons (AMZN)!

And an Apple a day may not be enough to keep the doctor away!

• He's bullish!

Sir Mark J. Grant just appeared on "Squawk Box," making his bullish case for bonds.

It was January 2, 2014 and I said, here in writing, that yields were going down. Every lead bank, all thirteen of them, without exception, had the viewpoint that yields were going up. Most went further and called for a rise in Inflation in 2014. All of the lead banks have been wrong; quite wrong.

As of this morning the Long Bond is up 12.4% for the year and if you add in the annualized coupon the return is 16.03%. During the same time period the ten year Treasury has appreciated 11.00% in price and the addition of the coupon brings the return to 13.75%. At the same time the Dow Jones average, utilizing data supplied by Bloomberg, is basically flat. Minimal pain but no gain!

You may certainly wonder how all of the lead banks got it so wrong and there is an answer to this question. They did not factor in the Fed and its abilities to lower interest rates and the reasons they will continue to do so. Yields, in my opinion, are going lower, even from here.

According to the Securities Industry and Financial Markets Association (SIFMA) the total size of the U.S. bond market is $38.14 trillion. The Fed currently owns $4.25 trillion in bonds and they will end the year with about $4.75 trillion as/if the "taper" ends. If you exclude corporate bonds, which the Fed has not bought, the American bond market ex-corporates is $28.8 trillion. This then means that the Fed owns 11.00% of the total U.S. bond market and 14.8% of the markets in which they are active. This, the Fed has learned, is enough to control interest rates and that is exactly what has been happening and exactly what the lead banks have missed in their calculations.

Now the global bond markets, according to data supplied by the Bank for International Settlements (BIS), is approximately $78 trillion. The ECB has not, to date, followed the same strategy of the Fed though they have hinted that Quantitative Easing might be on the way soon because Europe is experiencing a bout of Deflation. If you adjust Inflation in Europe for the austerity taxes you will find that twenty-five out of twenty-eight nations in Europe are in a Deflationary environment with Italy being in the worst position at -5.6% utilizing data provided by the European Commission. Given the high unemployment rates in countries like Italy, Spain, Greece et al you would think that their sovereign yields would be quite high but you would be very wrong and there is a reason for this also. The reason is the ECB and their ability to control yields and they have been even more aggressive than the Fed.

In Europe the banks are much more tightly linked to their host nations, you may even say "controlled," than the banks in the United States. There is nothing right or wrong about this; it is just the way of things on a Continent that is much more "socialized" than America. In Europe the ECB has done three things which have caused interest rates to fall quite dramatically regardless of any nation's economic condition. First, they allow sovereign debt to be carried on any bank's balance sheet "risk free" which means no haircuts and no marks-to-market. Then the ECB buys asset-backed securitizations from the banks, many of which are probably 30-40% in the red, and they give the bank face value to restore liquidity. Finally, and most importantly, the ECB lends money to the European banks at 0.25% and, pick a word, "encourages, prods, pleads, coerces," the banks to buy European sovereign debt and hence lower yields. It has been a remarkably successful strategy and while the EU points to the lower yields and claims it is because of improving economic conditions in Europe that is nothing but a fantasy but it is one that they enjoy repeating with great regularity.

In fact, the yields of many of the European five year sovereigns are lower and appreciably lower than the American five year Treasury. Our five year is at 1.72% this morning while Slovakia is at 0.74% and Ireland, who went bankrupt, has a five year yield of 1.11%. The U.S. ten year is at a 2.66% this morning while nations like France, the Czech Republic and Belgium have lower yields. I make the case; again, it is not the economies but the actions of the European Central Bank that have driven yields lower.

So why do I think yields are going even lower in the United States? 

I think the Fed is going to follow the European strategy because they can and because it will require no additional money and because it is in the best interests of the United States government and in the best interests of the American people to have lower yields. The Fed, according to their own data, owns $1.72 trillion in U.S. Treasuries with maturities of less than ten years. Short yields are just off zero so all the Fed has to do is sell their shorter maturities, buy longer maturities, and force down yields all across the curve which is exactly what the ECB has done through their banks in Europe.

The U.S. government will have to pay less interest costs. The debt to GDP ratio for America will improve. Corporate borrowings will cost substantially less. If the U.S. ten year Treasury (2.66%) just matched the ten year sovereign of France (1.97%) then it would appreciate approximately 6.125 points from here. If FNMA/Freddie Mac mortgage spreads remained the same, 1.34 points now on a thirty year mortgage, then the mortgage rate would not be 4.00% but 3.31% and think of the effects on the Real Estate markets. In fact auto loans and consumer loans of all sorts would drop dramatically in cost which would be a boon to the American economy and ultimately the equity markets once yields had gotten so low that people and institutions alike would throw money at the equity markets again because of the very low yields in the bond markets.

The reality is that it is in everyone's interests to have lower yields and now that the Fed has learned that they can accomplish this all on their own---I submit that we are going to have lower yields. The financial crisis of 2008/2009 drove a grand experiment which succeeded. That was five years ago and the Fed is still pumping money into the system. The focus on "taper" is the wrong focus and the right focus is on the size of the Fed's balance sheet and what it can accomplish. To date, I would say, that the Fed's actions have dramatically helped the markets but have helped the Main Street economy far less. A further drop in interest rates, though, will have a very positive effect on every part of our economy. 

I remain bullish on the bond market and my opinion is this:

"You ain't seen nothing yet!"

• Here is his morning commentary.

The gospel according to Peter Boockvar:

An expansion of just the list of individuals and companies close to Putin who will be subject to sanctions rather than on a new set of industries such as banks has Western European stock markets bouncing today. The reason for not enlarging the criteria of those impacted by the sanctions was given by Obama who said "we are keeping in reserve additional steps that we could take should the situation escalate further." As the current round of sanctions have done nothing to alter the moves of Putin, don't expect these to matter either. We'll see this week how Europe responds as they have a more delicate balance to weigh. The Russian Micex is higher after 5 days of declines and the ruble is also up but bonds are trading lower with the 10 yr yield matching the mid March high.

While the US$ was no safe haven last week from geopolitical concerns, it's seeing no bounce today with the rally in Europe as the euro is back to where it was the day before Draghi threatened more action. The British pound is also near 5 year highs. The US$ weakness of late is also in the face of another round of taper this week with the QE program basically getting cut in half to $45b per month vs $85b at the peak. At least vs the euro, the Fed's balance sheet is only growing less slowly while the ECB's balance sheet is actually shrinking every week with the pay back of LTRO money. In the UK, the BoE likely won't wait until 2015 to start raising short rates. A Lloyds Bank survey of UK Business Activity saw Current Economic Optimism rise 22 pts in April to the best level on record dating back to 2002 when the survey began. Lastly in Europe, Italian consumer confidence rose 3.5 pts to the highest level since January '10 on likely Renzi optimism for 'change,' a politician's favorite word.

In China, the Shanghai index closed at a 5 week low, continued to be weighed down by not just growth concerns but the possibility of more than 100 IPO's coming to market in coming months. The yuan closed little changed at a 16 month low vs the US$. In Japan, consumers front loaded their purchases in March ahead of the April consumption tax hike as retail sales rose 6.3% m/o/m, about in line with expectations of up 6%. All eyes are on income growth in coming months and to what degree it materializes.

• I'm still short.

The Bank of America (BAC) news is awful.

Bank of America was featured as a short idea in my weekend Barron'sinterview.

• This weekend's interview was one of the best and contains some good long-term investing ideas both long and short.

My roots run deep with Barron's -- indeed, you might say I bleed Barron's blue.

At 15 years of age I began to read Barron's, coincident with my interest in the stock market, which was stimulated by the investment education administered by my Grandma Koufax.

I was so anxious to read what was in the magazine that I often purchased it before 7:00 a.m. on Saturday mornings and was typically done reading it by 9:00 a.m. There was no _nternet in the mid-1960s and Barron's was a rich and indispensable resource and compendium of opinions, ideas and data.

My association with Barron's started with a cover story in 1992 ("Investing in a Cold Climate") in which the magazine ran a story about my associate Hugh Johnson and me. (We were both at the time at First Albany.)

That same year I wrote my first Barron's cover story, "Pow! Smash! Ker-plash! High-Flying Marvel Comics May Be Headed for a Fall." (I was right on this one, as the company declared bankruptcy a few years later.) That column, more than anything else, cemented my reputation as a short-seller.

I have also written three editorials in the "Other Voices" section of Barron's.

1. "Kids Today" (subscription required): In which I warned (in 1997) that bear markets were borne out of conditions like the heady tech stock party that was being experienced in the late 1990s. The market, I surmised, was beginning to lose its moorings. I used the sage advice of "Adam Smith" (a.k.a., George Goodman) and "Scarsdale Fats" (a.k.a., Bob Brimberg) to illustrate my points. Three years later the Nasdaq began a 75% decline in prices.

2. "Look Who's Selling" (subscription required): In 2006 I cautioned that attention should be paid to Sam Zell, who at the time was selling out of his interests in Equity Office Properties Trust to Blackstone (BX). Why did Aesop's scorpion sting the frog, I queried? And why was Blackstone buying out Zell during a speculative boom and potential top in the real estate markets? Because that is what they do. Less than two years later, the bottom fell out of the real estate business and domestic economy.

3. "The Threat of 'Screwflation'": In 2011, I worried about stagnating wages, the rising costs of the necessities of life and structural imbalances (especially of an employment kind). Real domestic economic growth, I suggested, would remain subpar, as the important middle class was exposed and vulnerable. This has been the case, and trickle-down monetary policy has failed to improve the stead of the average Joe.

I have been interviewed on more than 30 occasions by the late great Alan Abelson (an iconic American journalistic treasure) in his "Up and Down Wall Street" column. (Recently, Randy Forsythe, who has replaced Alan after his death, has kindly referenced several of my market observations.)

Alan was a wordsmith and dear friend who championed the individual investor. My special professional relationship with Alan Abelson (and his assistant Shirley Lazo) was at the core of my association with Barron's over the past 22 years; I spoke to him nearly every Thursday afternoon. Our conversations were wide-ranging, often deviating from investment stuff. I could never thank him enough for his inclusion of my comments so often in his columns, which, to me, formed the epicenter of the magazine.

All totaled, a search of my name in the Barron's Internet archives will produce over 200 mentions since 1996 (which is as far back the search engine goes at Barron's).

This weekend I was proud to have participated in my fourth interview (since 2008) in Barron's:

1. In 2008, my interview with Lawrence Strauss, "Confessions of a Short Seller," explained why I got into short selling and what the benefits are of this non-correlated asset class within the context of total investment returns.

2. The next year, in "Skeptical That Growth Will Take Root," Barron's' Lawrence Strauss again interviewed me on the subject of why domestic economic growth would remain subpar. Among the individual stock ideas I mentioned (on the long side) was Altisource Portfolio Solutions (ASPS). Originally suggested at $16 a share in 2009, the shares have risen to $240 a share, adjusted for the spin-offs of Altisource Residential (RESI) and Altisource Asset Management (AAMC). Another long I mentioned was State Street (STT) at $40 a share. It currently trades at $64.

3. In Leslie Norton's 2012 interview, "Bearish on Brokers, Bullish on Housing," I made the case that though there would be fits and starts, housing was embarking on a long and durable recovery. The global economy, however, would experience muted growth. My long ideas included Oaktree (OAK; then $36, now $54.50) , Ocwen (OCN; then $19, now $38) and, again, Altisource Portfolio Solutions (then $73, now $240).

4. I think this weekend's interview, again conducted by Lawrence Strauss, was one of the best and contains some good long-term investing ideas both long and short.

Here it is in its entirety:

Doug Kass: Preparing for the Bear's Return

Investment pro Doug Kass, who thinks the S&P is at least 12% overvalued, has ramped up his short positions.

Photo: Jeffery Salter

By LAWRENCE C. STRAUSS

April 26, 2014

Doug Kass, a regular presence in Barron's since 1992 and a longtime student of the markets, brings keen insight, contrarian ideas, and humor to any financial conversation. Kass, 65, is president of Seabreeze Partners Management, an asset manager in Palm Beach, Fla., with several hedge funds. Concerned about stocks' big gains in recent years, he has put a lot more short positions into the firm's portfolios. "Most bull markets end with the emergence of speculative excesses," he says. "Some end with bubbles, and this one could be ending with both." Kass, a prolific pundit and television commentator, has put many of his ideas in Doug Kass on the Market: A Life on TheStreet, a book that John Wiley & Sons plans to publish this fall. Barron's spoke with him recently by telephone.

Barron's: What's your assessment of current stock valuations?

Kass: Prices are high, and values are growing scarce. Warren Buffett, based on the words of Benjamin Graham, teaches us that price is what you pay, and value is what you get. And my buddy Howard Marks, at Oaktree Capital Management, says that investing success is not a function of what you buy¿but what you pay. Last year, the S&P 500's earnings were up only about 5% or 6%, but the index advanced by more than 30%. The difference in performance between earnings and investment returns was an outsize increase of 25% in market valuations, as animal spirits were awakened. Since 1990, the average annual increase in the multiple has been 1%. So last year's valuation rise borrowed and has taken away from future market returns.

What's driving stock returns?

Share prices have obviously benefited from massive liquidity and a zero interest-rate policy. The recent high-beta earthquake in which stocks sold off was probably the first shot across the bow. Increasingly, the market seems to be realizing that each progressive quantitative easing is having a more restrained impact on growth. With rates at zero, QE has become a blunt tool. The Federal Reserve has built a bridge to growth, but it can't deliver the destination on its own. And the flattening of the yield curve tells a story of slowing growth. There is about a 230 basis point [2.3 percentage points] spread between two- and 10-year Treasuries, compared with almost 270 bps at the end of last year. That's signaling muted economic growth. If growth fails to emerge in the months ahead, we'll see an ah-ha moment in which investors, to quote the singer Peggy Lee, say, "Is that all there is?"

What concerns you about projected earnings growth?

The consensus is looking at $120 a share this year for the S&P 500. But these are anything but normal earnings. They are inflated because corporate profit margins are at a 60-year high, and they are 70% above the average of the past six decades. So normalized earnings are well below that estimate of $120 a share, just as normalized earnings back in 2009 were well above the deflated estimate of $45 a share, which was the 12-month trailing number. So the S&P 500 might appear to be trading at only 16 times stated earnings. But against reasonable margin assumptions and normalized earnings, the market is probably trading closer to 19 times. Based on my analyses for different cases for growth, interest rates, and valuations, the S&P's fair market value is about 1650, 12% below where it traded recently.

What concerns you about corporate profit margins?

Corporate profits are the mother's milk of stock prices. First, we've had this lengthy improvement in corporate productivity, and that's likely near complete. We've had years of fixed-cost reductions by corporations, and that's also likely over, because they've cut to the bone. If the employment market gradually tightens, labor costs will rise, pressuring margins. Both interest expenses and effective tax rates will have to rise as central banks normalize monetary policy and the U.S. sees the need to reduce its deficit. And a very costly regulatory policy is likely to continue, increasing corporate costs. And finally, the quiescent capital-spending cycle will ultimately be awakened. With that, amortization and depreciation costs will ascend.

We are in a market with no memory from day to day, sometimes from hour to hour. But we are seeing the rotation that we began to see between 1999 and 2000. Warren Buffett was really out of favor when, during the technology and Internet boom in 1997, '98, and '99, people said he had lost his touch. Value stocks were out of favor and tech stocks were in favor, but then, all of a sudden at the beginning of 2000, you began to see a rotation out of high-beta, high-octane stocks, which eventually collapsed into value stocks. In early 2000, that move presaged a late-2000 considerable decline. So, we are moving from a one-way market to a two-way market where you can make money both long and short. At another important top, in early 2000, the market leadership rotated from high tech to value stocks¿exactly what has happened in the past two months. Leadership changes are often the sign of a market correction or bear market.

What in particular will pressure the markets?

Disappointing global economic growth, weaker-than-consensus earnings, and a contraction of the price/earnings multiple, compared with a 25% expansion last year. Those will be the culprits for a negative return this year. The consensus view is missing, among other things, the vulnerability of the middle class, which provides an important source of economic growth. It's missing the economic vulnerability of our young people. It's missing our addiction to low interest rates, both in the public and private sectors. It's missing the consequences of higher rates and the risks to profit margins, probably my biggest concern. And it's missing the widening gap between the haves and have-nots¿and the economic and social consequences over time.

You have been long a group of closed-end municipal bond funds. How has that worked out?

The group is up more than 10% this year. My belief at the end of last year was that, contrary to the consensus, rates were going lower. At the end of last year, muni-bond funds were under pressure, owing to concerns about credit quality and rising rates. The yield on the 10-year Treasury went over 3%, and funds were selling at near-record discounts¿almost 10%¿to net asset values. They were at a near-record tax-equivalent yield, compared to taxable bonds. The discounts are now 6%, but they're still attractive. The funds were under intense year-end selling pressure. Investors had lots of unrealized stock gains and were using them to take losses to pair against gains. My funds include Invesco Pennsylvania Value Municipal Income Trust [ticker: VPV] and Nuveen Quality Income Municipal Fund [NQU]. By the end of 2014, I suspect, total return will be north of 15%.

Do you still see any opportunities in the stock market?

One of my long holdings is Ocwen Financial [OCN], a leading player in origination and servicing of subprime loans. The nonprime mortgage business is likely to undergo a renaissance. No company is better positioned than Ocwen, the largest player in subprime. Prior to the financial crisis, about 60% of U.S. households could qualify for a prime mortgage, and about 10% could qualify for a subprime mortgage. The remaining 30% were renters. Postcrisis, approximately 30% of households qualify for a prime mortgage, and subprime is almost nonexistent. So unless we're destined to become a nation of renters, something has to change. At the same time, the recent rise in home prices hasn't coincided with income gains for average home buyers. That represents an opportunity for nonprime mortgage companies. Gone are the days of low- and no-documentation nonprime loans. Today, these loans are very secure. The nonprime industry space has been abandoned and created a void for Ocwen.

What about other sectors of the market?

This is a pair trade. I'm short Tesla Motors [TSLA] and long General Motors [GM]. GM's shares have dropped from over $41 at the end of 2013 to $34.17 recently, down nearly 20% since the recall problem stemming from the ignition-switch malfunctions. It is serious, but GM is intelligently addressing its problem. It reminds me of BP's [BP] oil spill a few years ago. That, too, created a major investment opportunity. GM has taken important steps, including hiring Kenneth Feinberg, an accomplished attorney with a history of dealing with these sorts of events. And GM is taking a voluntary charge of more than $1 billion for repairs, warranty costs, and other restructuring charges. These events, although extremely unfortunate, have provided a fantastic entry point for the stock.

What about Tesla? The shares are up 37% this year, though they're down about 20% from their 52-week high of $265, set in February.

My interest in Tesla started out when I found something in the fourth-quarter earnings release and the most recent 10-K. Based on my analysis, the company reduced its warranty reserve by a hefty $10.1 million, a gain that flowed directly into the income statement and boosted margins. The stock rose substantially, providing a great short entry point. Then there were reports of Apple [AAPL] having had discussions with Tesla, allegedly about possibly acquiring it. To me, that was silly. Nothing has come of the rumor. Tesla is being capitalized at about $1.2 million a car, versus roughly $10,000 a car for Ford Motor [F]. A lot of future growth is in Tesla's share price. The narrative has moved to Tesla's plan to build the world's largest battery factory¿a risky move. With a market cap of about $26 billion, Tesla has a lot of execution risk and competitive issues. The hope for bulls is that the Gen III vehicle¿a lower-priced vehicle [than Tesla's core Model S sedan] to be launched in 2017¿will be enormously successful. We think the new Tesla will be hit by pricing pressures from incumbent manufacturers with deep resources, which have demonstrated a willingness to lose money on electric vehicles and have a big head start in mass production.

Moving on, what do you think of the large U.S. banks?

FICC activity, which involves trading of fixed income, currencies, and commodities, has been weaker lately for many of them, including JPMorgan Chase [JPM]. As for credit quality, interest rates, and the yield curve, if all these go in the wrong direction, capital-market activity could be weak. If I'm correct about a market correction, that will put pressure on these banks. Loan demand is tepid and growing slowly, partly because of subpar economic growth and partly because the country's largest companies are very liquid and don't need a lot of credit. Credit quality has improved in the past three or four years, but it's more of a headwind now, as loan-loss provisions start to be less of a benefit. That leads us to interest rates and the slope of the yield curve, by far the most important factor for bank profits; it should be the most worrisome area for bank investors and bank profits. Consider the hedge-fund community's favorite bank, Bank of America [BAC], which I'm short. Its net interest margin, fell to an adjusted 2.29% in the first quarter, and net interest income around $10 billion was disappointing.

Let's finish up with one more of your ideas.

Monitise [MONI.UK] is a London company that provides a platform for payments on mobile devices. It trades in London and over the counter in the U.S. [MONIF]. I see this as at least a five-bagger. There is probably no larger business than the mobile-payments industry. This company has a market cap of about $1.2 billion, and could well be one of the most important disrupters in the mobile-payments industry. Visa [V] and Visa Europe own about 13% of it. Monitise just did a private offering in the U.K. at 68 pence [$1.14] a share. The stock is down a little to about 66 pence. MasterCard [MA] has also taken a stake in it. Leon Cooperman, who runs the hedge-fund firm Omega Advisors, has increased his stake to 12% and is the largest shareholder. Monitise, which isn't making money, owing to heavy investment in future growth, has 28 million subscribers. It plans is to have 100 million by 2016, and 200 million by 2018, and it expects fees to go up.

Thanks, Doug.