Doug Kass: Risk Happens Fast
Many of our previous concerns were adopted by market participants this week.
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Several factors contributed to Thursday's market schmeissing — and conspicuous reversal from the early morning highs.
I would note that most, if not all of these reasons (mentioned below), have been expected by us and were at the core of our adding to our short exposure in equities:
* Geopolitical tension (Middle East). (This has been a dominant theme of ours)
* The escalation of tension between Iran and Israel has served to buoy oil prices and fan more inflationary fears.
* The likelihood of higher for longer — and less Fed easing than the consensus expects. (Another core expectation)
* Interest rates have been climbing for several months (the 10-Year U.S. note broke the prior resistance at 4.33% this week) — no longer ignored by the markets. (The equity risk premium, as noted earlier in the week, is at the thinnest level in sixteen years.)
* Accumulating signs of "slugflation" (sticky inflation and slowing economic growth and corporate profits).
* Recognition that the CRB has been on a higher path for weeks.
* All-time highs in silver and gold.
* Market breadth has been deteriorating. (The market, despite protestations from the bullish cabal, has not broadened out).
* We have warned that when energy is a market leader — it is generally a characteristic of a maturing bull market.
* Valuations are extended (having moved into the 95% tile), leaving little room for error.
* Finally, as noted in my Diary and by Peter Boockvar, investor sentiment had moved into a bullish extreme (nary a bear was to be found in recent weeks) — as many historical market valuation metrics have moved into the 95% tile.
Lessons Learned
There is always a reasonable chance that markets ignore risks — even on a prolonged basis (as we have recently learned).
Unfortuantely, the expiration date is uncertain and to an extent unknowable.
This helps to explain why I almost always "average into" positions — in the recognition that I can not (nor can anyone else) forecast bottoms and tops!
At the time of publication, Kass had no positions in any securities mentioned.
This commentary was originally posted Friday in Doug's Daily Diary on TheStreet Pro.
