Doug Kass: The Truth Is, I'm Not Buying the 'Soft Landing' Story
Accumulated market risks again dwarf rewards and yet no one seems to be facing the facts.
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For the third month in a row equities have started out weaker early in the month -- though in August and September, stocks quickly rebounded.
But this month, we start out with an all-time high in equities, the highest concentration of equities in U.S. households (at 25% up from 10% sixteen years ago), thin credit spreads and a historically high forward price-to-earnings multiple. All this is despite numerous geopolitical risks, political uncertainty, interest rate moves, inflation (the commodity research bureau index is within 1% of its high), continued supply issues in important materials like copper, and other economic uncertainties including the potential supply shortages from the massive port strike. All of these are producing potential adverse outcomes. But many of these possible problems are being dismissed by the bullish cabal and, importantly, machines and algos that worship at the altar of price momentum (knowing little about value and everything about price).
Importantly, to this observer, is the growing likelihood of yet another monetary policy mistake. With little room for error or to maneuver, the Fed is locking itself, once again, into a box, limiting its ability to change policy midstream and leaving term premium at risk, which is why I am shorting bonds (more on this later today). On top of this, the potential policy mistake of continued, reckless and unhinged fiscal spending. Looking at debt as measured against gross domestic product (U.S. debt to GDP is now at 7%, up from 3.4% in 2017), we see the U.S. in the same spot as many other less developed and fiscally irresponsible countries.
Of course, as is the case historically, fiscal concerns are fashionably dismissed (in some measure, because of their legitimate and unknown timing impact) particularly when stocks are near an all-time highs. But I am reminded of Bill's question and Mike's response in Ernest Hemingway's breakthrough novel, "The Sun Also Rises":
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. "Gradually and then suddenly."
When we combine "the party on phase" (h/t Stan Druckenmiller) of feckless and inflexible monetary with undisciplined fiscal policies it appears to me that the prospects of a "soft landing" are growing ever more remote and that the potential risks to such an ideal economic and market setting are not being priced into our equity or fixed income markets.
It is for these reasons and others (e.g., speculation has returned in China) I can not share the consensus' economic and market enthusiasm.
Bueller, Bueller, Bueller?
As an aside, the much heralded "broadening" is not happening. Financials are fizzling out. (Berkshire Hathaway BRK.B /Warren Buffett sells Bank of America BAC shares almost daily). Transports are doing worse and, (imagine this!) the Magnificent Seven is flat-lining.
And just look at the rollover in the Russell Index, which is no longer crowing, an index that my friend Tom Lee forecast would rise by 40% from July's levels.
Thursday morning at 6:45 a.m. I saw S&P futures were down 19 handles and Nasdaq futures down 90 handles.
As seen below, in Wednesday afternoon's "Things" — I did a lot of long selling and short selling (in both equities and in bonds)
Things I Did Today
Equities started the day weighted down by the conflict in the Middle East — but have moved back to neutral this afternoon.
I traded actively in today's regular trading session:
Today's "things":
* I moved to a delta neutral position in OXY (above $54).
* I shorted small SPY and QQQ calls with S&P cash +9 handles.
* Added to shorts in ARES $159.22, APO $134.41, KKR $131.62, TLT $97.81.
* Pressed five home builder shorts.
.* Added to longs MSOS $6.94, CURLF $2.92, GTBIF $10.22.
* I sold the oil gap and Energy stock spike early in the morning — reduced my other energy holdings all morning on a scale higher (SLB $44.02, XOM $122.55 and CVX $151.99) to very small.
* I added to MCD short at $303.
By Doug Kass Oct 2, 2024 3:34 PM EDT
At the time of publication Kass was long SLB (VS), XOM (VS), CVX (VS), MSOS (VL), CURLF (S), GTBIF (S), OXY common (M) and calls (S); short SPY calls (VS), QQQ calls (VS), MCD (M), TOL (M), DHI (S) LEN (S), GRBK (M), KRB (S), OXY calls (M).
This commentary was originally posted Thursday, October 3, in Doug's Daily Diary on TheStreet Pro.
