Anyone who reads (TSCM) with any regularity is familiar with the Doug Kass. Mr. Kass is founder and president of Seabreeze Partners Management, and is a well known and respected financial market pundit. He was right on the money with his contrary opinion that the market was due for a rebound in March, and he even placed his S&P 500 price target at 1050. With Wednesday trading in the history books, the S&P 500 stands at 1028.12, which is certainly an impressive 54% rally from the trough. Its been a nice ride and now the market and the economy are in a completely different place more than five months after Kass’ call. Accordingly, Kass is updating his outlook on the stock market based on the new environment. We have reprinted some of his article, but it is worth reading the entire piece.

“It is important to emphasize that when I made my variant March call, I expected many of the conditions that now exist — namely, a resurgence of economic and investment optimism during the summer to be followed by a multiyear period of weak investment returns. Specifically, I expected a mini production boom and an asset allocation away from bonds and into stocks to be embraced and heralded by investors, who would only be disappointed again in the fall as it becomes clear that a self-sustaining economic recovery is unlikely to develop.

My view remains that it is different this time. Again (now for emphasis), the typical self-sustaining economic recovery of the past will not be repeated in the immediate future for 10 important reasons that will weigh on the economy and markets like the governor that controlled the speed of the Good Humor truck I drove when I was in my teens during the summer:

  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.

Just as I looked over the valley in March 2009 toward the positive effects of massive monetary/fiscal stimulation within the framework of a downside overshoot in valuations and remarkably negative sentiment, I now suggest another contrarian view is appropriate as I look over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed…

Stocks bottom during times of fear. With the benefit of hindsight, the March 2009 lows represented a dramatic overshoot to the downside.

Markets top during times of enthusiasm. I believe that the markets are now overshooting to the upside and that the U.S. stock marketspacer.gif has likely peaked for the year.” — Doug Kass for

We have to hand it to Mr. Kass, there is not much that can be added to this well-reasoned article. At Ockham, being contrarians as well, we have been making many of these same arguments for the last few weeks in our weekly newsletters.

The market has a tendency to overshoot to the extremes, and we never expected the market would rally so fervently over what we are calling the not-so-bad-quarters we have just experienced. Clearly, we are not as confident at predicting the market’s direction as is Kass, but we think it would be wise for investors to lessen their risk exposure.

A March Bull Turns Bearish for the Long Haul