"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

09 January 2007

Why Stocks Will Fall- by Doug Kass

H2-2006 was a miserable time for bears, in fact, it was WORSE than bubble excesses of 1999 and early 2000. The financial state of our nation has deteriorated massively in six years. $9.2 TRILLION in debt and so much off balance sheet financing that OMB Director Rob Portman can only mouth the mantra that we'll balance the budget by 2009. Up until recently, it hasn't mattered and ANY 50 point Dow correction has been met with +1200 ticks to bring it back even. It's even gotten to the point where CNBS Booyah pitchman Jimbo Creamer boasts at 2:30 that "the market will close green", even when it's down 80 then. Who's handing him a crystal ball???

Needless to say, short players like Doug Kass are apoplectic. Buddies in the market tell me, "stop tilting at windmills!" But just read what Doug has to say and maybe even PermaBulls will see there's reason to be a bit more "prudent". Who was that PRUDENT MAN that they once modeled the responsible asset manager after???

I didn't need Bob Dylan to remind me that you don't need a weatherman to know which way the market's wind has been blowing. Well, maybe I did during the last half of 2006, when I regularly got slapped around by the market as disbelief was suspended despite growing signs of escalating economic and geopolitical risks. Many argue in their recent emails to me -- and I am paraphrasing the author Gay Talese (Honor Thy Father, Unto the Sons, etc.) -- that I am something of a restless voyeur who sees the warts on the world, the imperfections in companies and industries. They argue that gloom is my game, the spectacle my passion ... and that normality is my nemesis. It seems to appear to many, based on some of their more recent communiqu├ęs, that my market observations resemble an account of the traffic on I-95 from the point of view of the accidents. Not true.

I actually yearn for normality. To this observer, normal would be mean reversion in 2007 for home prices, consumer spending, credit losses, corporate profit margins -- and in stock prices. Indeed, with an odd year here and there being the exception (2000-02), we have been in a bull market for the past 25 years. During that period -- and with perfect hindsight -- the best financial advice regarding equities and bonds was also the most concise: The interest rate analyst could have confined himself to saying down and the equity market analyst to saying up.

The fact of the matter is that Wall Street investment strategists and analysts, commentators in the media, and portfolio managers (most of whom are mandated to be fully invested) are almost constitutionally incapable of an ursine market moment or criticizing the securities that they own. While three days of trading does not make a trend, the early signs for 2007 indicate that the times might be a-changin' (toward normality), and I am looking forward to the opportunity of profiting from a more normal two-sided stock market.

Thus far in January volatility appears to be on the ascent, and the broad decline in commodities seems to be a statement of our economy's health. Although the notion of a more normal market is in the eyes of the beholder (in my case, an ursine one), we do know that normal is not ignoring disturbing signs; normal is not going without a 2% correction since July; normal is not going through a 10% correction in more than 900 trading days. The hedge fund crowd -- many of whom invest/trade at the altar of momentum -- are now much longer than at any time in the advance, and despite last week's modest correction, the remnants (i.e., short-sellers) have more or less folded their tents. From my perch, that is abnormal, as are the aforementioned positive skeins in share prices and the general notion that cash is trash!

Notice that Doug won't tell JoeSixPack (JSP) to go short..or even to take their 401Ks to cash. But who just got slaughtered in these new commodities Exchange Traded Funds (ETFs)??
Your Path to Precious Commodities
By Roger Nusbaum Contributor,1/8/2007 2:04 PM EST
One thing that has been clear about ETFs is that new product innovation will allow individual investors to access parts of the market that had not been easily available. The folks at PowerShares, in conjunction with Deutsche Bank, have rolled out a couple of products so far, and on Friday they rolled out seven new commodities-based ETFs.


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