The Air Is Getting Thinner As the S&P Climbs Higher

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It's almost as if nothing is predictable any more -- in life, in the economy or in the markets.

Consider the fact that:

* Desperate violence and terrorist attacks are melding together to create a disturbing overlay to our everyday lives.

* Both the Democratic and Republican presidential nominees' flaws are driving this year's election campaign, causing a disconnect between politics and the reality of our everyday lives.

* The widening gap in incomes and net worth is sparking a rejection of the status quo, both here and abroad.

* Global economic growth's weak trajectory and Washington's stark partisanship have combined to produce fiscal inertia. This puts the responsibility for stimulus on central banks, which have in many cases taken interest rates into negative territory. This has disadvantaged savers and put investors and traders on an arguably dangerous path of malinvestment in a search for yield.

Now, I've often remarked that we've never seen so many possible market and economic outcomes before in history. Yet many "talking heads" still express a certainty of view on business TV and elsewhere.

However, I've learned as my career has progressed over the past four decades that uncertainty and ambiguity aren't market-friendly. Instead, valuations suffer proportionately to the degree of uncertainty and risk.

That basic interrelationship hasn't changed despite the market's recent euphoria.

In other words: "Tick, tock, tick, tock ..."

Don't Trust This 'Goldilocks' Market

"The market can remain irrational longer than you can remain solvent."

-- John Maynard Keynes

With the S&P 500 seeming to rise ever higher, Wall Street's consensus appears to be that we're seeing the return of "Goldilocks" conditions -- an improving U.S. economy coupled with less chance of a Federal Reserve rate hike. Stocks continue to defy all odds and reject untoward events of almost any kind, but I remain wary.

It's true that stocks and bonds' recent relentless climb has calmed most investors -- making them far less fearful of a possible major downturn (what I call the Bull Market in Complacency). It's also a fact that plenty of people aren't heavily invested these days, having turned away from stocks after the 2008 crash even though a new bull market began in March 2009. Thus, many retail and institutional investors are "offsides" in a world that's filled with plenty of uncertainties.

There are many reasons for this, not the least of which is what I call the "Screwflation of the Middle Class." After all, plenty of middle-call investors face a squeeze in disposable income and simply don't have the cash to invest. They have to pay rising costs of living instead.

As such, I see a weak foundation for the markets, along with a disappointing trajectory for global economic growth. The market's potential upside simply doesn't look very promising to me when compared to its possible downside.

I see numerous structural headwinds, and I continue to see more good short opportunities for stocks than long ones. I also have virtually no fixed-income holdings.

I suspect that we'll first see a rejection of the "Goldilocks" theory in U.S. Treasury yields, which I think will eventually climb. In fact, I continue to believe that we've already seen agenerational low in bond yields.

Personally, I took in my short of the SPDR S&P 500 ETF SPY on Friday night amid the near 15-handle drop in S&P 500 futures that followed the attempted coup in Turkey. I did this almost robotically, based on the failure of previous geopolitical developments to dent the S&P 500. I assumed that I'd get a chance to reshort Spiders this week at higher prices.

I'll likely continue to trade on the short side in the months ahead as long-side opportunities deteriorate and risks expand. If I were investing a large personal portfolio and/or a substantial-sized pension plan, I'd simply have too much respect for my capital to do anything other than reduce long exposure in the face of today's arguably poor risk-vs.-reward quotient.

Of course, short selling isn't for everyone. After all, as John Maynard Keynes famously noted in the quote above, markets can remain irrational longer than you can remain solvent (or in this case, short).

That's why I say that most traders and investors should consider simply staying in cash, as "Cash Is the Alternative" to stocks (or "C.I.T.A.").

The bottom line: The investment air is getting thinner and thinner on Wall Street as the S&P 500 climbs ever higher.


Doug Kass is president of Seabreeze Partners Management Inc. This essay originally appeared at  

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