This Is No Time For You to Bury Your Head In the Sand

This Is No Time For You to Bury Your Head In the Sand
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"What Washington needs is adult supervision."
--Barack Obama

Yesterday's opening missive, " Wall Street Blues," depicted an overvalued market, moderating U.S. economic prospects, elevated investor optimism and a new Administration that, arguably, appears to be doing nearly everything it can do to jeopardize its legislative agenda (which, despite protestations in some parts, has been crucial to the S&P index's impressive run since the November election).

The latter is an important point, though Jim "El Capitan" Cramer, and some others, have disputed President Trump's prospective market influence -- here and here, for example -- and respectfully disagree with my narrative.

To me, the domestic economic recovery and the trajectory of growth is far too fragile (and stock prices by almost every metric to high) to dismiss the growing probability that the Trump agenda is on less than a solid foundation -- owing, in part, to numerous (bizarre) tweets, policy decisions, constitutional issues and, arguably, a general level of disorganization.

That said, I expect the Republicans to come together and pass an affordable health-care bill which will likely be a product of extensive compromise and, in the main, imperfect to the Republican and Democratic parties.

I anticipate that the stock market may very well rally somewhat further in response.

But, as always, it is all about one's timeframes (and risk profile) -- and I am describing my near-term tactical strategy.

I am concerned with what follows after health care's passage -- that future policy (regulatory and tax reform, repatriation and fiscal policy) may be hobbled and that our markets will feel the pain.

My Tactical Approach to the Markets

As I wrote yesterday, for my trading positions, the market's influences are too "newsy," and I have reduced my gross and net exposures. Fortunately, many of these positions have been on the short side and have benefited from a market that may be rolling over. Financial stocks, which I have been negative on -- particularly life insurance ( Lincoln National (LNC) from $73 to $63, Metlife (MET) $56 to $51) and brokerages ( Goldman Sachs (GS) from $253 to $229, Morgan Stanley (MS) from $47 to $41) -- have been the right places to be short.

There Is Always a Bull Market Somewhere

In fact, Jim and I might BOTH be right.

There will always be attractive stocks to own in nearly any market setting -- hopefully I have some (last night Campbell Soup (CPB) announced a $1.5 billion share repurchase). But ignoring valuation, investor sentiment, moderating domestic economic growth expectations, political and geopolitical risks is not my path.

Moreover, for every Amazon (AMZN) there is a Macy's (M) and a Nordstrom (JWN) .

For every PVH Corp. (PVH) there is a Target (TGT) .

For every Boeing (BA) there is a General Electric (GE) and a Caterpillar (CAT) .

For every Apple (AAPL) there is a Hewlett Packard (HPE) .

And for every JPMorgan (JPM) there is a Deutsche Bank (DB) .

So, as always (and as Jimmy opines), search to identify the winners (and if you are a short seller, search to identify the losers).

It remains my view that in the aggregate (and when considering overall market exposure), ignoring valuation, sentiment, the bigger economic picture (in retail, housing and autos) -- and even politics (and geopolitics) -- may be injurious to your investment well being.

Five Charts That Spew Overvaluation

While I recognize that valuations are a poor timing tool, we must never forget what Warren Buffett said:

"Price is what you pay, value is what you get."

I discuss five charts that embody some of my valuation concerns.

1. Warren Buffett's favorite indicator, total market capitalization compared to GDP, is now at 130% -- that's a +130% rise in the last eight years

2. The cyclically adjusted price-to-earnings ratio (CAPE) developed by Yale's Robert Shiller is, with the exception of 1929 (preceding the Great Depression) and 2000 ( bubble), at the highest reading on record

3. An all-time high in cash flow multiples -- occurring by P/E ratio expansion and not through profit growth (2012-2016 experienced +0.5% compounded growth versus 1995-1999 of +9%):

4. Rising margin debt hit a record high in January, 2017 -- the prior tops were one month and three months prior to the bear markets that began in 2000 and in late 2007:

5. The Bull Market in Complacency:

Bottom Line

I remain negative on equities -- by my calculation, the aggregate downside risk "trumps" the upside reward by a factor of about 3:1.

My market forecast, expressed in last December's 15 Surprise for 2017, remains the same:

"The S&P Index has a high of 2,375 (up 5%) for the year and a low of 1,815 (down 20%), closing the year closer to the low end of the annual price range (down 15%)."

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

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