I'm Not Afraid of a Bear Market, I Just Don't Want to Be There for It

I'm Not Afraid of a Bear Market, I Just Don't Want to Be There for It
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"To love is to suffer. To avoid suffering one must not love. But then one suffers from not loving. Therefore, to love is to suffer; not to love is to suffer; to suffer is to suffer. To be happy is to love. To be happy, then, is to suffer, but suffering makes one unhappy. Therefore, to be happy one must love or love to suffer or suffer from too much happiness." --Diane Keaton, from Woody Allen's "Love and Death"

As you all know by now, I have had eight questions that keep me up at night and form an important basis for my negative market outlook.

After this missive is completed I will have a total of 10 disturbing questions.

Last night I literally awoke at 3:21 a.m. with a new question that I recently have been asking myself and that I have added to my stable of market concerns:

* Was the world always this crazy, uncertain and unpredictable -- and we just didn't realize it because there was no social media?

This morning, for good measure, I will add another question (making it 10, in total). As you likely will recognize, this question has been on my mind for more than a year:

* With so many political, geopolitical, social, market and economic outcomes possible -- many of them adverse -- is it no longer safe, with most valuation metrics elevated into the 95% decile, to be a "buy and hold" investor? Do we all essentially need to become "traders"?

When I arose in the early morning today, I felt ever more insecure, remarkably like the state of Woody Allen throughout his movie career, as seen in this quote from the film genius: "Why are our investment (investment -- my emphasis) days numbered and not, say, lettered?"

For reference, here are the previous eight questions that I have been asking every morning:

* In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?

* In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?

* With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

* Remember when the big argument in favor of President Trump was that he was a dealmaker who knew how to get things done? That was when he was doing real estate deals. Now he has to deal with 535 other politically partisan legislators in Congress -- on their own real estate turf.

* Does the administration have the depth of experience, understand the extent of the legwork and organization required for passing legislation or have a coherent idea or shared vision of what it wants to achieve and what problems it means to solve? (Reminding me of Woody Allen, who said, "Life doesn't imitate art, it imitates bad television.")

* If President Trump can't easily put through a health care package, what does that mean for more difficult regulatory reforms and his tax- and fiscal-policy agenda?

* President Trump took credit for the stock market's advance since his election victory. Will he take responsibility for a correction? And is it a slippery slope for an administration to use the S&P 500 as a barometer of success? And is a pro-business and anti-domestic programs (in education, the arts, etc.) agenda going to benefit those in the lower and middle class (largely his base) who have suffered the most over the last decade?

* With the specialist system now extinct, when ETFs sell, who will buy?

Bottom Line

"I am astounded by how many people who want to 'know' the universe when it's hard enough to find your way around Chinatown."--Woody Allen

Today I remain astounded how so many are self-confident in a bullish view, given some of the issues and potential headwinds raised in this morning's column. But, let's not forget that many of those bulls took retail and institutional lemmings over the investing cliff in 2007-09 as they extrapolated economic and profit growth without looking to see how insecure the foundation of growth really was.

In the face of my 10 disquieting questions markets have moved higher and are within a percent or two of all-time highs as investors clearly are siding with the sentiment expressed a decade ago by former Citigroup CEO Chuck Prince, who said in a remarkably poorly timed July 2007 Financial Times interview, "When the music stops in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

"Then again, maybe some of us are just too eager to call this boom a bubble. Yesterday Moody's reported that global defaults of speculative-grade debt (a.k.a. junk) in the second quarter were at their lowest level since 1995. I would bet that default rate is about to start rising, but still: The world's big corporations are doing spectacularly well at the moment. Can you blame Chuck Prince for wanting to throw more money at them?"
--Time Magazine, July 2007

Most investors and the media were very much on board with Chuck Prince in the summer of 2007; just read the quote above in Time Magazine's 2007 column "Citigroup's Chuck Prince wants to keep dancing, and can you really blame him?"

During that same time frame, philosopher Woody Allen hypothesized -- using a different subject matter, but perhaps drawing a parallel between the markets and sex -- "Love is the answer, but while you are waiting for the answer, sex raises some pretty good questions."

So I guess we can say that we are in the midst of an extended eight-year bull market that is sexy and filled with a lot of love-making and capital gains.

However, as you all know I live with the notion, instilled by Grandma Koufax, that the Cossacks -- and investment headwinds -- are coming and I constantly am looking over my investing and trading shoulder.

I constantly remind readers that the only certainty I see is the lack of certainty.

As Bertrand Russell wrote, "The problem of the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts."

To me, markets, sectors and individual stocks ultimately should be evaluated on a reward vs. risk basis, gauging upside versus downside and not through a binary and often dogmatic buy-or-sell basis.

More Woody: "I'm not afraid of death (or a vicious bear market -- my emphasis); I just don't want to be there when it happens."

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

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