Über-bear Doug Kass outlines his views on why, regardless of what the Fed’s actions are this week, their impact on equities will be de minimus:
1. Housing collapse: The record level of unsold homes, the pace of mortgage resets and the likely deterioration in coming jobs reports coupled with still-stretched affordability issues suggest that the inherent supply/demand imbalances will continue for some time despite government intervention. Every recession since 1960 has started with a decline in home construction — the recession of 2008-10 will be no different.
2. Retail woes: The recent weakness in retail comps could into the current back-to-school period and in turn into the Christmas season.
3. It’s the end of the expansionary credit cycle: No longer is the world of CDOs, CLOs, MBSs and other misguided credit packages being celebrated.
4. The Fed ain’t my friend: If my economic concerns are realized (as housing’s negative multiplier gains effect), there remains a chance that the Federal Reserve will be perceived as "falling behind the curve."
5. Fund-of-funds and hedge-fund imbalances and disintermediation: Despite the 1.5% rise in the S&P 500 index for the month of August, the fund-of-funds community (the financing wheel of many a hedge fund) had one of its worst months in history.
6. Politics as unusual: The skeptic in me suggests that the White House "bailout" of housing will have only a modest and delayed impact. We should expect the politics of trade protectionism and higher corporate and individual taxes in the future.
7. Disequilibrium is the constant in private equity: With over $300 billion of delayed financing (bridge loans and high-yield bonds), the likelihood of deals between now and year-end seems increasingly less likely.
8. Sentiment reads too optimistic: Barron’s reports that most investment strategists — far more influential than market writers in other surveys — remain relatively constructive despite less-than-optimistic economic views.
9. Corporate profit margin and earnings expectations also read optimistically: Especially vulnerable are a wide swath of industries that face a mean regression and normalization in credit losses.
That’s the unvarnished views of Doug (as of 9/4). The only question I have is how much of this is built in to prices already, and how large of a disconnect exists between the public perception and reality.
You can read the full piece here.
Nine Reasons the Feds Can’t Save Stocks
The Street.com, 9/4/2007 1:00 PM EDT