Nine Reasons the Feds Can’t Save Stocks

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
Doug Kass
The, 9/4/2007 1:00 PM EDT

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What's been said:

Discussions found on the web:
  1. Market Swimmer commented on Sep 16

    Do you feel missed out the train in Chinese stock market? A series on “China Syndrome”, Part-II just released.

    Have a nice weekend,


  2. fat mary commented on Sep 16

    you presuppose that stocks are in for a fall. What if stocks go up? the fed may not have to do anything other than what its been doing since 2003. its been a great bull market and by many measures the trend is still up. why is everyone so negative on a very robust world economy?

  3. tjofpa commented on Sep 16

    None of this is currently built into stock prices because, as John Templeton correctly stated several years ago, “The stock market is broken.”

  4. m3 commented on Sep 16

    why is everyone so negative on a very robust world economy?

    the world economy is slowing down by anyone’s measure. this is a fact, particularly in the developed countries.

    global liquidity, which has supported equities, is drying up. the crunch in the euro banking system is actually worse than it is here.

    also, people in the euro zone are waking up to the fact that they had major residential real estate bubbles there as well.

    plus the dollar has fallen to new lows, with no fundamental reason to keep it from falling. if anything the fundamentals suggest it will keep falling. i still haven’t heard a plausible explanation of how this is a good thing.

    and yes, we know “~50% of S&P earnings come from abroad.” but what about the other 50%? does it not matter? even if it doesn’t matter, the int’l economy is slowing down too. (see above)

    what about the small caps and mid caps that are domestic? do they not matter? the overwhelming share of job creation come from smaller companies, not mega-corporations.

    stocks may go up, but the fundamentals for that rise are shrinking by the week. it’s not sustainable, for various reasons.

  5. Frankie commented on Sep 16

    “Stocks are still in an uptrend”
    “the very robust world economy precludes a recession”

    Comments like that remind me of my medical residency time where the patient who drank too much, smoked 2 packs a day and exercise by default (job was physical) would shot back at me, after being warned of the healths risks of his lifestyle: “I still can run these young turks to the ground, you know what’am sayin’?. Ya know what’s your pwablem Doc? You’re a worry wart man, that why! Relaaax! I feel just fine.”

    Of course, this patient could sail through life without suffering big health problems. But the likelihood of experiencing severe adverse events was MUCH higher for this man than the guy of drank 120 ml of wine per day, didn’t smoke, and exercise 5-6 days a week for at least 30 minutes every day.

    That’s the crux of the matter: the probability that an adverse event hit the market. Given the current health indicators of this market, is the patient at high risk of disease?



  6. Crush Da Bears commented on Sep 16

    With retail short ratio at historically high levels of 30% (normal 5-10%) and retail vs. specialists short ratio over 80 (normal 35-60), I would not be able to sleep at night knowing that my bets are on the same side as this unsophisticated group of traders that are seldom right when shorting stocks.

    I do not understand how Kass can be on the same side as this unsophisticated group of traders.

  7. EricP commented on Sep 16

    I remember reading Kass back in 2002. He was bearish then, I guess you have to have convictions in your positions. Me, I just go with the trend, it is just consolidating the move of the last 5 years. No reason to be ubershort or uberlong anything. I like gold, and dipping into some REIT’s and home builders for a dead cat bounce.

  8. Mark Reed commented on Sep 17

    The points from this I look at are housing causing demand decrease causing less profits, and 30% of S&P profits is financial companies.

    The financial companies are all already down this year. Stock market is working.

    Who will be first hit by housing decline? Besides all the mortgage companies that went bankrupt? We will need to start seeing this effect before the stock market can fully price it in. When do we expect retail sales to fall? How long before we can say its a trend? Which companies will report declines in profit first?

    Im sure there are stocks already falling in anticipation of lower earnings. The indices will catch up later as the larger mkt cap companies feel the effects.

  9. jonah commented on Sep 17

    I’ll believe it when the yield curve forecasts it.

  10. Peter commented on Sep 17


    One slice of the yield curve pie is shown on the last chart on p. 7 at the link via my name below. Looks a little ominous?

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