Kass: Curbing My Enthusiasm
Written by: Doug Kass
Tickers in this article:
BCS JPM SPY
Investor Sentiment and Expectations: Still Low. Most classes of investors have de-risked, which is not surprising considering sluggish worldwide economic growth, still elevated unemployment and the ongoing eurozone crisis. Add in the JPMorgan Chase (JPM) large derivative loss and the Libor manipulation of Barclays (BCS) and other banks, and a show-me attitude will likely continue for some time. Low trading volume, dominated still by high-frequency strategies, and the absence of inflows into domestic equity funds are a reflection of investor indifference. Stated simply, stocks remain an unpopular asset class, and the reallocation out of bonds and into stocks looks to be a more distant event.
Political: The Outlook for the November Election Remains Uncertain. The Supreme Court's healthcare decision has likely further divided our dysfunctional political leaders/parties. As a result, an August 2011-like impasse on the fiscal cliff is more likely. A potential positive to the capital markets (based on the general belief that a Republican administration will be more business- and market-friendly) is that the Republican Party is gaining some traction as compared to several months ago.
Today I have updated the probabilities of the four outcomes to reflect the six changing conditions listed above. In large measure, the worsening situation in both Europe and the U.S. is leading me to further reduce my calculation of the S&P 500's fair market value from 1455 to 1430, which is still about 5% above the cash level at Monday's close of trading (1358):
- I am keeping the chances of the two tail events -- namely, a reacceleration of U.S. growth and a U.S. recession in 2013, at 5% each.
I am increasing the probability of sub-1.5% 2013 real GDP growth from 25% to 35%.
I am reducing the likelihood of my baseline, muddle-through scenario (defined as 2013 real GDP growth of between 1.5% and 2.0%) from 65% to 55%.