Kass: The Lion's Share

Valuations: P/E ratios are undemanding relative to inflationary expectations, interest rates, earnings and private market values. Most conspicuously, risk premiums are back to mid-1975 levels, a period that was followed by outsized gains in the senior averages.

How to Trade a Trading-Sardine Market

Many of my most successful hedge fund friends have made their fortunes in buying and holding -- namely, by discovering investment acorns that rise into mighty oaks. They contend that, regardless of the environment, there will always be those opportunities.

Many of these hedge-hoggers have prospered by bottoms-up stock picking and have often downplayed the macroeconomic backdrop.

They might be correct -- and for many it has paid mighty dividends -- but I contend, by contrast, that the unique conditions that exist today make the harvesting of those great investments ever more difficult. Indeed, there are numerous fundamental, valuation, sentiment and technical factors that support the notion that both the upside and downside might be limited.

In his seminal book, Margin of Safety, hedge fund manager Seth Klarman tells an old story about the market craze in sardine trading. One day, the sardines disappear from their traditional habitat off the Monterey, Calif., shores, so the commodity traders bid the price of sardines up, and prices soar. Then, along comes a buyer who decides that he wants to treat himself to an expensive meal and actually opens up a can and starts eating. He immediately gets ill and tells the seller that the sardines were no good. The seller quickly responds, "You don't understand. These are not eating sardines; they are trading sardines!"

The 11 factors discussed above that on one side limit the market's upside and on the other limit the market's downside seem to almost offset each other -- ergo, we might be locked in a trading range. These conditions are likely set to deliver what I have termed in the past a trading-sardine market, not an eating-sardine market.

Investment Conclusion

In summary, the U.S. stock market is populated by an unusual amount of visible (fierce and not-so-fierce) lions in the open and likely several lions lurking in the grass.

For now, the pride of lions is holding the markets at bay, and reward vs. risk appears in balance.