Kass: Where I Stand

Tickers in this article: AAPL SPY WMT
This column originally appeared on Real Money Pro at 8:40 a.m. EST on Feb. 19.

NEW YORK ( Real Money ) -- This morning's opening missive is an expression of market opinion based on a compilation my most recent observations.

I like to produce this "Where I Stand" column at least on a monthly basis as a means of summarizing and keeping subscribers up to date with my investment outlook.

I continue to hold to a contrarian and bearish view of future worldwide economic growth and on the direction of U.S. corporate profits.

At the core of my concern is that a global economy built on a foundation of excessive monetary easing is one of low quality, decaying fundamentals and not likely to be effective or self-sustaining.

To me investors are not being realistic in their expectations (and almost magical thinking) that an aggressive printing press can relieve and trump the profound challenges and headwinds to global growth without any negative consequences.

I remain concerned that much of the current investor optimism expressed in a rising stock market is not consistent with the underlying economic and profit data.

The Economy

Domestic economic growth is stumbling under the weight of structural headwinds, a continued deleveraging and the uncertainty of tax and regulatory policy.

I see little improvement ahead.

"In case you haven't seen a sales report these days, February month-to-date sales are a total disaster.... The worst start to a month I have seen in my seven years with the company."

-- Jerry Murray, Wal-Mart's (WMT) vice president of finance and logistics (in an email to Wal-Mart executives on Feb. 12, 2013)

Fourth-quarter 2012 U.S. real GDP contracted. Disappointing and subpar growth lies ahead, with the important consumer sector adversely impacted by tepid wage and salary income growth. Despite the props of a 5% year-over-year increase in home prices and a steady increase in stock prices, lower to middle income consumers are further suffering from:

  • a jobs market that is not improving much;

  • a 2% reduction in disposable income (due to the expiration of the payroll tax holiday);
  • a marked reduction in refinancing activity (worrisome, as it occurred coincident with a modest mortgage rate rise);
  • several months of consecutive gasoline price increases; and
  • the specter of additional fiscal drag ahead (in March when the spending sequester will likely take effect).
  • While early indications are that domestic economic growth is improving from the dreadful fourth-quarter experience, the trajectory of growth is likely to be modest at best.

    Nominal U.S. GDP growth is likely to expand by only 3% to 4% this year, an awful performance considering the unprecedented quantitative easing by the Fed. Even such sluggish growth requires the continuation of an excessively accommodative Fed (holding the risk of negative consequences), which makes our economy vulnerable to any exogenous shocks and still does not provide a suitable backdrop for healthy corporate profit growth.

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