Yesterday on CNBC’s Halftime Report, Doug Kass laid out the reasoning behind his bearish outlook for stocks. His main concern is whether the economy and profits are headed lower.
Kass also mentioned the waning influence of monetary policy; both in the U. S. and abroad, creating a negative feedback loop reminiscent of August 2011. Finally, there is a lack of leadership in the stock market with financial stocks being weighed down by the Barclays move in fixing LIBOR with “JPMorgan and Deutsche Bank in the crosshairs,” Kass remarked. Net interest margins are increasingly pressured because we are going to have zero interest rates as far as the eyes can see, added Kass.
Kass said technology stocks, which are particularly exposed to the European slowdown along with the recent strength of the U. S. dollar, have seen unit growth expectations in personal computers, smartphones, chips and disk drives being revised lower.
After putting all the factors together, Kass sees a “toxic cocktail” for stocks.
Host Scott Wapner pointed out that Kass had a net short position of 20% and asked him where stocks go from here. Kass said the S&P 500 is basically caught in a trading range from 1280 to 1410-1420. But in the event it becomes increasingly likely over the next few months that President Obama will be re-elected, he would expect risk to the downside.
If the negative feedback loop continues, corporate profits, which are expected to be up 5% year over year in the second quarter, and as much as 6% in the second half of the year won’t be realized; so downside risk would be down to the low 1200′s for the S&P 500, Kass stated.
Update: The last time I checked in on the views of Doug Kass was in mid-April where he was seeing positive trends and a bullish outlook for the big banks [link]. The Financial Select Sector SPDR ETF (XLF) is down about 6% since then. His favorite stocks from that interview, Berkshire Hathaway (BRKB), Wells Fargo (WFC) and Bank of America (BAC), have shown mixed results with BAC down around 10%, WFC being flat and BRKB up about 2%. However, Kass was bullish at the beginning of the year, which has been the correct call as the U. S. market is currently showing gains of around 10%, with international stocks up about 3% [link].