Monday, October 10, 2011

Doug Kass - 10 Questions for the Bears

Isn't it amazing after a frantic run up in the first hour, we have sat in a +/- 2 point range on the S&P around that 1188 level I mentioned  for hours on end?  Ahh, computers....

Last week hedgie Doug Kass asked 10 questions for the bulls; this week he has 10 for the Bears... and not just how they expect to stop Detroit's offense tonight on Monday Night Football. (duu duh duu duu)

  1. Pace of domestic economic growth: Third-quarter 2011 GDP (in real terms) will likely expand by over 2.5%, well above 2011's first-half growth of less than 1%. This pace of growth is stronger than the consensus forecast was as recently as a month ago, as business fixed investment, personal consumption expenditures and the improving trade deficit will all be positive contributors to growth. As well, third-quarter S&P 500 corporate profit growth (aided by a still-weak jobs market, strong productivity gains and rising production) should advance to a near $100-per-share annualized rate. Sure, beyond the current results, visibility is limited, as the manufacturing orders less inventory mix produced the third negative reading in four months and the household sector labors under a decline in stock and home prices, a contraction in government jobs and stagnating wages and little progress in real incomes.
    Nevertheless, both the residential real estate and the U.S. automobile industries are deeply depressed, represent historically low percentages of GDP and pent-up demand will be unleashed at some point. Almost all of the other recent domestic economic releases (e.g., jobless claims, the national ISM and lower food and energy prices) signal that the U.S. will muddle through into 2012. Meanwhile corporations have already proven that they are positioned to prosper even in a relatively sluggish backdrop -- for instance, in the first half of this year, earnings exceeded expectations despite sub-1% GDP growth. Corporate balance sheets are liquid, inventories are conservatively aligned relative to sales, and profits are at record returns in third quarter 2011 (as profit margins having benefited from, among other factors, years of cutting fixed costs).
  2. Europe and China: While Europe is a wild card, it rarely ever pays to bet on catastrophe. European leaders, though slow in response, no doubt have a full understanding of the consequences of not addressing their debt crisis. As I mentioned recently on "Fast Money," the eurozone and its banks are now experiencing a La Dolce Vita moment -- in the same way in which Marcello Mastroianni struggled between the allure of the cafe life in Rome and the responsibilities of living with his girlfriend. This was exactly what the U.S. and our financial institutions experienced three years ago -- as a country, we were forced to find our way back to recovery and our banks were forced to accept responsibility (and recapitalize) for their misdeeds.
    My expectation is that the eurozone will become domesticated and accept the consequences of its actions (and recapitalize). Indeed, on Sunday, Merkel and Sarkozy agreed to a eurozone bank recapitalization.
    As to China, the September Chinese HSBC Markit Service PMI climbed back to 53.0, a blow to those who believe in a hard landing.

Read the other 8 here.

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