Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Hedge fund manager Doug Kass has been a vocal bull on prospects for 2012. While we are all hit or miss on a % of our call, Kass’ call for a flat 2011 were very much on the money. This year he expects new highs (ex NASDAQ of course, which might take decades to get to 1999 bubble levels). So far so good as 2012 has been non stop gap ups (first day of the year, and yesterday) or flat action. Some stocks such as Home Depot and Caterpillar are up 8 sessions in a row. While it is still a long year ahead (over 11.5 months to go!) Kass was out with a note yesterday morning imploring participants to buy buy buy, with 10 reasons. A few people, but follow the link for the entire list.
1. Poorly positioned market participants: Forget put/call ratios, Investors Intelligence and AAII readings — investors (of all shapes and sizes) are now negative and could be caught offside. Watch not what they say; watch what they do. And the dominant investors (retail and institutional/hedge funds) are underinvested and/or skewed disproportionately in a “flight to safety” into fixed income over equities. Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds; that swing of $1.3 trillion is unprecedented in history. Hedge funds, according to ISI, are now at their lowest net long exposure since the Generational Low of March 2009.
3. Big rotation: The rotation from high-octane, high-beta leadership (Priceline (PCLN),Google (GOOG), Baidu (BIDU), etc.) has investors poorly positioned. Google’s sudden weakness, in particular, has scared a number of hedgehoggers I know into materially raising cash in recent days. Meanwhile, financial stocks have been meaningfully outperforming in 2012. Don’t market historians tell us that a better tone for the financial sector is a necessary condition and reagent for a better stock market? Yet that turnaround of the financial continues to be treated with skepticism by most.
7. Better economic data: Consistently ignored have been improving domestic economic releases (PMI, consumer confidence, housing, automobile industry sales and jobs). Fourth-quarter real GDP growth should be 3% to 3.5%. But more important is that the prospects of a self-sustaining U.S. economic recovery have been more solidified in the past six weeks. (I continue to be of the view that ECRI’s Lakshman Achuthan’s recession call is wrong-footed.)
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
