The Yin and the Yang - 08/18/09
August 18, 2009
The Yin and the YangBy Doug Kass, The Edge
The bulls and the bears may not be able to exist without each other.
"It will always be the ball and me."
-- Tiger Woods
Just when you think it's safe to go out into the ocean, the yang gets ya.
Sometimes, as demonstrated by the PGA Golf Championship over the last weekend, not even a Tiger is safe!
During this past weekend, some members of my most trusted hedge fund cabal (some of whom I have most admired over decades) grew ever more optimistic, but on The Edge, I have cautioned and maintained that swimming naked in the pool doesn't make much sense just because the temperatures have zoomed higher in late summer.
Similar to the weather, Mr. Market's upward momentum can be most unpredictable, as we witnessed on Monday.
From my perch, there are numerous economic outcomes possible, some of which are not market-friendly.
With the outcomes so hard to predict right now, we should pay attention to the following wise words of William Butler Yeats:
The best lack all conviction, while the worst
Are full of passionate intensity.
Five months ago when I made my generational bottom call with the S&P 500 at 666, it was materially variant in view. The planets were aligned, fundamentals were getting less worse, valuations were remarkably attractive, and we were at an extreme negative position in sentiment, but panic and fear filled the air, and the market overshot to the downside.
This is no longer the case. Indeed, a strong opinion in either direction seems inappropriate, smug and even glib.
We are clearly entering an improved earnings cycle as corporations are the beneficiary of huge monetary and fiscal stimulation, draconian cost cuts, wage deflation and well-below historical inventories. Despite that, I am relatively certain that the numerous uncertainties present unusual headwinds, especially as it relates to the consumer who is now deleveraging and hunkering down under the accumulated weight of lower stock and home prices and a bleak job picture over the last two years.
These factors and others argue against an outsized commitment to equity and credit, especially in light of the magnitude of the advance from the March lows. These nontraditional headwinds render a traditional recovery unlikely. Consensus already calls for a shallow recovery, but since we have not faced many of these challenges before and heavy lifting remains ahead, the economic and profit consequences are less assured.
But now old friends are acting strange
They shake their heads and say I've changed
But something's lost when something's gained
Living every day.
I've looked at life from both sides now
From win and lose and still somehow
It's life's illusions I recall.
I really don't know life at all.
-- Joni Mitchell, "Both Sides Now"
Perhaps, on this day, the 40th anniversary of the last day of Woodstock, we should face these realities head on and structure portfolios that are more evenly balanced than in the past -- on both sides now (long and short). Under these conditions, complementing long-term investing with short-term opportunistic trading seems in order, and identifying attractive stocks might trump the pursuit of finding attractive markets or even sectors in the months ahead.
Over the balance of 2009, think William Butler Yeats, not Tiger Woods, as domination and a sure hand might be something that lies in our past but not in the future.
Stated simply, there is too much uncertainty -- and now is not the time to be wildly bullish or bearish.
Think yin and yang, as we are now in a market/economy in which things are not completely black or white and in which the bulls and the bears may not be able to exist without each other. the bull may not be better than the bear -- and vice versa. Instead, they might both be necessary, and a balance between both views could be highly desirable in the construction of portfolios.
