The Market Is Overpriced and Ready for a Fall

By Doug Kass  JAN 29, 2013 9:06 AM

The market is failing to distinguish between economic progress and reality. It is ignoring countless factors, such as an earnings cliff and a spent-up consumer.


Let's not lose sight of the fact that, to most investors, the trend is one's friend. Variant views are typically rare (particularly when the trend is as powerful as the last three weeks of market advances), as they can expose managers to not only investment risk but to business risk. At the same time, a variant view near inflection points can deliver alpha or excess returns -- see Apple (NASDAQ:AAPL).

The crowd usually outsmarts the remnants, and the comfort of the herd provides most investors with a security blanket.

Over the past several days the business media has been filled with talking heads who are partying like it's 1999, appearing more bullish than ever and likely disregarding or downplaying the fact that the S&P 500 (INDEXSP:.INX) has risen from 666 to 1500.

Below are the most common epithets I have heard appropriated to justify the talking heads' bullishness (and my quick response in parentheses). These glittering generalities are appealing words closely associated with concepts and beliefs that carry conviction without supporting information or reason:
To be quite direct, most of these are old, worn, simplistic, and non-rigorous arguments, many of which have been in place since the S&P 500 stood at 666 in March 2009. And, for now, they are working in investors' favor!

As I like to write, though, price is what you pay and value is what you get.

Since these glittering generalities have been accepted by many as a rationale for the market advance, let me submit my own glittering generality: The market is failing to distinguish between economic progress and reality, ignoring countless factors (an earnings cliff, a spent-up consumer, etc.), and it is overpriced and ready for a fall.
No positions in stocks mentioned.