The Clouds Are Gathering, Time To Be Fearful

Doug Kass
Yesterday, the following clouds gathered:

1. renewed fears of populism as the administration considers launching a tax on financial institutions.

2. a disappointing Alcoa (AA Quote) earnings release;

3. China guided the one-year bill higher to curb lending and this morning raised bank reserve requirements; and

4. we experienced a different sort of market close.

My responses?

1. I remain fearful of the ramifications of populism in 2010-2011 on economic growth and on the market's prospects.

2. The industrials trade is far too crowded.

3. China is setting the stage for a rise in benchmark interest rates in the first half of 2010 (something included in my surprises for 2010 list).

4. And I know that when things look too good to be true (read: the markets persistently rise), they usually are!

I am not a Cassandra, and I have suggested on RealMoney Silver that, while there are numerous market positives in place as we enter 2010 that could produce favorable economic and corporate profit growth outcomes, there are also many probable outcomes that are less benign.

Often, the irrational is rationalized in such strong market settings, and arguably, this has been the case over the past six months, as headwinds (e.g., still sluggish labor markets, rising populism and marginal tax rates, commodities pressure, higher interest rates, etc.) are too easily ignored and perception becomes readily detached from reality.

In markets and in life, we are consistently bamboozled by appearance and consensus. Too often, we are played as suckers as we just accept the trend, momentum and/or the superficial as certain truth without a shred of criticism. Just look at those who bought into the success of Enron, the financial supermarket concept at Citigroup (C Quote), the uninterrupted profit growth at Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), housing's new paradigm of noncyclical growth and ever-rising home prices in the early to mid 2000s, Saddam Hussein's weapons of mass destruction, the uncompromising principles of former New York Governor Elliott Spitzer, the morality of our politicians (e.g., John Edwards, John Ensign and Larry Craig), the consistency of Bernie Madoff's investment returns (and those of other hucksters) and the clean-cut image of Tiger Woods.

"Do you want to know the truth or see me hit a few dingers?"

-- Mark McGwire

And, even the heroic home-run production of steroid-laced Major League Baseball players such as Mark McGwire is ignored until the facts are made public in black and white.