We have two calls by great traders/investors:
Jim Cramer: buy, buy, buy.
Doug Kass: preserve cash, it's sideways correction.
Who is right? Doug Kass, who is "right as a rain" (Jim Cramer). Or Jim Cramer "El Capitan" (Doug Kass)?
I'm inclined to believe Doug. My reasons are below.
Despite latest rally, market is still in the trading range since mid-May. None of technical indicators is working. If S&P breaks 960 and stays there, it might be decisive, but I'm more likely to believe Todd Harrison, who thinks that we are to see a false breakout. There is also a huge similarity with pattern of 1932, when 9 week rally from the bottom was followed by 5 months of slow correction.
Slowly but surely, sentiment is changing to the bullish side. This is a contrarian indicator, so situation is actually bearish.
Fundamentals are bad. Unemployment is going to break 10%, no doubt here. We are in the reporting season, and most companies are beating earnings expectations, which would be great, if they were not missing revenue expectations. Looks like US companies did a great job of cost cutting, but cost cutting alone can't improve economy. Increasing saving rate in US is even scarier. People don't want to spend, who is going to buy all the stuff? Without increased consumption recovery is not possible.
There is a huge black cloud on the horizon: rising taxes. Obama's administration wants to raise taxes to pay for multiple projects and for the sake of "responsible budget". If you look at the time of Great Depression, it's the worst idea possible, but who cares! Even worse is the situation in states. Most of them just can't or don't want to issue new debt and may be forced to raise taxes. Especially sale taxes, which is exactly the worst tax in the recession. We need to encourage, not punish consumption. Add to that rising pressure on the Fed to raise rates, and we might get 1937 scenario soon. I don't expect it until the second half of 2010, but who knows!
I think Doug Kass is right. It's time to keep more cash at hand and try to play volatility, trading around most healthy and most liquid stocks.