Exposed

So the tide of free money is tabled to go out and the bull market geniuses are caught with their bathing suits down, exposed. And we see who is long and who is short.

We have the levered bond bulls (one trade wonders) getting killed, the perma-bull equity guys taking hits but still profitable, the gold bugs getting squashed, and the free market hypocrites whining about the bernak. Get over it. Live by the sword of free money, and die by its withdrawal. Don’t go all “ben’s a bum” cause you finally got fully invested at the top and are taking a pasting on a meager 7% hiccup.

Shame on you Larry Kudlow. There’s no QEi driven bull market guarantees in “free market capitalism is the best path to prosperity.” There might be ones in crony capitalism if that’s your preference, but talking your book and begging for endless QE is one simple word, embarrassing.

Stocks have been overdue for a pullback. And we are getting one. It might just be in the 4 or 5th inning, no one know. The Bubblevision blathering heads mocked and scoffed at the “sell in May” adage and declared victory in some form of absurd chest thumping last month. I didn’t get it then, but the mockers and scoffers are taking it now, where the sun doesn’t shine. Sheet and corrections happen. Take it like men and stop the whining.

It’s about freakin time cash is something more than trash. For far too long the bulls in every asset class won, even classes that shouldn’t correlate positively.

I have been negative on most stocks for the past couple months, regularly using the four lettered S word, especially regarding high valuation defensive stocks like staples, health care, utilities and telecomm as well as domestic interest sensitive cyclicals. I have remained positive on some MITE sectors that have been underpriced like retro tech, ag chem/equip, and energy. These stocks never got priced to sell. Next year’s strong season should present better opportunities to harvest gains there.

The liquidity driven bull market run since last fall ignored a fair amount of poor macro, unsustainable fundamentals, and geopolitical risks. Investors became addicted to the QEi mantra of endless free money and the bernake put. Valuations were dismissed and artificially depressed interest rates were made permanent in dividend discount models. But eventually, everything unsustainable must unwind. And just the fed’s very qualified heads up that QE wasn’t really “i” is causing major indigestion for stock and bond markets. Remember, liquidity is a coward that disappears at the first sign of trouble. At market tops, its just a synonym for stupidity.

So a correction has begun and few are positioned for it. Not the bond bulls who swear a 2.25% ten year represents universal investor loathing. NOT. And a 15 p/e multiple on record profit margins represents a cheap stock market. NOT. Its a long way down before many stocks hit my new buy screen parameters of down 25%+ from 52 week highs, to 13x’s fy1 or less on revenue and eps growth. From 2010 to 2012, the new buy list ramped to 300-500 names during those annual drawdowns. This current correction has taken my screen to 60 names. In the past few years investors ignored many cheap stocks in the corrections. Not today, down and cheap is hard to find.

Quite simply, my stock market caution is a high valuation, low growth phenomenon as much as it is a call on mixed macro and unfavorable seasonality. Buyers beware.

Regarding that macro, things are slowly grinding forward here. The economy has held up better than the bears, myself included, expected. This suggests a mid cycle correction rather than end of cycle bear market. However, there remain risks from global macro deterioration in Europe, China, and commodity driven countries around the world. Decoupling is a myth.

And despite the cheering and chest thumping of the bulls, very few domestic imbalances have been corrected. The Feds still guarantee most mortgages, unemployment is still a problem, TBTF is still a threat to the financial system, a 6% of gdp deficit generates political pride, and entitlements, and the tax system remain unreformed. But no worries, the Dow just hit 15k! And Jeremy Seigel will be on CNBC every week til stocks stabilize. Everything must be good.