Watch Out, All This Late 2010 Bullishness May Evaporate In 2011

I am growing increasingly defensive in today’s no-fear market

‘Twas another fun evening on Fast Money.

The red flags for the U.S. economy — and the U.S. stock market — are numerous indeed.

Monday Monday, so good to me, 
Monday Mornin’, it was all I hoped it would be 
Oh Monday morning, 
Monday morning couldn’t guarantee (Bah da bah da da da) 
That Monday evenin’ you would still be here with me

Every other day,(every other day) every other day, 
Every other day of the week is fine, yeah 
But whenever Monday comes (but whenever Monday comes), but whenever Monday comes 
You can find me cryin’ all of the time.

Monday Monday, so good to me, 
Monday Monday, it was all I hoped it would be 
Oh Monday morning, Monday morning couldn’t guarantee 
That Monday evening you would still be here with me.

— The Mamas and the Papas, Monday Morning

 

With the animated Simon Hobbs substituting for Melissa Lee, I spent another Monday evening on CNBC with the “Fast Money” gang last night.

The producers asked me to comment on one or two possible warnings for 2011, and this is what I said: As we end 2010, there is a total absence of fear in the U.S. stock market. But what seems easy for bullish investors to imagine today might prove more difficult to deliver next year. My warning is we should be fearful that the current recovery in the U.S. economy (especially in retail spending) might be short-lived along with the rally in the stock market.

If, as I suspect, some important portion of the recovery is simply “recession fatigue,” the universally optimistic and tightly grouped consensus forecasts (which have extrapolated the recent strength) will prove ephemeral.

Investors should be fearful that the foundation of growth is less robust than it appears. They should be fearful of elements that will begin to weigh on the economy and corporate profits in the second half of 2011. These include secular headwinds in fiscal imbalances, inevitability of higher marginal tax rates, a housing market plagued by inventory from past credit abuses, gridlock and the reluctance to address the ballooning deficit and a structural increase in unemployment. Also dangerous is the likely cyclical rise in interest rates and inflation in commodities such as oil.

We also should not lose sight of the fact that corporate profit margins are at highs of 55 years or more — and quite vulnerable to a regression to the mean. I have remarked that many of those who are now expressing the most extreme levels of optimism were the most wrong-footed two years ago and experienced not-inconsequential pain in the last market cycle.

I would be getting out of retail stocks right now. I am growing increasingly defensive in today’s no-fear market, and maintaining above average-cash positions is a good idea at this juncture.

On “Fast Money,” Joe Terranova asked whether a shallow correction should be bought. I remarked that, while the charts are moving from the lower left to the upper right for now, as Dennis Gartman often notes, I would only be buying on marked weakness.

Following that, I said, to paraphrase Gertrude Stein, “There is less there there to this market — as its foundation is weaker than many think.” Dennis Gartman remarked, “A rose is a rose is a rose. And a bull market is a bull market — until it is not.” Ethel Merman? No — Gertrude Stein again (according to the tongue-in-cheek Denny the G).

Anthony asked about my thoughts regarding where the market will be in 12 months. I responded that, in marked contrast to the universal optimism of most strategists, we are likely moving into a sideways market in 2011.

Let’s go to the tapes!

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