GO
Loading...

Three reasons the market is peaking: Doug Kass

Doug Kass hasn't exactly been dead-on with his market calls this year. In fact, Kass has been bearish all year, while the S&P has climbed 19 percent. But this bear isn't backing down just yet.

"Combine the likelihood that we're at the upper range for price-to-earnings multiples, we have political issues that are profoundly important, and we have some deterioration in the technicals," and Kass believes he has all the reason in the world to be short the market right now.

The president of Seabreeze Partners Management laid out each potential catalyst in depth on Tuesday's "Futures Now."

Reason one: Multiples will contract

When asked what he missed about the market's rise this year, Kass pointed at one factor: Multiple expansion.

"Frankly, we have to realize that most investors and strategists and talking heads on CNBC have made very little change in their economic forecasts, and forecasts for earnings, for this year and the next," Kass said. "What's happened is that valuations have gone up from 14 times at the beginning of the year to over 16 times now."

In other words, it's not so much that earnings have greatly improved, but rather that investors have been willing to pay more and more for those largely flat earnings.

"If we look at the 35 percent increase in the S&P since the beginning of 2011, 90 percent of that gain came from multiple expansion," Kass said.

A price-to-earnings multiple of 16 may not be far above the five-decade average of 15.2. But Kass still believes that given the current state of the market, it is inappropriate for multiples to be elevated.

"Given the structural global economic issues—disequilibrium in the U.S. jobs market, continuing leverage, et cetera—and the fact that all this is contributing to tepid economic growth, a discount to the average over the last five decades of 15.2 is probably more appropriate," he said.

(Read more: Why I'm buying into the market right now)

Douglas Kass
Daniel Acker | Bloomberg | Getty Images
Douglas Kass

Reason two: Politics will spook the market

Kass believes that the fall will be a busy season for politicians—and this could be a major concern for the bulls.

"I believe that [politics] is going to return to the front burner in the coming months," Kass said. "And if we look at the September and October political agenda, it's lengthy. It includes the debt ceiling, government spending, immigration, tax, GSE reforms and, of course, what the Fed is going to do."

There won't necessarily be a government shutdown or a bruising immigration fight. But with so many contentious topics coming up, Kass believes that the market could get spooked.

(Read more: Siegel: Keep buying—you 'can't lose')

"I think that investors have become inured to this nonsensical rhetoric we've seeing in Washington," Kass granted. "But we could still have a lengthy fight, and an impasse could again weigh on business and consumer confidence."

For evidence of the same, just look at what happened at the end of 2012—when D.C. brinksmanship around the "fiscal cliff" put the market rally on pause.

Reason three: History says the rally can't last

"The third issue are the technicals," Kass said, "and that's what's really changed."

Kass points out that history seems to indicate that the rally should soon run out of steam.

(Read more: Marc Faber: Look out! A 1987-style crash is coming)

"The bull market is long in the tooth," Kass said. "We're almost 54 months from the generational low in March of 2009. And if we look over the last 60 years, the average bull market has been only about 43 months." On top of that, "the longest bull markets lasted about 56 to 60 months."

That means that the rally stocks have enjoyed is becoming increasingly unprecedented.

And undergirding this thesis, again, is Kass' ursine view of the global economy. "If we look at the longest bull streaks, obviously they didn't face the structural economic headwinds," he said.

Any way you cut it, then, Kass believes that this market should be sold.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

Watch "Futures Now" Tuesdays and Thursdays at 1 p.m. EDT exclusively on FuturesNow.CNBC.com!

Like us on Facebook! Facebook.com/CNBCFuturesNow.

Follow us on Twitter! @CNBCFuturesNow.

Contact Futures Now

  • Showtimes

    Watch Futures Now Tuesdays & Thursdays 1p ET exclusively on cnbc.com!

Sponsor Links

  • CME Group brings buyers and sellers together through its CME Globex electronic trading platform and trading facilities in New York and Chicago.

  • Take your trading to the next level with a platform that lets you trade stocks, options, futures and forex all in one place with no platform or data with no trade minimums. Open an account with TD Ameritrade and get up to $600 cash.