Doug Kass: Catalyst in Market Is Negative and Unappreciated

Doug Kass: Investors Missing China Risk to Rally

Looking at the divergence between the S&P and Shanghai, strategic investor Doug Kass, president of Seabreeze Partners, is convinced that the S&P has made its highs for 2012.

Famed for his market timing, strategic investor Doug Kass tells us not to get too used to the S&P at 1400. It won’t last.

Kass is convinced that the highs are in for the year.

The president of Seabreeze Partners and CNBC Contributor has identified a string of headwinds in the market. They follow:

Market Headwinds

1. Paul Ryan as Romney’s running mate
2. Romney lags in polls
3. Continued European contraction
4. Rising geopolitical risks
5. China hard landing

However, of all the negatives listed above, Kass thinks that last one is a little more misunderstood than the others.

Kass believes China poses a very serious threat to the rally and few investors understand how serious the threat is.

“The Shanghai Composite is one of the only major indexes that is down – and it’s down 40% from the post-crash high while the S&P is up over 40% during the same time. It’s a stunning divergence between the two markets.”

Kass believes the divergence is a sign that China is in big trouble. But that’s not the only sign.

He adds the latest export data out of Tokyo shows “Japan exports to China which is their largest trading partner notably fell by almost 12%.”

“And 10 days ago we had lousy import and export numbers from China.”

Also he says Hewlett Packard cited China as a source of pervasive macro-problems for the company. And a published report quoted the CEO of Caterpillar as saying ' the global economic outlook is more uncertain than at the start of the crisis at 2008.'

All told, he takes these developments as confirmation that China’s economy is eroding. “I’m afraid that China is in for a crash landing.”

And with his belief that Europe is teetering on recession and that the US can only hope to generate slow growth, at 1400 the S&P is overbought.

Posted by CNBC's Lee Brodie

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Trader disclosure: On August 22, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Tim Seymour is long BAC; Tim Seymour is long MSFT; Dan Nathan is long DS SEPT 90/80/70 PUT FLLY; Dan Nathan is long INTC SEPT 25/23 PUT SPREAD; Dan Nathan is long CSCO SEPT 16 PUTS; Dan Nathan is long MSFT OCT 30/28 PUT SPREAD; Dan Nathan is long DELL SEPT/OCT 11 PUT SPREAD; Dan Nathan is long SDS CALLS; Dan Nathan is long SEPT VIX 20 CALLS; Brian Kelly is long SPY PUTS; Mike Murphy is long WFC; Mike Murphy is long TOL; Mike Murphy is long LNG; Mike Murphy is long ANR; Mike Murphy is long TWI; Mike Murphy is long LEN

CNBC.com with wires.