Seabreeze partner Doug Kass thinks you may have just missed a generational market low (or, in any event, a cyclical bear-market one):
A classical wall of worry is being reinforced by an overwhelming consensus that the recent advance was a bear market rally. Moreover, the negative “chatter,” as Jim “El Capitan” Cramer describes it, appears loosely constructed and fails to credibly argue against the salutary effect that $4 trillion of stimulus will have on the domestic economy.
Based on the 12 considerations comprising my watch list [see below], I respectfully disagree with the prevailing negative consensus, most of whose members failed to properly analyse the cracks in the foundation of credit, in the economy and in equities two years ago. Indeed, it remains my view that the fear of further investment losses and possible investor redemptions are clouding many managers’ objectivity in assessing the markets.
Kass’s watch list:
- Bank balance sheets must be recapitalized. Yesterday a comprehensive bank rescue package was introduced. It is obviously too early to consider its full impact, but the details of the program suggest to this observer that it will likely be effective in clearing toxic bank assets. (We grade the package a B+, up from a D+ only two weeks ago.)
- Bank lending must be restored. While bank lending standards remain tight, my view is that yesterday’s announcement of ring-fencing toxic bank assets will almost unquestionably succeed in unclogging the transmission of credit. (Grade B, up from a C previously.)
- Financial stocks’ performance must improve. Financial stocks have finally awakened from the dead, and the recent outsized move to the upside could foreshadow continued market strength…
- Commodity prices must rise as a confirmation of worldwide economic growth. Beginning two weeks ago, commodities’ prices began to strengthen, and the Fed’s message last week accelerated that trend…
- Credit spreads and credit availability must improve. Spreads remain worrisome and the transmission of credit remains poor, but the economy should gain traction as public policy is implemented, money is made more available and lending terms are liberalized. (Grade D, flat from two weeks ago).
- We need evidence of a bottom in the economy, housing markets and housing prices. As I have written, the retail industry has exhibited evidence of sequential improvement in the January through March period. Other economic signs are somewhat more ambiguous but, nevertheless, are showing some life. Months of inventory of unsold homes are declining and so are mortgage rates, but home prices have yet to stabilise despite an improvement in the affordability indices and a better relationship between home ownership and rental costs… (Grade C+, up from a C-.)
- We need evidence of more favourable reactions to disappointing earnings and weak guidance. I am encouraged by the better price action in the face of poor earnings results and guidance in a wide range of companies, including Freeport-McMoRan Copper & Gold (FCX), FedEx (FDX), Airgas (ARG) and General Electric (GE). (Grade B+, up from a C+.)
- Emerging markets must improve. China’s economy (PMI and retail sales) and the performance of its year-to-date stock market have turned decidedly more constructive, but other emerging markets remain moribund. (Grade B up from a C.)
- Market volatility must decline. The world’s stock markets remain more volatile than a Mexican jumping bean. (Grade C+, flat with two weeks ago.)
- Hedge fund and mutual fund redemptions must ease. I am comfortable writing that the worst of the redemptions are behind the asset management industry. Nevertheless, the disintermediation and disarray in the hedge fund and fund of fund industries still have a ways to go… (Grade C, up from a D).
- Marginal buyers must emerge. Low invested positions at hedge funds and by individual investors no doubt fuelled March’s market rise as the fear of being out has begun to replace the fear of being in. These two classes could continue to be the near-term marginal buyers fueling stocks. Corporate acquirers could also emerge as important marginal buyers (Grade B, up from a C.)