Bears Have Fight Left

08/31/06 - 12:20 PM EDT

Doug Kass

The hard landing of real estate has only begun to be felt, as the downturn is still less than a year old and new housing starts have dropped by only about 15% from their fall 2005 peak. In past down cycles, the duration of the downturn has been between 25 and 52 months, and in terms of unit declines has averaged approximately 52% from peak to trough. So, stated simply, the worst is yet to come for housing, and with it, the typical adverse multiplier effect on the rest of the economy.

For now, the market's technicals belie the fundamental direction of the economic contraction and the likely drop in corporate profit margins (which should lead to revisions in corporate profitability in late 2006 and for 2007). Sentiment, as Gary "The Other" Smith points out repeatedly, remains poor (a residue of the May-June swoon) and has buoyed equities this summer.

While it can be argued that the impressive rise from the June lows has now contributed to a growing complacency among market participants, the bulls remain very much in command.

But the market, as we have recently observed, is a fickle temptress, and ignoring the rising economic and corporate profit threats might turn out to be injurious to one's financial health.

In the face of a clear pattern of upside momentum I remain steadfastly bearish (and bruised!) -- and I continue to fight the "good" fight.

RealMoney Barometer Poll

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2 Which of these sectors do you think is set to move up in the coming week?
3 Which of these sectors do you think is set to move down in the coming week?


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Doug Kass is general partner for two investment partnerships, Seabreeze Partners L.P. and Seabreeze Partners Short L.P. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box." Kass appreciates your feedback; click here to send him an email.
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