Kass: Even I Can't Pass Up Cheap Cisco

This blog post originally appeared on RealMoney Silver on Feb. 7 at 7:37 a.m. EST.

The Bad News

The end of the Cisco (CSCO) conference call was revealing and should put an exclamation point on the case for a U.S. recession, particularly when coupled with the recent ISM non-manufacturing survey, still weakening housing activity, the loss of jobs, a multiyear low in retail sales and a host of other economic releases.

Geographically, Cisco experienced a broad-based, sharp and abrupt fall off in January's orders. Equally important, there was not enough visibility to give much forward guidance beyond the next quarter. CEO Chambers noted that budgets were being cut as higher returns were increasingly required by its customers and the process of approving budgets has become more rigid (more signatures, more diligence, more analysis).

How can anyone, given the still-eroding credit market conditions, the weakness of the consumer and growing negative overall sentiment, be surprised of Cisco's shortfall? Apparently, most of Wall Street was based on the share price fall and this morning's Cisco earnings cuts.

Those persistent economic bulls who have been preoccupied by backward-looking and faulty government statistics should stand up and take notice of Cisco's conference call -- and better quickly recognize that business fixed-investment expenditures are likely the next shoe to drop.

I suspect by the time the economic permabulls cave in to reality, the equity market will be down by 20% and their revised expectations will have had little value to investors.

The Good News

The good news is that the markets are galloping toward the restoration of value as share prices are beginning to discount economic reality, even before the Wall Street strategists make their belated move.

Nevertheless, the two flaws in the value restoration argument continue to be that:

1. consensus EPS forecasts remain elevated (I still believe $80 in earnings on the S&P 500 will be closer to reality); and

2. as Goldman Sachs' (GS) David Viniar warned yesterday at a CSFB conference, "Credit markets are trading like we're in the middle of the worst recession," and he went on to convey that there remains a total disconnect between the equities market and the credit market.

The critical questions remain the same for investors:

• To what degree has the drop in market share prices discounted a recession?
• And how long and deep will the recession be?

Cisco is a vivid example of the conflict. Having declined from $34 in early November to $21 today, it now trades at only 15 times current profits and at 13 times prospective earnings, and it has $3 per share in cash.

And it is for precisely these reasons that I bought Cisco into this morning's weakness.

Color me a market agnostic, who remains in a state of permanent flexibility.

Doug Kass writes daily for RealMoney Silver, a premium service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, click here.