Kass: How a Year-End Rally Could Materialize

But He Can't Do It Alone

So now that we've covered some steps that Obama could take to move the markets and the economy in a more positive direction, let us now turn our attention to a few things outside of the President-elect's control that need to occur in order to foster more optimism.

Cut interest rates. The Fed should slash the fed funds rate to zero.

One or two high-profile hedge funds must fail. Only after a high-profile or several high-profile hedge funds fail will markets "clear."

Reinstate the uptick rule in order to reduce the negative influence of the quant funds. There is little question that quant short selling (especially near the end of the day's trading sessions) is contributing to investors' pessimism and dismay. There is still even some question as to their role in taking down some financial institutions. Computer-generated strategies are clearly exacerbating down moves, as quant funds have begun to dominate trading and, given the contraction of other hedge fund asset classes (long/short, etc.), are benefiting from the reduced level of liquidity. Consider that the assets of the hedge fund industry peaked at about $1.8 trillion this spring. Let's say about $1.4 trillion remains and that about $300 billion will be redeemed by early next year; that leaves $1.1 trillion. Since quant funds manage about $200 billion in capital (and lever that two to four times), they probably represent an influential $600 billion-plus in assets. Authorities must reduce the downside (manipulative) influence of those quant funds by reinstating the uptick rule.

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Know What You Own: Goldman Sachs operates in the diversified investments industry, and some of the other stocks in its field include Morgan Stanley (MS), CME Group (CME), NYSE Euronext (NYX), Penn West Energy Trust (PWE) and Nasdaq OMX Group (NDAQ). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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

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