Kass: The Parable of the Mustard Seed

Time and (lower stock) prices cure all, so even before credit improves, hedge fund redemptions decelerate, and signs emerge that the current forceful policy measures are remedying the downside economic spiral and an engaged President-elect surrounded by an experienced and intellectually gifted corps of advisers enacts his own policies, the market's downside influences could recede as stock prices might advance well before the all-clear economic signal is embraced.

Given the above, my investment blueprint over the next several months is taking a more positive tint. We seem to be moving toward the following paradox:

1. Investments that are deemed to be safe (e.g., 10-year notes, 30-year bonds) are increasingly unsafe, and I am shorting.

2. Investments that are deemed to be risky (e.g., selected equities) are becoming safer, and I am buying them (gingerly, for now).

I have concluded that we have likely seen the year's lows, but the harder issue is trying to define the slope of the recovery in stocks. Given the headwinds (especially in credit), it should be frustratingly modest at first -- we still seem to be in a very broad trading range -- but the trajectory will hopefully gain steam as the year progresses and clarity regarding the depth/duration of the recession develops, the hedge fund redemption issue is left behind us and stocks increasingly react more positively to bad news.

Already some of Larry's mustard seeds are being ignored. For instance, take a look at housing, in which a combination of targeted and aggressive policy efforts aimed at reviving this beaten down sector of the economy, a marked reduction in home mortgage rates, better affordability and an extended period of low production of new homes (vis-à-vis population and household formation growth) argue that the balance between housing supply and demand might move closer in balance earlier than expected.