Kass: Patience Is a Virtue

This blog post originally appeared on RealMoney Silver on Jan. 5 at 8:07 a.m. EST.

"How poor are they that have not patience! What wound did ever heal but by degrees?"

-- Othello

In early December, I turned more optimistic on the U.S. stock market.

Since then, equities have responded well. The proximate cause for the market's advance is debatable, but I subscribe to what Jim "El Capitan" Cramer aptly describes as the exiting of the clowns, whose policy initiatives were ad hoc and incoherent. Thank goodness the Bush Administration's cabal of yes men, who inaccurately gauged the depth our the domestic economic woes as recently as six months ago, are exiting stage left in two and a half weeks.

But now comes the heavy economic lifting that will be required by the Obama Administration's unconventional and massive policy initiatives. In the meantime, as the lynx-eyed John Maudlin wrote over the weekend, the prospect for 2009 S&P 500 profits remains very much a downward moving target as estimates continue to slip-slide away.

Investors have faced the precipice and have survived and navigated away from it, but, with so much wealth destruction in homes and share prices coupled with a continued deleveraging from swollen debt levels (at all levels of our economy), the "easy" money has probably been made in the recent market advance. The investment forecast ahead seems likely to be more of a two-way market, with both selected shorts and longs contributing to the delivery of superior investment performance.

No doubt, much of the optimism regarding a more engaged President-elect is justified and so is the leap of faith that the massive doses of fiscal and monetary stimulation will inevitably take hold. How we discount continued bad news and the uncertain timing of economic stabilization/modest recovery seem to be the critical elements to answering where stocks are headed in the first half of the new year. Given the aforementioned damage to individuals' wealth and to corporate profitability, that can only be accomplished through the passage of time and with the discovery of pricing "equilibrium" (in home and stock prices).

Given the abuses and absence of due diligence in lending/borrowing over the last decade, it should not be surprising that the pendulum of credit (from easy to hard) will delay recovery. History shows that that the economic transition will require patience on the part of investors.