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Kass: Printing an Important Market Bottom

This blog post originally appeared on RealMoney Silver on March 11 at 7:06 a.m. EDT.

Last night I not only re-emphasized my 2009 market bottom call on "The Kudlow Report," I also suggested the possibility that a generational low is being put in place.

Yes, I said that.

Here is the tape.

In terms of substance, I essentially summarized yesterday's opener.

My main point is that we live in a Land of Johnny-Come-Lately Chicken Littles, most of whom failed to identify the credit and economic risks 1½ years ago but who today hold with alacrity and great confidence a belief in a continued dire outcome for equities, as they all too often see the world from a rear view mirror.

By contrast, as I related in yesterday's opener, the sky is not falling, and Mr. Market has dropped a ton of value on our investing doorstep -- dinner is now being served.

What I found particularly interesting is that the most vociferous bull on our "Kudlow Report" segment, a nice fella from Beantown who has been bullish most of the way down, got weak in the knees because of the magnitude of yesterday's market ramp! He actually said investors are getting too optimistic in only one day!

My response was that considering that the hedge fund industry is at its lowest net long position in years and since individual investors have recently accelerated their account liquidations and redeemed their mutual funds, they are not even thinking about getting back in. There is plenty of buying power sitting on the sidelines to fuel a sustained market advance.

But both institutional and individual investors will get involved again -- if the market can post several days/weeks of strength. And there remains a huge asset allocation trade back into equities from cash-rich pension plans whose portfolios are now materially skewed toward fixed income.

Most will miss the rally -- it's not surprising since the pain has been so extreme in recent months.

The purists will point out to a bunch of indicators that have yet to fall into place -- like a low put/call ratio. But my response is that most buy puts to protect longs, so with most investors being light on equities there is less of a need to buy protection in puts. So it is not surprising if the put/call ratio stays historically low, as long positions are historically low and cash positions are historically high.

My best guess is that we'll rapidly move back up toward the typical bear-market trough valuation -- 12 times normalized or trend-line S&P earnings of about $67 a share, or about 805 on the S&P 500 Index. In the fullness of time I expect the S&P index to test its 200-day moving average, which is currently about 30% above yesterday's close.

Yes, I said that too!


Know what you own: Kass mentions the indices. ETFs that track major indices include ProShares Ultra Dow 30 (DDM), ProShares Ultra S&P500 (SSO), ProShares Ultra QQQ (QLD), Diamonds Trust (DIA), ProShares QQQ Trust (QQQQ), iShares Russell 2000 Index (IWM) and SPDR Trust (SPY).

At the time of publication, Kass and/or his funds were long SPY and short SPY puts, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.

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