Kass: Madman at the Gates

This blog post originally appeared on RealMoney Silver on Sept. 29 at 7:16 a.m. EDT.

Market participants have become increasingly complacent, both with regard to recent signs of more tentative economic growth (in last week's durable goods and housing sales reports) and with regard to increased geopolitical risk (of an Iranian kind). On the latter, a policy of engagement by the administration (and others) against madman at the gates President Ahmadinejad of Iran appears to be coalescing as Iran fires short-term missiles over the weekend, either by pursuing sanctions or worse. With this confrontation will come some difficult choices by the President and, likely, will come increased stock market risks.

Despite my protestations, the market vaulted higher yesterday. While the $6.4 billion Xerox (XRX Quote) acquisition of Affiliated Computer Services (ACS Quote) was the media's reason for the strength, I doubt it as only a quarter of the deal was cash and the rest was in the form of Xerox's common stock (which faded by about 20% in response). Rather, it was likely good, old-fashioned window dressing and some renewed price momentum after last week's selloff.

Arguably, at the current time, the market's technicals are exponentially better than the fundamentals as the bullish crowd has overwhelmed the bearish remnants. Skepticism is going unrewarded as the optimism over current earnings has dominated investment sentiment. And confidence in a smooth recovery (and $73-plus in 2010 S&P 500 profits) has provided fuel for an extraordinarily positive reaction in price momentum across the world's equity markets.

Due bills be damned! The consensus for growth has moved toward business as usual for the balance of 2009 and 2010-2011, a bit shallower in slope compared to historic recovery cycles but still one that is self-sustaining. While I can accept that the baseline consensus expectation of S&P 2010 EPS of $73 a share is a possible and logical outcome, a double-dip would not be illogical considering the economic, credit and equity markets' heart attack. I would argue that there exists a wider range of economic and profit outcomes than is customary during a recovery phase and that the certainty associated with today's consensus of a positive outcome could be tested.