This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Kass: Finding Meaning in the 'Meaningless'

This blog post originally appeared on RealMoney Silver on May 27 at 7:06 a.m. EDT.

Away from the numerous fundamental headwinds -- higher tax rates, the long tail and aftershock of the last credit crisis (both here and abroad), deleveraging's role in slowing economic growth, risks of a double dip, geopolitical concerns, partisan politics and global fiscal imbalances -- individual and institutional investors' confidence is being shaken by the market's volatility and the sharp and random moves.

As I have written, the market is in the hands of high-frequency trading strategies. Once accounting for 50% of the day's trading volume, that share has increased ever further (probably close to 70% now) in the face of hedge fund "de-risking" and in the absence of inflows into domestic equity mutual funds. Quick and sudden moves, such as we saw in the last half hour in trading last Friday and yesterday, are the consequences of the aforementioned low-volume voids filled by the HFT community's momentum-seeking weapons of market destruction.

While I have argued in favor of killing the quants before they kill us, there is a brighter side of the negative impact of these dark pools of algorithmic trading strategies that are undermining market confidence.

  • Investors replace renters: Renters are being taken out of the market as stocks move into stronger hands.
  • Fear is the friend of the rational buyer: The introduction of fear (ever-present today) -- fear that an investor can lose 1%-3% in a nanosecond -- is an important ingredient to establishing a better foundation for a real rally in equities. Just look at the impact of fear on The Divine Ms. M's oversold oscillator this morning. In its usual place at the bottom of the page, it is all but ignored!
  • Emotional markets create opportunity: When investors' fundamental views (which should account for almost all of our investment decisions) are thrust aside and are increasingly disregarded, hyperbole and emotion take over.
  • Stronger U.S. economic prospects are ahead: As the HFT strategies wreck havoc, investors are increasingly losing sight of the relatively upbeat economic/fundamental recovery in the domestic economy.
  • Rising equity risk premium provides good entry point: The markets are now discounting a second-half domestic slowdown and, by my calculation, are now discounting 2010 S&P earnings of only $70-$72 a share. The equity risk premium is now between 5%-6% -- well over the long-term trend line of 3.5%.
  • S&P profits intact, P/E has contracted: The leading and coincident indicators still point to 2010 S&P earnings of $83-$85 a share. The market's multiple now stands at only 12.7 times, against 17 times when inflation and interest rates are contained (as they are now).
The abrupt market moves have temporarily distracted market participants from the reasonably good prospects for the U.S. economy and for better profit trends for the component companies of the S&P Index.

While I view the fundamental headwinds (listed in the first paragraph of today's opening missive) as real and as an influence in capping the eventual upside to the markets, the outsized and disruptive role of quant trading is providing a short-term opportunity to buy stocks cheaply, and I see the recent week's action as a precursor to a good rally in equities.

Color me increasingly bullish.

Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs