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Kass: Emotional Abuse

This blog post originally appeared on RealMoney Silver on July 1 at 8:18 a.m. EDT.

Yesterday, I made the case that the equity market was traveling the path of fear rather than the path of fundamentals.

Emotion continued to take over in Wednesday's trading and into the evening's trading in S&P futures.

Specifically, though well above the 50 reading that implies healthy expansion and a soft landing, the U.S. futures responded last night by trading down by eight handles on a weaker-than-expected China PMI.

Importantly, what was even more surprising to me in terms of the market's immediate adverse reaction, was that the China PMI was in line with the whisper but down only slightly from consensus.

I went to sleep with tears on my pillow and my laptop and Bloomberg next to my bed but awoke to a return to reason as futures were more or less flat after the evening's weakness.

Unfortunately, the damage in the U.S. equity market over the past two months (and on the back of the 2008 investment shock) is very real, and as former Federal Reserve Chairman Alan Greenspan mentioned on CNBC's "Squawk Box" earlier this morning, the poor state of the stock market is likely to be a (self-fulfilling) force that will, at the margin, add to weakening economic conditions (especially of a consumer kind) and to the current soft patch.

In other words, Mr. President, what is good for Wall Street (and our stock market) is good for Main Street.

Yesterday, in " Something Good Is About to Happen," Jim "El Capitan" Cramer made these prescient points on RealMoney, which I paid attention to but few others did:

It's not so bad, it is just bad enough that maybe something good will happen. That's my feeling about the U.S. economy right now.

It's not so bad because we have ever-so-slightly falling job claims, we have better balance sheets for companies and lots of profitability with some companies doing extremely well. But it is bad enough because we are not creating jobs and not seeing any loan demand that I think Washington will do something.

We saw the beginning of that Tuesday, totally obscured by the selling of stocks. We saw a bank tax that went away, we saw the rumblings of cap-and-trade being put on hold and we saw the makings of a breakthrough in extending unemployment claims money.

You know what these moves smell like to me? Self-preservation. Self-preservation on the part of the Democrats to get some jobs created, maybe even to stop the uncertainty about taxes and make statements that we will keep tax increases on hold. Why not?

When we began 2010, I wrote that corporate profits growth would surprise to the upside in the first half of the year but that the U.S. stock market would be unresponsive and could trade lower. Among other issues, I highlighted populist policies that would ultimately dampen economic growth (higher taxes, more burdensome and costly regulation, etc.) and that would be seen as (equity) valuation-threatening.

This has been the case.

Now, as Jim writes, in order for "something good" to happen, our ( P/E-multiple-deflating) political leaders must step up and reconsider some of their actions for the sake of Main Street and Wall Street.

It is not too late for some positive action on the jobs and tax front from our legislators and particularly from the Obama administration.

If nothing else, as the economic data soften in the months ahead, survival and self-preservation could be an emotion taking over our politicians as the November elections loom.

Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

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.

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