Kass: The Scale Tips to the Bullish Side

As I have previously written, we are in this vortex of tax and regulatory traps. The uncertainty of policy has resulted in what can be viewed as a fiscal tightening and a paralysis of corporate indecision. Arguably the continued weak series of economic releases over the past week increases the possibility that, by year-end, we will see a renewed sense of urgency from our politicians for policy relief from the tax and regulatory logjam.

A catalyst to a tipping point of changing fiscal policy could also occur as an outgrowth of a Republican win in November's elections, leading to a decision to continue the Bush tax cuts or even institute a payroll tax cut (or other "outside the box" initiative) in early 2011. (The market, as it usually does, will likely react positively in advance of these possibilities.)

In determining market levels -- as I did in calling for a generational low in March 2009 -- the principal factors I use in establishing a "fair market value" and range for equities are economic fundamentals, interest rates, valuations, expectations and sentiment.

Moderating Economic Growth Has Historically Provided a Healthy Backdrop to the U.S. Stock Market

In direct contrast to Wired magazine's Peter Schwartz and Peter Leydens's 1997 "The Long Boom: A History of the Future, 1980-2020" -- "We're facing 25 years of prosperity, freedom and a better environment for the whole world. You got a problem with that?" -- investors see us in a new paradigm of slow or no growth. But just like Schwartz and Leyden's bogus paradigm, which set the state for the tech bubble and its collapse, the newest paradigm of Roubini-like gloom, "The Short Boom" -- like the "Long Boom" it follows -- seems likely to be also dead on arrival.

An easy Federal Reserve that is content to maintain a zero-interest-rate policy indefinitely, coupled with a cycle low in inventories, residential investment, automobile unit and capital spending sales relative to their long-term relationship to GDP and relative to their longer-term trends, argue strongly against a domestic double dip. Moreover, an expected mean regression of these four series could provide important support for a moderate expansion in GDP growth in the years ahead.

In other words, the current soft patch indicates a moderating expansion but not a double dip.