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My 'Fast Money' Recap

The proximate cause for this week's equity weakness was the European weekend voting results, but one could make the case that Hollande's victory (which was predicted by Ladbrokes; he was 1:9 odds for the last two weeks) is a net positive as we will end up with a more activist ECB concentrating less on austerity and more on pro-growth fiscal policies.

As to Greece, who cares? As Miller Tabak's Peter Boockvar remarked today, Greek bondholders have already been body slammed -- their debt is trading at around 20% of face value. How many times is the market going to discount Greece's demise? Meanwhile, Greece is going to have a new election in June, and the odds favor a pro-troika result.

Steve Weiss argued that the economy is weaker, citing structural unemployment, moderating profit growth and poor earnings guidance.

Again, notwithstanding the structural disequilibrium in the jobs market (something I have written about over the past five years), I disagreed.

  • Economic growth: Most observers are more cautious regarding domestic growth today, even though the recovery's breadth is better -- employment has improved, and there is a nascent recovery in the residential real estate markets.
  • Profits: Corporate profit momentum has turned positive -- the first-quarter beat was by over 500 basis points.
  • Housing: The outlook for housing is markedly improved. Household formations are recovering from the depths of the recession, the NAHB index and buyer traffic are at five-year highs while inventories of unsold homes are at five-year lows.
  • Household health: Consumer deleveraging is advanced -- household debt/GDP is back to trend line levels.
  • Employment: Indicators are improved relative to a year ago. Claims are lower -- ISM employment components are consistent with monthly private payroll gains of about 200,000; take out 20,000 government job losses, and you come out with monthly jobs growth of approximately 175,000 to 180,0000.

Many, like Weiss and Mel are fearful of the similarities between May 2012 and May 2011 -- a year ago, the market began a wicked decline.

I said there are more dissimilarities than similarities.

I believe history rhymes, and instead of May 2012 rhyming with May 2011, a more reasonable parallel is with May 1987. The May 1987 bottom was followed with a near-20% rally in the summer of that year. Below is a chart that overlaps the two periods.

I am under no illusion that the stock market is poised for a move straight up to the Promised Land -- rather I expect an irregular grind to higher levels. Given the technical damage and the ambiguous domestic economic release, we likely need confirmation of my view of a self-sustaining recovery in additional data points over the coming weeks.

I don't have an idea as to the short-term direction of the markets, but I do feel strongly, that those with a three- to six-month time horizon will be rewarded -- perhaps richly rewarded.
At the time of publication, Kass and/or his funds were long F, SPY, TBT and TBF/short TLT, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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Chart of I:DJI
DOW 17,812.19 +19.51 0.11%
S&P 500 2,089.14 +2.55 0.12%
NASDAQ 5,102.8080 +0.33 0.01%

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