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Kass: Mr. Market Sings a Happy Song

Oil prices: After a several-month-long drop in gasoline prices (see above), the price of crude oil seems to have stabilized and has started to move higher over the past two weeks.

Federal budget deficit: A near-term improvement in the U.S. budget deficit could be bad news for the sequestration, as both Democrats and Republicans become less willing to negotiate anything in the budget. This could portend a big debt-ceiling debate/fight.

Currencies: The profound weakness in the Japanese yen reduces the competitiveness of other countries. Specifically, it will likely temper U.S. manufacturing export growth and the profits of some of our largest international corporations that serve non-domestic markets. This could stall U.S. jobs growth and capital spending expenditures and plans. In its extreme, the Japanese experiment could have worldwide deflationary ramifications, resulting in a 2014 recession and lower profits and profit margins, even despite the magnitude of global money printing.

Quantitative easing: Last week, Appaloosa's David Tepper was optimistic on the markets based on the Fed's continued printing. The Fed has printed about $1 trillion, and this year, the U.S. exchanges' market cap has risen by $2.75 trillion. That is quite a lot of bang for the Fed's buck! In other words, Tepper says that the Fed's printing press is going into stocks -- and will continue to do so. But the stock market wealth build already well exceeds the expected 2013 EPS growth -- plus the $1 trillion of fresh money printing. To me, Jon Hilsenrath's Wall Street Journal column a week ago was a shot across the bow to prepare investors for halting steps in printing. I expect that the Fed could pause/taper in the second half of 2013. If so, interest rates will rise, providing a headwind to interest-rate-sensitive domestic economic sectors and result in more competition to equities.

To summarize, despite my continuing concerns, I have been deeply wrong of view as my focus has been on factors that market participants have totally ignored or dismissed.

Stated simply, I sang a sad song of lackluster fundamentals while Mr. Market sang a happy song of global easing.

Mea culpa.

At the time of publication, Kass and/or his funds were short SPY, 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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