This blog post originally appeared on RealMoney Silver on July 28 at 7:47 a.m. EDT.
"The future ain't what it used to be." -- Yogi Berra
Surprises, disappointments and linear thinking (especially of a
kind) littered the investment playing field during the first half of 2008, but the next six months might be more predictable and less volatile.
Multiple factors form today's investment mosaic and near-term outlook. Most of the issues are known, but some important influences may not be known.
Today, I will try to highlight the five most important questions to be answered by investors that will influence and dictate the direction of stock prices over the balance of the year. Importantly, these questions (and their answers) are not all inclusive but attempt to drill down to the most important known issues that will weigh on equities.
What is the outlook for corporate profits in 2008 to 2010?
While U.S. equities remain inexpensive relative to consensus earnings forecasts and relative to short- and long-term interest rates, the predictability of profits remains the single most important concern for investors. And, on that score, the outlook is dimming, as pressures on corporate margins (the most mean-regressing economic series extant) seem inevitable. (The always understandably clear and rigorous John Mauldin covers this topic in his latest
, "Earnings and Mr. Bear.")
Has the price of oil and other commodities peaked, or is the current weakness simply a vicious correction that will be followed by higher prices in the months ahead?
The recent price decline in the price of all energy products reminds us all that the cure for high prices is, well, high prices. Ongoing demand destruction is real, while the notion of a worldwide economic decoupling is increasingly growing unreal, serving to contribute to a continued fall in commodity prices across the board. This trend could persist over the next five months.
What are the investment and economic implications of a democratic presidential win in November 2008?
that an Obama presidency would cost the
between 100 and 125 points. Increasingly, Americans (investors and non-investors) are beginning to lose faith in our political system, as it has been totally reactive, with limited or no capacity for tough, anticipatory decision making. When dissatisfaction increases, the electorate wants change, and change is the platform on which Obama is running. From my perch, the odds of a Democratic president grow every day and correlate directly with the perception of Washington's public policy inertia. The specter of an Obama win will serve as another market headwind.
Have financial stocks made an important bottom, and are they poised for a period of outperformance?
The outlook for nationwide housing prices will help to solve the riddle of financial stocks. I do not currently share the
expressed by my friend,
Michael Panzner, that housing prices have another 15% to 20% of downside from current prices. When I look at the magnitude of the 2006 to 2008 home price drop, household formation, immigration trends, unsold inventory levels and improving affordability, I suspect only about another 5% drop in home prices before a bottom is reached sometime in late 2009/early 2010. Nor do I share
Wall Street Journal
ace reporter Jason Zweig's
on financial stocks. Rather, I am of the view that, for investors looking at the intermediate term, carefully selected financial stocks provide unique opportunities based on the advanced state of the curative process of rebuilding capital bases, market share gain opportunities and the expanding value of the core deposit base/lending apparatus of the major money center banks.
Has the overall market made a low for the year?
While we are only one geopolitical/economic/credit event away from breaching the recent low in the major averages, I suspect a significant market low (or near to one!) has effectively been put in.
Whether one is a Cassandra, a Pollyanna or (like most) somewhere in between, the message of the market over the first six months of 2008 seems apparent.
As Sir Larry Kudlow often says, "profits are the mother's milk" and lifeblood of a better stock market. And, unfortunately, Mr. Market's recent message is that the expectations for corporate profit growth in 2008 to 2010 are simply too optimistic.
The backdrop of tepid top-line sales growth, a continued rationing of credit (and an extended period of time in which companies are unable to securitize customer receivables) and likely profit margin deterioration coupled with middle class populism and rage (which produces political change and public policy aimed at raising corporate and individual tax rates) are not P/E-expanding or market-friendly events.
That being said, I think we have probably seen the lows for the year, but I am hard-pressed to see big upside -- unless oil cracks toward the $100 level.
My guess (and my baseline expectation) is that the S&P 500 will end the year with a decline of 10% to 15%, or roughly about 5% above current levels.
Doug Kass writes daily for
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Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.