This blog post originally appeared on RealMoney Silver on Oct. 29 at 9:04 a.m. EDT.
We had another lively session on "Kudlow & Company," with "Uncle Vinnie" Farrell (a late addition), the Divine Ms. F. (a.k.a., Melissa Francis) and the lynx-eyed Steve Liesman. I couldn't have been more pleased!
So, without further ado,
Since I spend my time talking to companies, not looking at charts (like the adjusted monetary base), it should not be surprising that I materially disagreed with Sir Larry's view (and others on the show) regarding an imminent and surprising economic recovery.
Corporate profits have only begun to tail off, and the market's weak response to poor results at
Universal Health Services
yesterday should be of some concern going forward. In fact, Jim "El Capitan" Cramer has an
, "Feeling Regret Over Doing the Homework," which underscores my corporate profits concerns.
Unfortunately, the benefit of a sharp commodities downturn (which I had previously looked to as a bullish economic sign) is now being offset by the tipping point of lower home prices and a disastrous equity market. We saw those factors manifested in a very weak consumer confidence release on Tuesday.
Yesterday, we had an exquisite combustion in the compost we now call equities. The causes for yesterday's rally were relatively clear:
- Credit is thawing (I remarked that not only were most credit spreads narrowed but that commercial paper issuance on Monday was 10 times larger than the actual issuance, on average, in the prior week);
- a deeply oversold market in which belief, prior to yesterday's trading, had been suspended;
- former Fed governor Larry Meyer's expectations of two 50-basis-point cuts in the next two Fed meetings;
- continued Japanese yen weakness;
- an unusual short squeeze in Volkswagen's shares, which forced collateral short-covering in other issues from those hedge funds;
- the absence of mutual fund and hedge fund dumping of securities, particularly late in the day (on that score, look at the unusually large gap between the year-over-year change in the leading economic indicators vs. the S&P 500, which helps to underscore that fear contributed to the recent stock market dive);
- end-of-month buying; and
- large asset allocation trades, which reduced bond exposure and increased equity exposure.
I suggested to the panel on "Kudlow & Company" that there were two important questions that investors had to answer in navigating the markets over the balance of the year:
How deep and long-lasting will the recession be?
Who will be the marginal buyer to sustain the current rally?
To those questions, I concluded that a bounceback from depressed lows has been
for a few days, however, a more sustainable recovery in equities (and for the economy and corporate profits) seems far more problematic.
I ended by discussing my variant and positive take on a
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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
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.