Although I'm no raging bull on the broader markets, I feel compelled to provide a counterpoint to Doug Kass' recent column, titled " Why Stocks Will Fall ."

First, near the beginning of the piece, Street Insight's resident bear says the market got the better of him in the second half of 2006, citing suspended disbelief "despite growing signs of escalating economic and geopolitical risks."

I certainly can't argue that these risks don't exist throughout the world. In fact, things seem pretty crazy these days. If there is any sign of improvement in Iraq, I certainly haven't seen it. Iran is probably building nuclear weapons. Hugo Chavez is busy nationalizing companies in Venezuela, and Russia is cutting off oil supplies to Europe.

On top of that, there has been an explosion in hedge funds and incredibly complex derivative instruments, a decline in the housing market and a big round of rate hikes from the Fed. In addition, the U.S. still has fairly large trade and budget deficits.

However, we can't ignore the fact that, through all of this strife, the past few earnings seasons have been pretty good. Because companies have been doing fairly well throughout some fairly turbulent times, I don't believe it's crazy to think that the primary focus of investors should be earnings. We can't totally ignore the big picture, but earnings are among the most important determinants of stock prices, so for the market to fall apart convincingly, we'll need to see broad-based earnings weakness and/or a multiple retraction.

The stock market as a whole is not terribly expensive. After fairly solid performances by corporate America's largest companies over the past few quarters, is it time to declare that the good times are over? Probably not. Sure, the party will end, but as of yet, there simply isn't much indication that earnings are going to suffer in the upcoming reporting season.

Later in the piece, Kass also opines that "the broad decline in commodities seems to be a statement of our economy's health." This is a fairly bold statement. I believe it's simply way too early to imply some correlation between the near-term performance of commodities and the overall economy. Over the past few years, one could have identified any number of economic indicators and trends that might indicate a weak economy (sluggish job growth, for example) as rationalization for a bearish market outlook and lost out on substantial returns in stocks.

Finally, the author implies that the Wall Street herd is overly bullish. Wall Street is certainly positive, but I would not characterize it as overly aggressive. According to a recent Business Week survey of investment strategists, on average they expect a 5.9% gain in the Dow Jones Industrial Average and a mere 5.5% gain in the S&P 500 in 2007. Both numbers are below the historical average annual returns of stocks and below the returns that strategists expected going into 2006, when those surveyed forecasted returns of about 7.8% and 7.9%, respectively.

So is the world a crazy place? Yes. Is the economy going to implode? That's a big maybe, and there's no way of knowing if or when that will happen, let alone right now.

So until earnings stop growing, investors should focus on the financial performances of the companies they own and industry trends, because those will move their stocks the most.
In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at In this role he performs stock analysis for Breakout Stocks, and is also a regular contributor to Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback; click here to send him an email.