This blog post originally appeared on RealMoney Silver on July 3 at 7:49 a.m. EDT.

For several weeks, I have harped on a number of credit measures that indicated that credit market/bank balance sheet stress had diminished. This formed the basis and logic for my renewed bullishness in the financial sector (which has been dead wrong).

For example, the most important spread former Fed Chairman Greenspan focuses on in monitoring financial stress is the one between the three-month London Interbank Offered Rate (Libor) and the overnight index swap rate (OIS). This spread has barely moved since the start of the stock market correction in late May.

Libor Less Overnight Rate Spread
Click here for larger image.
Source: Bloomberg
So bear in mind that, when looking at credit measures, it should be clear that the steepness of the stock market's drop has little to do with credit conditions. Rather, the recent market schmeissing has to do with the following headwinds:

  • the ever-rising price of crude oil and other energy products;
  • the ECB's monetary tightening policy;
  • the Federal Reserve's jawboning on inflation;
  • fears of a General Motors (GM - Get Report) bankruptcy;
  • concerns regarding additional bank writedowns;
  • a weakening consumer under the burden of higher oil prices, tepid job growth and slowing incomes;
  • a continued contraction in residential real estate and the specter of a decline in nonresidential real estate values;
  • the perceived threat of a Democratic Administration and its politics of populism;
  • more evidence that the newest paradigm -- namely, the notion of a geographic economic decoupling -- is unlikely;
  • the growing escalation and prospects for a potential military confrontation between Israel and Iran; and
  • recognition that corporate profit expectations for 2008-2009 remain too optimistic.

On the last point, the current consensus for 2009 S&P 500 profits is about $100. I have been using a forecast of about $80 in my writings, reflecting my view that corporate profit margins will be exposed and that negative operating leverage was imminent. Based on a discounted dividend model using current interest rates, I estimate that the U.S. market is now discounting about $75 in S&P profits, which would qualify as a full-fledged recession.

Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.

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.