This blog post originally appeared on RealMoney Silver on Dec. 4 at 7:59 a.m. EST.

"It is like a grain of mustard seed, which a man took, and cast into his garden; and it grew, and waxed a great tree; and the fowls of the air lodged in the branches of it."

-- The Bible, Luke 13:18-9

On CNBC's "Kudlow & Company," Larry Kudlow is fond of bringing the financial world's attention to the mustard seed parable, which, in a religious context, is often interpreted as being a prediction of Christianity's growth around the world. Jesus compares the kingdom of heaven to a mustard seed. The parable is that mustard is the least among seed, yet grows to become a huge mustard plant that provides shelter for many birds.

In an economic context, Larry believes the mustard seed parable has some merit, as the "shock and awe" from the recent policy moves geared toward stimulating the economy could sow some good economic results in 2009. Given the painful market action over the past six months and the extremely negative sentiment, which seems almost antithetical to investors' enthusiasm a year ago, Larry feels a rich investment harvest might be reaped.

While Larry's optimism has some virtue, I have argued that we are not in a "garden variety" business/market cycle, as the wealth destruction of lower home and stock prices will retard growth -- similar to the notion held by some religious scholars that the birds in the mustard seed parable represent an undesirable presence capable of eating up any new seeds the farmer sows in his field and preventing the trees (Christianity and the stock market) from bearing fruit.

Moreover, I have opined that it is hard to have conviction until:

  • stability returns to the hedge fund community, as redemptions slow down, some large hedge funds fail, and the money is re-circulated to other investment managers;
  • the slope of the domestic economy's downturn is better understood, as the possible recovery is seen with better clarity;
  • credit improves;
  • stocks react more positively to poor news; and
  • the volatility in the capital market diminishes.

I now must recognize that my concerns, which are currently weighing on our credit and investment markets and on the world's real economies, have now been fully embraced by the media and by nearly every investor and strategist and that, to some degree, stocks have reflected the gross economic and credit realities. This is in marked contrast with conditions a year, six months or even three months ago, when I saw a plethora of short opportunities framed in a variant and negative view.

Time and (lower stock) prices cure all, so even before credit improves, hedge fund redemptions decelerate, and signs emerge that the current forceful policy measures are remedying the downside economic spiral and an engaged President-elect surrounded by an experienced and intellectually gifted corps of advisers enacts his own policies, the market's downside influences could recede as stock prices might advance well before the all-clear economic signal is embraced.

Given the above, my investment blueprint over the next several months is taking a more positive tint. We seem to be moving toward the following paradox:

    1. Investments that are deemed to be safe (e.g., 10-year notes, 30-year bonds) are increasingly unsafe, and I am shorting.

    2. Investments that are deemed to be risky (e.g., selected equities) are becoming safer, and I am buying them (gingerly, for now).

I have concluded that we have likely seen the year's lows, but the harder issue is trying to define the slope of the recovery in stocks. Given the headwinds (especially in credit), it should be frustratingly modest at first -- we still seem to be in a very broad trading range -- but the trajectory will hopefully gain steam as the year progresses and clarity regarding the depth/duration of the recession develops, the hedge fund redemption issue is left behind us and stocks increasingly react more positively to bad news.

Already some of Larry's mustard seeds are being ignored. For instance, take a look at housing, in which a combination of targeted and aggressive policy efforts aimed at reviving this beaten down sector of the economy, a marked reduction in home mortgage rates, better affordability and an extended period of low production of new homes (vis-à-vis population and household formation growth) argue that the balance between housing supply and demand might move closer in balance earlier than expected.

In conclusion, I am not yet in a rush to buy aggressively, but I am increasingly confident that investments made in the next three to six months will look terrific one to two years from now.

I am also convinced that the current negative groupthink on the part of the hedge fund community (and others), which is manifest by their current low invested positions amid fear of further investment losses and additional redemptions, will cause them to miss the bulk of the early advance in equities when it comes. As such, the potential is for hedge funds to become the new marginal buyer that is capable of extending the market's initial gains in 2009.

Shopping lists should now be made for both holiday gifts and for stocks, as they are both being discounted.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.


Know What You Own: Doug Kass is currently short the iShares 20+ Year Treasury Bond ( TLT), which operates long government ETF category, and some of the other ETFs in its field include the iShares 7-10 Year Treasury Bond ( IEF), UltraShort 20+ Year Treasury ProShares ( TBT), iShares 10-20 Year Treasury Bond ( TLH), UltraShort 7-10 Year Treasury ProShares ( PST), PowerShares 1-30 Year Laddered Treasury ( PLW) and SPDR Lehman Long Term Treasury ( TLO). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

At the time of publication, Kass and/or his funds were short the iShares 20+ Year Treasury Bond, 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.

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