This blog post originally appeared on RealMoney Silver on June 1 at 7:26 a.m. EDT.

The ability of the U.S. stock market to continue its rally is dependent upon numerous factors, but, from my perch, the consumer holds the key.

The bearish consumer case is no longer a variant view and, as such, might be incorporated in today's share prices. It is now a widely held consensus that the consumer will be a drag on economic growth as the great debt unwind yields lower personal consumption expenditures and an elevated personal savings rate.

As well, most bearish observers hold to the notion that corporate profit margins, which, in 2006-2007, reached the highest level since the mid 1950s, are now vulnerable to mean-reversion in the years ahead. After all, the prospects for tepid top-line growth and continued cost pressures (importantly influenced by the costly burden of more regulation and the inevitability of higher corporate tax rates) seemed to point to obvious contraction.

The context of first-quarter 2009 corporate profits was telling.

Remarkably (and not well-recognized), is that over 60% of the companies in the S&P 500 missed the first-quarter consensus sales forecasts (year over year and sequentially), but, even more surprising, two-thirds of the companies beat consensus earnings expectations as aggressive cost-cutting (especially of a job cut kind) ruled the day.

While half a loaf of bread is better than no bread at all, we are left with two outcomes to consider.

The positive outcome is that when fiscal and monetary policies really kick in and aggregate demand turns, corporate profit operating leverage will result in surprisingly strong earnings.

The negative outcome is that one man's bread -- namely, that of the corporation -- will not fill the belly of the consumer, who has lost confidence and millions of jobs. This, many predict, will derail recovery and lead to a sustained period of disappointing economic growth, as the consumer represents nearly 70% of the economy.

This tug of war between the continued spate of corporate cost-cutting and the flailing jobs market likely holds the keys to the kingdom, the economy and the stock market.

It is also why the employment picture should be investors' focal point and will remain the single most important determinant in shaping the recovery in the domestic economy.

My current view is that there are still elevated risks of economic and corporate profit disappointments based on the unusual nature of the buildup in credit/debt that preceded the downturn, which has been clearly manifested in the carnage in the financial sector and in numerous other service industries.

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's daily trading diary, please click here.


Know what you own: Some of the most active stocks in Monday's midday trading include Bank of America (BAC), Direxion Daily Financial Bear 3X Shares (FAZ), SPDRs (SPY), Citigroup (C), Direxion Daily Financial Bull 3X Shares (FAS), Financial Select Sector SPDRs (XLF) and Ford (F).
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 Long/Short LP.

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