Though a further drop in stocks will take more of a bite out of consumer confidence and spending, I continue to expect corporate profits to remain high, and, despite the current economic soft patch, I see little to alter my expectations, as companies successfully navigate an environment of relatively slow growth with productivity gains and a tight lid on costs.

I still see S&P earnings approximating $90 a share in 2011, slightly better than 2.0% economic growth (in the second half of 2010 and for all of 2011) and steady (albeit subdued) jobs creation.

U.S. stocks now sell at only 11.5 times vs. a multi-decade average of 15.3 times and at over 17 times during comparable periods of quiescent inflation and interest rates. By contrast, at 1,020, the S&P appears to be discounting slightly less than $70 a share in 2011 S&P profits, approximately 0.5% economic growth and some job losses.

Stated simply, expectations for the economy and markets are now reduced and are now more reasonable.

A Positive Word for Housing

I have been a bear on housing for some time, and the recent data on sales activity confirm my concerns. This weak housing data has been a clarion call for economic bears, but, again, I am adopting a variant view on housing.

I see latent demand and a number of other pro-growth factors coming to the support of housing in 2011.

Barring a flood of shadow inventory coming out, the residential real estate industry's outlook for next year has improved, reflecting record-low mortgage rates, a multi-decade improvement in affordability, a widening benefit of home ownership vs. renting, dramatically lower home prices compared to 2006-2007 levels and the underproduction of new homes compared to household formations.

The Business of Politics

It is time for our executive and legislative branches to step it up.

While I recognize that this might be wishful thinking, as we move toward midterm elections in November, the chances of thoughtful, innovative and market-friendly fiscal policy initiatives could brighten the outlook for economic growth in 2011-2012.

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.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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