This commentary originally appeared at 8:19 a.m. EST on Feb. 2 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.Today's dominant investor classes -- individual investors, hedge funds and pension funds -- have de-risked and are relatively uncommitted to equities. A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S&P 500 in 2012.
The aforementioned de-risking and flight to safety in bonds by all three dominant investor classes help to explain the last five years of action in domestic equities and the contraction in P/E ratios in 2011. I expect the recent trend of large outflows over the last year (and last five years) to be reversed in 2012. Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note. At first, similar to the past two weeks, in which under $1.5 billion has come into stock mutual funds, the pace of inflows will be slow. As it becomes clearer that the domestic economy is self-sustaining, that the European debt crisis is showing continued evidence of stability, that a Republican presidential win in November grows more likely and that corporate profit (and margin) expectations will be achieved, I expect the rotation out of bonds and into stocks to accelerate. Tactically, I favor the asset management stocks such as Och-Ziff Capital Management ( OZM), T. Rowe Price ( TROW), Waddell & Reed ( WDR) and Legg Mason ( LM) and the discount brokerage stocks such as E*Trade ( ETFC) and Schwab ( SCHW) as direct beneficiaries of the expected rotation out of bonds and into stocks in 2012.