NEW YORK (Real Money) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
This past week, Kass said he's reluctant to call a stock market top though he sees signs it's here. Meanwhile, he's betting that bank profits will rise with most of the declines in energy prices and U.S. dollar strength "having run its course."
Determined to Be More Reactionary
"I start each day with these three questions:
- In a paperless and cloud(y) world, are investors and citizens alike as safe as the markets assume we are?
- In a flat, networked and interconnected world, is it even possible for the U.S. to be an "oasis of prosperity" and a driver, or engine of global economic growth?
- With geopolitical coordination of the G8 at an all-time low, if the wheels do come off, how slow and inept will the reaction be?
Financial and economic markets are cyclical - the big bear is not likely in front of us but a little bear might be." -- Kass Diary, Q1 Brought More Sign Posts of a Market Peak
Market participants are at the most dangerous point in which fundamentals are being dismissed. Indeed, TINA (there is no alternative) is often back in the market commentary these days.
Market rationalizations, associated with the stubborn persistence of higher stock prices, is likely late in the acceptance period when investors set up for being disappointed. To me, it's only a matter of time until the market fades from the highs. But I don't know where the highs lie. As John Maynard Keynes wrote, "The market can stay irrational longer than you can stay solvent."
I take these words seriously and, tactically, I am determined not to be too anticipatory and to be more reactionary.
While I have a lengthy list and menu for analysis and selection on the buy side, with 24 stocks on my Best Ideas long list and only five stocks on my Best Ideas short list, I would continue to be cautious in adding incrementally to equities.
As always, my greatest market headwind is fundamentally based.
These conditions have weighed on banking industry valuations. But with rates likely bottoming and legal expenses and fines slowing down, I have argued that a healthy cocktail of expanding net interest margins and lending are about to be served up.
Importantly, of late both M2 growth and velocity have begun to turn up. At the same time, commercial and industrial loan growth has begun to accelerate:
This increased lending is getting little attention and bank stocks have been laboring. That lending rise is also having a positive multiplier effect on the money supply, which has begun to accelerate over the course of this year.
M2 (year over year) is now increasing at a rate of more than 6%. The 13- week rate of increase is even better at 7.2%, which is positive for the economy and banking.
Here are some charts that support my positive view on bank profitability and bank shares.
In this setting, bank profits should expand nicely and bank shares could embark on a lengthy period of outperformance.