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[Ulisses Pereira]

"It's the Economy, Stupid"

By Doug Kass
RealMoney Silver Contributor
6/8/2011 11:30 AM EDT


"That expression, voiced by Democratic strategist James Carville back in 1992, is now resonating in the stock markets around the world.

The near-universal investment optimism of April has now been replaced by growing investment concerns, as weakening economic data call into question growth assumptions.

As share prices move ever lower, we have finally begun to discount the increased possibility of a self-sustaining soft patch as opposed to the consensus forecast of smooth and self-sustaining growth, which vaulted stock prices to two-year highs only seven short weeks ago.

Over the last six to nine months, I have voiced numerous economic concerns -- it is unnecessary to repeat them -- and they continue to exist.

My role as an investment manager is to gauge risk and reward and to select the best investment vehicles I can in the construction of a portfolio. My role as an investment manager is not to be dogmatic and to recognize that there is always a price that incorporates value in the market and in individual securities.

There are offsets to my economic concerns; ignoring the positives would be foolhardy and inflexible (as arguably was the case when the bulls dismissed economic and market risks when the S&P 500 was at 1360).

Too many investors bathe in the water and find comfort in the momentum of rising stock prices, and too many investors are frightened by the value that is created as an outgrowth to market drops. I prefer to be an opportunistic investor and trader.

My net long exposure is still low, but I am expanding my long book into weakness.

"In the twentieth century, the United States endured two World Wars and other traumatic and expensive military conflicts, the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
-- Warren Buffett

Here are some of the reasons why I believe that the downside to stocks is limited:

1. Corporate balance sheets and income statements continue to display strength. While I see some vulnerability to corporate profits, my estimates are only a few dollars per share below consensus.

2. Valuations are not stretched, especially relative to inflation and interest rates. At 1250, the S&P 500 will be priced at a reasonable 13.5x my 2011 S&P forecast of $93 a share. (Price is what you pay; value is what you get.)

3. Uneven and more volatile economic and profit growth are my baseline expectations. But an extended (yet lumpy) economic up-cycle still appears the most likely outcome. More effective and productive public policy could extend the recovery further.

4. At 1250, the market will be sufficiently oversold technically, and sentiment will have moved to a more negative extreme. Always remember that a public opinion poll is no substitute for thought.

5. Individual investors are relatively uninvolved and hedge funds are conservatively positioned.
Just as stocks overshoot on the upside, however, we must recognize the potential for an overshoot to the downside. As well, precision of forecast is difficult given the complexities of the investment mosaic today -- as I have written previously, there are many moving parts.


Nevertheless, my tactical investment strategy is to be more even keeled and to slowly expand my long exposure as the S&P 500 moves toward the lower end of my projected range for the balance of the year of between 1250 and 1350.

A more balanced investment perspective and strategy is called for as stocks drop down closer to what I consider to be more attractive levels and better entry points. "

(in www.realmoney.com)