On the Ascent

 | Apr 25, 2012 | 12:00 PM EDT  | Comments
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This commentary originally appeared at 7:35 a.m. EDT on April 25 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.

Despite a panoply of concerns -- economic contraction in Europe, an Italian and Spanish debt crisis that shows few signs of stabilization, renewed questions regarding austerity as a solution to the EU's woes, a potentially upsetting French presidential victory by Fran├žois Hollande, a cut in the outlook for India's sovereign debt, a sudden and ominous drop in the yield on the 10-year U.S. note (to close to 1.90%), and a technical breakdown in the S&P 500 under important technical moving averages -- the market bent this week but did not break.

April's erosion in the U.S. stock market was broadly discussed in the business media, and increasingly, many of the talking heads, strategists and commentators who were thrust upon that stage warned of an imminent market drop. (Many incorrectly used the share price drop in Apple (AAPL) as a confirmation of their negativity and bias.)

It was enough for some investors to panic out of equities -- and many did, as evidenced by the near-4% drop in stocks this month (measured at the low on Monday).

The S&P 500 finally traded under my fair market value calculation of 1360, and I have been slowly expanding my net long exposure, which now stands at the highest level since early January 2012.

Unlike some, I welcome lower prices; they provide attractive entry points. Wearing my hat as an investor, I never quite understood the notion of selling because the market is breaking down, when share prices grow cheaper and when putting in buy tickets is the hardest trade. The Oracle of Omaha expressed the concept of buying low (and on weakness) more eloquently: "Price is what you pay; value is what you get." (Of course, one that wears the hat of a trader must be more responsive to the market's price action.)

Many subscribers justifiably have asked how I can become so much more constructive if the averages only fell to slightly lower levels than fair market value. Below are a few brief answers:

  • As I have repeatedly written, in a fairly valued market, many individual stocks can thrive.
  • My fair market value calculation is not intended to be pinpoint and precise; it is a guideline.
  • Deteriorating sentiment and an oversold market often places many market participants offside (underinvested or short), serving to exacerbate rallies.

So, what has happened to stabilize the markets since Friday's close? Below are four impactful factors:

  1. Overall earnings and forward guidance were far better than many of the pessimists expected.
  2. Apple remains a pivotal stock and an important contributor to aggregate corporate profits, and its blowout results cannot be overstated in consequence and on investor sentiment.
  3. The general concerns regarding domestic economic weakness might have been overstated -- my baseline expectation of a muddle-through 2% real GDP trajectory still seems likely.
  4. Lower market prices began to discount the known economic and market headwinds and threats.

From my perch, the U.S. stock market might now be heading back to new highs.

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