Look Within

 | Jun 27, 2012 | 12:00 PM EDT  | Comments
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This commentary originally appeared at 8:04 a.m. EDT on June 27 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.

Yesterday I got an email from a subscriber who asked me why I so frequently mention Ocwen Financial (OCN) and Altisource Portfolio Solutions (ASPS) in my posts.

Besides superior earnings prospects, an important reason is that both companies generate almost all of their sales in the U.S.

My friend/buddy/pal BTIG's Dan Greenhaus had a wonderful chart in his missive on Tuesday evening that highlighted the strength of company share prices that are domestic-based and are insulated from the sovereign debt crisis in Europe (compared to the S&P 500).

As I have previously written, sharp and growing differences in geographical growth are now emerging.

Europe's economies are moving in reverse. There is a sense of hopelessness.

By contrast, the U.S. economy is expanding at a modest but steady pace. In the U.S., there is hope.

Moreover, the flight to safety around the world is paying short- and long-lasting dividends for the U.S. in the form of much lower interest rates. The beneficiaries are U.S. consumers and corporations, both of which have locked in these low interest rates in the guise of mortgage loans and corporate borrowings.

The events over the past few years have highlighted the likelihood that the U.S. stock market (the best house in a bad neighborhood) will be favored over most other investment markets in the world.

Here, again, are my 10 reasons why I remain optimistic about the investment opportunities in the U.S.:

  1. Above all (and as cited above), our country's relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.
  2. U.S. banks are well-capitalized, liquid and deposit-funded. Domestic financial institutions are far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world – while the badly capital impaired EU banking industry continues to delay capital raises. Importantly, our banking system is deposit funded, while Europe's banking system is wholesale funded (and, thus, far more dependent on confidence).
  3. U.S. corporations boast strong balance sheets and healthy margins and profits. Our corporations are better positioned than those in the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.
  4. The U.S. consumer is more liquid and stable. An aggressive Federal Reserve (through its extended time frame of zero-interest-rate policy) has resulted in a U.S consumer who has re-liquefied more than individuals who live in most of the other areas in the world. (Debt service and household debt are down dramatically relative to income and back close to historic averages.)
  5. The U.S. is politically stable. After watching regime after regime fall in Europe in the last year (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth political regime changes and the most stable rule of law (that has contributed to social stability, a relatively limited amount of outright corruption and a sense of overall order).
  6. The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)
  7. The U.S. is rich in resources.
  8. The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting responsibly during crisis.
  9. The U.S. dollar is (still) the world's reserve currency and is far more solid than the euro and many other currencies.
  10. The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

In summary, conditions that have evolved over the last decade have conspired to favor risk assets in the U.S. over many other areas of the world. In the period ahead, look inward (not outward), as I continue to expect a powerful reallocation trade out of non-U.S. equities and into U.S. equities.

Continue to buy American. I am.

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