This commentary originally appeared at 9:18 a.m. EDT on April 26 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
It was a fun segment with Scott Wapner, who subbed for Mel last night on "Fast Money."
At the start, I reminded everyone that when discussing the markets on "Fast Money" during the first week of April, I suggested that we faced a correction of about 5%.
At the low on Monday, we got close to that loss.
What makes me more constructive now is that we have had a panoply of concerns but the market has only bent it has not broken. Some of the obvious concerns include an economic contraction in Europe, an Italian and Spanish debt crisis that shows few signs of stabilization, renewed questions regarding austerity in the EU as a solution to its fiscal woes, a potentially upsetting French presidential victory by François 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 (from 2.38% to close to 1.90%), and a technical breakdown in the S&P 500 under important technical moving averages.
It's important to remember that, at times, it is how stocks react to news that is sometimes as important, or more important, than the news itself.
So I have concluded that the correction in April has discounted the known economic and market headwinds that I fretted about nearly a month ago on the show. (Interestingly, AAII reports this morning that investor sentiment remains sour (a contrarian signal) with bulls 27.6 vs. 31.1 and bears 37.4 vs. 33.8.)
But it's not just price action that is bringing us back to the land of the living (at least from an investment sense). It's also that:
- Overall earnings and forward guidance have been far better than I (and others) have expected. In fact, the earnings beat thus far in the first quarter is almost 600 basis points above consensus. This is serving to offset the squishy macroeconomic releases.
- Since we operate in the NBA -- nothing but Apple (AAPL) -- market, Apple remains a pivotal stock and an important contributor to aggregate corporate profits, and its blowout results cannot be overstated in consequence and effect on investor sentiment.
- The general concerns regarding domestic economic weakness might have been overstated -- my baseline expectation of a muddle-through 2% real GDP trajectory is now looking low, as first-quarter 2012 real GDP is trending close to 3% and second-quarter 2012 real GDP is tracking at around 2.5%.
- And I am looking at the bond market, which today went down on a weak durables number, which follows other ambiguous economic releases. This means that the important reallocation out of bonds and into stocks might have already started. It could be a powerful catalyst for equities.
From my perch, the U.S. stock market might now be heading back to new yearly highs.
To be sure, the ascent may be uneven, and the move higher could resemble more of a grind than a swift rise.
Scott asked me where I would put money to work and why financials have been underperforming.
I responded that banking industry net interest margins were squeezed in the first quarter by an across-the-board reduction in bond yields -- something I see reversing in the months ahead (as central to my thesis is a durable multiyear recovery in the residential real estate market).
I would take a broad and diversified approach to the markets with an emphasis on housing-related names, financials, consumer staples, and industrial and tech sectors.
My individual long picks mentioned on "Fast Money" included Bank of America (BAC), Citigroup (C), Berkshire Hathaway (BRK.B), Goldman Sachs (GS), Ocwen (OCN), Altisource Portfolio Solutions (ASPS), Microsoft (MSFT), Yahoo! (YHOO), Intel (INTC), Broadcom (BRCM), iShares FTSE/Xinhua China 25 Index Fund (FXI), General Motors (GM), Ford (F), Clorox (CLX), Procter & Gamble (PG) and PepsiCo (PEP).
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