Thursday, June 18, 2009

Double Dip Or Roaring Recovery?

Two terribly bright stock market minds joined me on last night's Kudlow Report - Jason Trennert of Strategas Research and Dougie Kass of Seabreeze Partners Management - to discuss the stock market and economy. Both the video and Dougie's recap of the discussion follow below.

With My Fav'rite Host
6/18/2009 7:41 AM EDT

Last night, I was back with one of my fav'rite hosts, Sir Larry Kudlow (of course, along with my other favs, Becky, Carl and Joe on "Squawk").

The topic of our short segment was "Double-Dip or Roaring Recovery?"

With us was my friend/buddy/pal, the lynx-eyed Strategas Managing Partner Jason Trennert, who posited that we are in the "V" portion of what Lee Cooperman has described as a "square-root economic recovery." Jason was more optimistic than I (though he fully recognized the consumers' weak status) and favors the late-cycle stocks (materials, gold and energy) or "where the government is investing."

Sir Larry, ever the optimist, viewed the "amazing monetary stimulus," narrowing in credit spreads, the rise in the CRB Index and the steepening yield curve as forward indicators of prosperity.

By contrast, I saw growing signs of a possible double-dip in mid 2010, as the consumer is already flailing. Moreover, a number of nontraditional headwinds must be encountered and overcome in the 2009-2011 cycle.

I opined that Best Buy's (BBY) weak results (domestic down 5%, international dropping by 15%), even without the competition of now bankrupt Circuit City, were symptomatic of a weakening retail picture and an overextended consumer. My notion of May as Retail Interruptus gained some support this morning on the report of an unexpected downturn in U.K. retail sales during the latest reporting period.

I emphasized that a generational stock market low was very much in place and that a further move in the S&P 500 over the next few months towards my 1,050 objective still remains possible but the odds are now being lowered. If achieved, however, then it's Katie, bar the doors, as the economic double-dip grows into sharper focus later in the year.

In terms of where to put money, I thought the late-cycle plays that Jason pitched were somewhat crowded trades and were starting to roll over. I favored bank and specialty financial stocks, which will benefit from widening net interest margins that could serve to ameliorate the continued pressures from the loan-loss cycle.