Thursday, June 04, 2009

Dougie Kass's Kudlow Report Recap

Here's my pal Dougie Kass's recap of Tuesday night's economic discussion with the terribly bright Ed Yardeni on CNBC's The Kudlow Report.

With My Fav'rite Host
6/4/2009 7:25 AM EDT

I was back with my fav'rite host, Sir Larry Kudlow, on Tuesday night. Along with us was one of the most respected economists extant, Ed Yardeni, who posited an optimistic message of low inflation, reasonably healthy domestic economic growth and an encouraging picture of corporate profits for 2009-2010. Ed remains concerned about our long-term deficit situation, however, and suggested testing Social Security and Medicare, which could alleviate the growing concerns of the bond vigilantes.

Below were my bullet points from Tuesday night's show:

- I remain confident that a generational stock market low is now in place.

- I described the early March low as a "Susan Boyle" moment that took most market participants by surprise.

- But equities have now fully discounted the "second derivative recovery"; stocks are ahead of the real economy.

- There is little causality between advancing stock prices and an improving economic recovery.

- Should Treasury rates continue their rise, they will provide additional competition to equities by the third quarter of 2009.

- Near term, more tangible signs of economic traction are necessary before the markets move toward my 1,050 target for the S&P 500 by late summer.

- The trajectory of economic growth will be shallow and will likely disappoint the equity markets during the second half of 2009.

- Massive cost cutting has resulted in better than expected first-quarter 2009 profits, but it holds a downside as significant employee layoffs (and a still-weakened consumer) threaten the seeds of domestic economic growth over the intermediate term.

- Savings rates will remain high and personal consumption expenditures will remain low for an extended period of time.

- The specter of rising taxes and higher interest rates in late 2009/early 2010 will likely impact an already fragile recovery in the economy and in the markets.

- Summarily, the weakened state of the consumer is the most significant intermediate-term market/economic challenge. Rendering the market as near-term exposed and capping the upside, it is the single most important factor influencing the economy and markets.

- Where to invest? I reminded Sir Larry of one of Grandma Koufax's old Yiddish proverbs: "steep curve means big bank profits." I continue to be most attracted to bank stocks, with Bank of America (BAC) and SunTrust (STI) being my favorite names.

Position: Long BAC and STI