Basis For Better Market Seems Likely

[boont]

Doug Kass, Street.Com

A combination of a higher U.S. dollar and Japanese yen, the vortex of selling and unwinding of long commodities positions (by pension plans and endowments, corporations, hedge funds and managed commodity funds) and renewed evidence of a deepening recession have served to accelerate the decline in commodity prices.

According to the lynx-eyed Denny "The Man" Gartman the DJ-AIG Index is "down a stunning 18.6%, and the month is only three-quarters over! For the year, the index is down 26.2%."

Remarkably, the CRB Index, which includes energy product prices, is now back to its late 2004 level. The CRB Raw Materials Index, which excludes energy product prices, is back to its level last seen in summer 2006.

In the aggregate, the energy, materials and related sectors only account for about 25% of the S&P 500's profit, so the remaining 75% of the S&P is poised to benefit from the cost relief associated with lower commodities prices. This, combined with the continued tame year-over-year change in unit labor costs (of around 1%), will produce a marked deceleration in headline and core inflation.

While the outlook for top-line revenue growth in 2009-2010 remains problematic, the above cost trends will, in the fullness of time, act as a headwind to a sharp mean regression in corporate profit margins.

For now, a bull market in fear, concerns regarding a "Great Recession" and the continued indigestion in the hedge fund and fund of funds industries remain front and center. Over time, however, the basis of an improving intermediate-term market picture seems likely to reassume center stage based on the following considerations:

* Inflation is ebbing.

* The Fed is and will remain market-friendly.

* The credit markets are thawing.

* Fiscal stimulus appears on the way.

* Financial institutions' capital bases are being shored up (posthaste!).

* Stock valuations are subdued.

* Investor sentiment is at record negative levels.

* Forced selling by executives, individuals, hedge funds and fund of funds has historically marked a market bottom.

Color me uncertain about the market's near-term outlook but more bullish about the market's intermediate-term outlook.