I reported two weeks ago on “Doug Kass’s 15 sur­prises for 2012”. Hedge fund man­ager Kass of Seabreeze Part­ners is a famil­iar and respected name on this blog, and read­ers are always keen to learn his views. I there­fore thought his 10 rea­sons for the U.S. stock mar­ket to rally might also be of inter­est. The full arti­cle appears on The Street and I urge you to read it in its entirety. A sum­mary is pro­vided below.

Kass said: “I have rarely been accused of being an economic/stock mar­ket cheer­leader, but I believe the U.S. stock mar­ket will sur­prise to the upside in the near term for the fol­low­ing fun­da­men­tal, tech­ni­cal and sen­ti­ment reasons:”

1. Poorly posi­tioned mar­ket participants

Watch not what they say; watch what they do. And the dom­i­nant investors (retail and institutional/hedge funds) are under­in­vested and/or skewed dis­pro­por­tion­ately in a “flight to safety” into fixed income over equities.

2. Tech­ni­cal breakout

[Break­ing out of the recent trad­ing range] will encour­age tech­ni­cally based chasers of mar­ket momentum.

3. Big rota­tion

Don’t mar­ket his­to­ri­ans tell us that a bet­ter tone for the finan­cial sec­tor is a nec­es­sary con­di­tion and reagent for a bet­ter stock mar­ket? Yet that turn­around of the finan­cial con­tin­ues to be treated with skep­ti­cism by most.

4. Mis­placed pre­oc­cu­pa­tion with Europe: The Euro­pean sit­u­a­tion has improved. Timid pol­icy response is mov­ing toward “shock and awe” — yet investors are still scared to wake up every morn­ing to ris­ing sov­er­eign bond yields, and that fear is keep­ing them sidelined.

5. Recent earn­ings cuts discounted

Memo to neg­a­tive strate­gists: The mar­ket has likely already dis­counted (with a 15% decline in price-to-earnings ratios in 2011) a dimin­ished prof­its outlook.

6. Likely régime change in the U.S.

Though the odds of a Repub­li­can pres­i­dency have improved, most investors are ignor­ing this “mar­ket friendly” devel­op­ment that could occur within the next 12 months.

7. Bet­ter eco­nomic data

The prospects of a self-sustaining U.S. eco­nomic recov­ery have been more solid­i­fied in the past six weeks. (I con­tinue to be of the view that ECRI’s Lak­sh­man Achuthan’s reces­sion call is wrong-footed.)

8. Con­tained geopo­lit­i­cal risks

We should mon­i­tor but not let geopo­lit­i­cal issues pre­dom­i­nate our invest­ing thinking.

9. Market-friendly rates

Low inter­est rates around the world in 2012–13 mean that any model based on inter­est rates results in a very inex­pen­sive mar­ket val­u­a­tion. (I con­tinue to expect a mas­sive real­lo­ca­tion trade out of bonds and into stocks.)

10. Lower volatil­ity

Crazy mar­ket swings scared off and alien­ated investors over the past year. Shouldn’t the recent col­lapse in volatil­ity help bring back investor confidence?

Source: Doug Kass, The Street, Jan­u­ary 10, 2012.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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