market folly

Doug Kass' recent piece, 'Fear and Loathing on Wall Street,' highlights some excellent points. In it, he creates a list of things the markets need to see to begin their return to normality:

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• Bank balance sheets must be recapitalized. We await a bank rescue package in the week ahead.
• Bank lending must be restored. Bank lending standards remain tight. For now, we are in a liquidity trap.
• Financial stocks' performance must improve. We are not yet there. Financials' performance is still drek.
• Commodity prices must rise as confirmation of worldwide economic growth. There has been some recent evidence of higher commodities, but it's still inconclusive.
• Credit spreads and credit availability must improve. While credit spreads are improving, the yield curve is rising and interest rates have rebounded, the transmission of credit remains poor. Time will tell whether monetary and fiscal policies will serve to unclog credit.
• We need evidence of a bottom in the economy, housing markets and housing prices. The economy's downturn continues apace. Months of inventory of unsold homes are declining and so are mortgage rates, but home prices have yet to stabilize despite an improvement in affordability indices.
• We also need evidence of more favorable reactions to disappointing earnings and weak guidance. We are not yet there, but this will tell us a lot about the state of the stock market's discounting process.
• Emerging markets must improve. China's economy (PMI and retail sales) and the performance of its year-to-date stock market have turned decidedly more constructive.
• Market volatility must decline. The world's stock markets remain more volatile than a Mexican jumping bean.
• Hedge fund and mutual fund redemptions must ease. While I am comfortable in writing that most of the forced redemptions have likely passed, we will find out more over the next few months. Regardless, the disintermediation and disarray of hedge funds and fund of funds have a ways to go.
• A marginal buyer must emerge. Pension funds seem to be the likely marginal buyer as they reallocate out of fixed income into equities, but we have not yet seen the emergence of this trend."