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Kass: 'I Just Can't Be That Negative Now'

Tuesday, 24 Aug 2010 | 1:44 PM ET

Despite the Dow Jones Industrial Average having briefly dipped below 10,000 for the first time in seven weeks and being down as much as 183 points in the day, famed strategist Douglas Kass said Tuesday he "just can't be that negative now."

That's largely because Kass thinks the doom-sayers—such as economist David Rosenberg of Gluskin Scheff, who said the economy is in a depression, not a recession—are missing key points.

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"If you look at cyclical areas of the economy ... It’s hard for me to expect material economic weakness in the second half of this year and into 2011," said Kass, founder and president of Seabreeze Partners. (In other words, he expects the economy to expand, although modestly.)

So does Joe Terranova of Vitrus Investment Partners. He points to the strength in manufacturing and corporate earnings. The rate at which the economy expands remains to be seen, but one thing is for sure - if the economy can grow - history is on the side of stock market investors such as Kass and Terranova.

Quarterly real gross domestic product growth rates of 0-1 percent have produced a quarterly return on the Standard & Poor's 500 Index of more than 2 percent and "that's pretty damn good," said Kass. Even when the economy contracts in a given quarter, Kass said the S&P is 50 percent likely to increase in value by more than 9 percent.

It does seem Kass has a knack for reading the market. Less than a week before the S&P 500 hit a generational low of 676 on March 9, 2009, Kass went on CNBC and predicted the bottom. On July 6, 2010, he said the market had made its lows for the year and so far, that has also proved to be true.

The money manager said he is also now more optimistic on financial names. On Friday, Kass revealed on "Fast Money" that he liked the space and had bought "a lot" of Citigroup and Bank of America. The latter hit a new 52-week low Tuesday, despite insider buying from CEO Brian Moynihan, who bought 30,000 shares of the Charlotte, N.C.-based company on Monday.

Financial names remain intact, he explained, because we'll see a moderately expanding economy. The cyclical areas of the economy, like the automotive industry and CAPEX, are now so low relative to GDP and the trendline relationship to GDP, that "it's hard to see a material economic weakness in 2011."

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Kass said he's more positive on stocks and less so on fixed income. The market has already discounted possibility of a double-dip recession and lower S&P earnings for next year, he explained. The bond market, however, seems to be discounting something worse. The 10-Year Treasury bond usually trades at 300 basis points above real GDP. With a 2.5 percent yield, the Federal Reserve is discounting a recession.

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CALL THE CLOSE

"I think you can buy some calls here to protect your shorts," said Brian Kelly of Kanundrum Capital.

"I think corporate balance sheets went out," said Joe Terranova of Vitrus Investment Partners.

Pete Najarian, co-founder of optionMONSTER.com, is keeping an eye on the volatility index. He notes that it's very high right now and recommends selling if it gets to 28.

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Trader disclosure: On August 24, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian is long (HPQ) calls; Pete Najarian is long (TCK); Pete Najarian is long (SCCO); Pete Najarian is long (CNI); Pete Najarian is long (V) call spreads; Pete Najarian is long (WDC) calls; Pete Najarian is long (STX) calls; Pete Najarian is long (AKAM) call spread; Pete Najarian is long (DD); Pete Najarian is long (X); Cortes is long (FCX); Cortes is long (SFD); Cortes is long (BHP); Cortes is long Crude Oil; Cortes is long Australian Dollars; Terranova owns (AXP), (C), (BMO), (V), (POT), (OXY), (GLD), (FCX), (APA), (SU), (XBI), (MRVL), (TBT)

For Brian Kelly
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (SLY)
Accounts managed by Kanundrum Capital own U.S. Dollar
Accounts managed by Kanundrum Capital own Swiss Franc
Accounts managed by Kanundrum Capital own (TLT)
Accounts managed by Kanundrum Capital are short (IAI)
Accounts managed by Kanundrum Capital are short (XLF)
Accounts managed by Kanundrum Capital are short (MCO)
Accounts managed by Kanundrum Capital are short (RTH)
Accounts managed by Kanundrum Capital are short (AFL)
Accounts managed by Kanundrum Capital are short the Mexican Peso

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (DRYS)
Virtus Investment Partners own more than 1% of (EXR)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (XLK)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)

CNBC.com with wires.

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