Kass: Super Mario Buffers

U.S. stocks are trading at about 14x consensus 2012 S&P 500 earnings expectations, seemingly attractive when compared to a five-decade average of slightly more than 15x and against historically low interest rates (risk premiums remain high). But given current (inflated and vulnerable) 65-year highs in corporate profit margins, downside risk to U.S. corporate profits in 2012-2013, the threat of a steepening fiscal cliff, a still-tepid muddle-through domestic recovery susceptible to external shocks, a destabilized eurozone destined for years of subpar economic growth, the likelihood (according to most polls) that the Democrats will regain the presidency and maintain control of the Senate, the increasing possibility of a harder landing in China, escalating hostilities in the Middle East (and its implications for rising oil prices), continued weak fund flows by individual investors into domestic equity funds and an increase in bullish sentiment, I see little chance of P/E expansion and a rising possibility of P/E contraction.

"Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

-- Frederic Bastiat, "That Which Is Seen and That Which Is Unseen"

From my perch, investors are not being traditional in their investing; they are instead depending and are guided by their reliance on effective stimulative policy (and a global easing put).

Risks are high of policy disappointment.

And as long as the eurozone fails to address formidable and persistent cyclical and structural economic growth concerns, sell the news.