October 30, 2013

Doug Kass: Id Pay $32.50 a Share for Twitter

Hedge-fund manager Doug Kass, once a Twitter quitter, says he’s now “manifestly bullish” on the microblogging platform.

“It is my view that Twitter’s shares will likely double in the first month of trading — or maybe sooner,” Mr. Kass, president of Seabreeze Partners Management Inc., said in an email.
No profits? No problem.
“Given the lack of competition in its space, Twitter’s current monopolistic market position suggests a likely quick acceptance as an “anointed stock,” replicating the action of Internet service provider America Online (AOL) in the early 1990s and Internet goods seller Amazon (AMZN) in the mid to late 1990s. As such, Twitter’s share price may not be required, as most stocks are, to achieve visibility of early profits. Indeed, pegging the company’s share price (similar to AOL and Amazon back in the day) to the traditional metrics of profits and cash flows will not likely be a headwind to appreciation over the next few years, as its dominant market share and top-line growth will be conspicuous.”
Mr. Kass, a market commentator, who holds a prominent place in the Twitterverse for his investing ideas and broad-market calls,  said he was quitting Twitter back in July. At the time, he cited the constant criticism and skepticism he faced on a daily basis from his more than 60,000 followers, claiming there were “too many haters” on the social-media site.

Kass: Fair Market Value Update 2.0

"We believe that short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."

-- Warren Buffett's letter to Berkshire Hathaway (BRK.A)/ (BRK.B) shareholders, 1980

Forecasting prospective market levels out 12 months is an imprecise art form that requires probabilistic decision making, using imperfect information about an inherently unknowable future. Forecasting market levels out beyond 12 months is, to me, more a function of one's philosophy than an investment prediction.

But try we must (especially over the next 12 months) even despite The Oracle's protestations. It has been nearly nine months since I last published my estimate of the S&P 500's fair market value, but I am going to give it a go again this morning (with the insistence from subscriber Renato, who sent me a nice note recently).

Remembering the phrase that if you have to forecast, forecast often, I will attempt to update my fair market value every month or as circumstances change. Early this year, I expressed the view that a domestic economy incapable of reaching escape velocity would produce a challenging earnings landscape. This, to me, represented the principal enemy to the U.S. stock market for 2013 and formed the basis for my four core scenarios (economic, earnings and market valuation) that yielded my fair market value calculation.

Anemic top- and bottom- line growth in corporate sales and profits were by no means the only factors that contributed to my valuation concerns this year as was the growing evidence that aggressive monetary policy is losing its effectiveness and that our leaders are failing to address our deep-seated fiscal issues. Instead (and out of necessity), our authorities placed ever more pressure on our monetary policymakers to bear the responsibility of bringing our domestic economy out of its doldrums. After nearly five years, the results barely met a passing grade and uncovered the depth of our structural headwinds that have been ignored for so many years (e.g., disequilibrium in the jobs market, screwflation of the middle class, financial repression penalizing the savings class, etc.), and once again, the Fed has overestimated U.S. economic growth and the positive impact of trickle-down economics (through the lifting of asset prices).

Forecasting is the art of saying what will happen and then explaining why it didn't. While my fundamental observations (and headwinds) still seem materially correct, my assumptions for a contraction in P/E multiples were wrong-footed as were my market conclusions and S&P price targets.

October 29, 2013

Sell Stocks, market top for the year

It remains my view that stocks have topped for the year and that stocks should now be sold.

Two other asset classes soared -- namely gold (up $35 an ounce) and bonds (the ProShares UltraShort 20+ Year Treasury (TBT) dropped by $2 a share as the 10-year yield fell by 5 basis points, to 2.62%) -- signaling slowing economic growth and the prospects for a weakening in corporate sales/profits.

Meanwhile the U.S. dollar is taking its worse licking in a month and is moving back toward the February 2013 lows.

Below are some of the reasons behind my negative market outlook.

Market participants might have been somewhat naive in yesterday's celebration, as it is clear that last night's agreement again failed to incorporate any tax or entitlement reform as part of the package to a debt-ceiling extension and a clean continuing resolution. More importantly, it is not likely that the extra time bought will be used productively to achieve a grand bargain in 2014. With our snollygoster government officials simply kicking the can down the road and failing to address our growing debt problem, a normalization in interest rates coupled with U.S. demographics (the aging of our population will lift entitlement spending dramatically) will likely bring the problem back into investors' focus sooner than later.

Indeed, it is unlikely that there will ever be a grand bargain with the animosity between the two parties. More political partisanship lies ahead - indeed, the schism between the Republicans and Democrats will likely deepen as we move ever closer to the important elections in November 2014, especially with the House of Representatives up for grabs.

October 6, 2013

Kass: Shutdown Showdown - TheStreet.com

High theatre lies ahead.The continuing-resolution and budget issues have merged into one.A twelfth-hour compromise on Oct. 16-Oct. 17 seems likely.Given data-release issues, a taper is not probable until March 2014.

It is clear that the government shutdown, continuing-resolution and debt-ceiling issues have now merged into one problem that will require one solution.

My Washington, D.C., contacts suggest that there is currently a stalemate, as neither side is yet talking to the other side.

With the debt-ceiling limit not in place until Oct. 17, it seems almost inevitable that the government shutdown could last another 13 to 14 days until an on-the-brink decision is made on the debt ceiling (see outcome No. 4 below).

Thus far, the stock market has meandered, and investors are complacent. While the DJIA and S&P 500 are slightly off their highs, the Nasdaq and Russell 2000 are basically at all-time highs. In other words, to date, the stock market is not placing pressure or forcing action in Washington. My explanation for the lack of market movement to the downside is that the broad "Bernanke put" seems to have (thus far) protected the markets from much downside.

At this point, President Obama is leaving for a trip on Sunday, and he plans to return about four days later. So, nothing will likely happen during next week. There are several possible outcomes to break the logjam in Washington, D.C. between now and Oct. 17:

1. A crack in the U.S. stock market could force action. (This is always a possibility.)
2. Boehner blinks. (A small possibility.)
3. A partial solution is offered if the debt ceiling is breached in which either Treasury payments would be prioritized or the president issues an executive order to lift the debt ceiling. (A low probability.)
4. A late-hour compromise on Oct. 16. (The highest probability and likely outcome.)

The consequences of breaching the debt limit would result in a dire outcome. It seems likely that debate will go down to the wire, but a compromise will be made at the last minute.

It is important to recognize that the current shutdown will bring a halt to the release of government economic data. If I am correct that the decision comes close to Oct. 17, the economic data vacuum will make it difficult for the Fed to properly assess the economic condition on a timely basis.