January 30, 2014

China slowdown could affect markets

China's economic growth is slowing. For now we do not yet know for sure whether that slowdown will be importantly impactful to global growth and, in turn, global equities. The more important point is that the rampant growth in municipal and corporate debt in China has delivered a potentially lethal and quantum increase of nonperforming loans in the Chinese banking system and shadow banking system. This has constrained lending and will likely translate into slowing economic growth in the region.

What will China do to avoid this slowdown? The public infrastructure build out option is a nonstarter, as there is already too much of it. The same applies to the private sector infrastructure complex.

What China needs is to shift from export/infrastructure and debt-driven growth to consumption-based growth and reform. However, with the banks and other financial intermediaries constrained, a tough transition lies ahead.

On one hand the Chinese growth challenge and credit risks are issues/problem that are well known to investors, and the bulls argue that this has been discounted, as China's stock market has been among the worst in the world over the past 12-15 months. "The China Problem," to many in the consensus, was one of the concerns widely held as we entered into 2014. 

On the other hand, the ramifications of a Chinese economic slowdown and a potential credit meltdown may have not been discounted by the U.S. stock market and other global equity markets.

January 28, 2014

Cash position for now

I am materially in cash now, a position with which I feel comfortable and that allows me to trade opportunistically in the weeks ahead.

I am embracing panic and look at it as opportunity. I remain of the intermediate-term view that stocks will decline by between 5% and 15% in 2014 and that bonds will outperform stocks by a reasonably wide amount.

It is important to emphasize that regardless of view (mine is negative), one can be long short term with an intermediate-term negative view and/or short short term with an intermediate-term positive view.

January 27, 2014

Doug Kass on talking heads on tv

This week is an example of what happens when everybody is in the pool and Mr. Market climbs a wall of complacency.

Hopefully, the same talking heads who have been (confidently) uber bullish now turn (confidently) uber bearish. With some exceptions, remember some of those talking heads are a mile wide in their knowledge but only an inch or so deep. It is the nature of those who are spending most of their time pontificating in the media, as there is little time in the day to do the real analytical work.

As we often learn, relying on price momentum as a predictor of future stock prices (the charts) can be a recipe for success or disaster. To me, fundamentals are the truth -- less so price (over the intermediate term).

Past prices/charts tell us where stocks have been, not where they are going.

Another lesson is to be skeptical of those of a self-confident nature who actually believe (and lead you to believe) that there are well-defined risk ranges, moving averages, fractals and special sauce that give them an upper hand in future stock price direction.

via http://www.thestreet.com/story/12270238/2/importance-of-fundamentals-chinas-slowing-economy-best-of-kass.html

January 22, 2014

Doug Kass: 15 investment ideas for 2014

Surprise No. 1: Slowing global economic growth and fears of stagflation emerge.
Strategy: Buy index puts, sell index calls, or purchase inverse ETFs.

Surprise No. 2: Corporate profits disappoint.
Strategy: Buy index puts, sell index calls, or purchase inverse ETFs.

Surprise No. 3: Stock prices and P/E multiples decline.
Strategy: Buy index puts, sell index calls, or purchase inverse ETFs.

Surprise No. 4: Bonds outperform stocks.

Surprise No. 5: A number of major surprises affect individual stocks and sectors.
Strategy: Buy C/short BAC pair trade, short SBUX, short 3D Systems (DDD), short AAPL calls, buy AMZN common and calls, buy GS, buy AAMC, buy MONIF, short GM, buy Consumer Staples Select Sector SPDR (XLP), short Consumer Discretionary Select Sector SPDR (XLY) and Market Vectors Retail ETF (RTH), and short QQQ.

Surprise No. 6: Volkswagen AG acquires Tesla Motors.

Surprise No. 7: Twitter's shares fall by 70% as a disruptive competitor appears.
Strategy: Short Twitter (TWTR) common and buy TWTR puts.

Surprise No. 8: Buffett names successor.

Surprise No. 9: Bitcoin becomes a roller coaster.
Strategy: Buy and then short bitcoins

Surprise No. 10: The Republican Party gains control of the Senate and maintains control of the House.
Strategy: Buy everything.

Surprise No. 11: Hillary Clinton bows out as a presidential candidate.

Armed militia
Surprise No. 12: Social unrest and riots appear in the U.S.

Surprise No. 13: Africa becomes a new hotbed of turmoil and South Africa precipitates an emerging debt crisis.
Strategy: Short iShares MSCI South Africa ETF (EZA), iShares MSCI Emerging Markets ETF (EEM) and Financial Select Sector SPDR (XLF).

Surprise No. 14: The next big thing? A marijuana IPO rises by more than 400% on its first day of trading.

Surprise No. 15: An escalation of friction between China and Japan hints at war-like behavior between the two countries.
Strategy: Short iShares China Large-Cap ETF (FXI) and SPDR S&P 500 ETF Trust (SPY).

January 20, 2014

Why Doug Kass is downbeat on 2014

There are numerous reasons for my downbeat theme this year. Below are a few (in no order of importance):

-Corporate profit margins (70% above historical averages) are stretched to 70-year highs, so earnings are exposed.

-Second-half 2013 strength in domestic economic growth has been boosted by nonrecurring inventory accumulation. Some more recent signs (e.g., automobile sales, retail spending and housing data) suggest a deceleration in growth may lie ahead.

-The baton exchange from Helicopter Ben to Whirlybird Janet could be unkind to the markets. On average, a change in the Fed chair has resulted in about a 7% drop in the major stock indices.

-Quantitative easing may not be a continued tailwind for stocks. As Peter Boockvar wrote, "QE doesn't create a safer world, it is just a temporary high and the danger always comes on the flip side as previously seen.... QE puts beer goggles on investors by creating a line of sight where everything looks good, but the Fed's current plan is to end it by year-end."

-Sentiment measures are elevated to historically bullish levels. This is seen not only in the disparity between bulls and bears (in the popular surveys) but also manifested in the third-highest margin debt to GDP in history.

-Valuations (P/E ratios) rose by nearly 25% in 2013 vs. only 2% annually since the late-1980s.

-The Shiller P/E ratio is at or near historic highs (excluding the bubble of the late-1990s).
According to JPMorgan, the S&P 500 is now more expensive on a forward P/E basis than it was at its previous peak in October 2007.

-Interest rates might pose more of a threat than is generally viewed. The rose-colored glasses being worn by investors might be cleared in the year ahead, as the withdrawal from QE and low rates might be harsher.

-A year ago, market enthusiasm was muted. Today there are no cautionary forecasts for the S&P for the next 12 months.

via- http://www.thestreet.com/story/12210901/4/doug-kass-15-surprises-for-2014-part-1.html

January 18, 2014

Often the crowd is wrong

Since the mid-1990s, Wall Street research has deteriorated in quantity and quality (due to competition for human capital at hedge funds, brokerage industry consolidation and former New York Attorney General Eliot Spitzer-initiated reforms) and remains, more than ever, maintenance-oriented, conventional and groupthink (or groupstink, as I prefer to call it). Mainstream and consensus expectations are just that, and in most cases, they are deeply embedded into today's stock prices.

It has been said that if life were predictable, it would cease to be life, so if I succeed in making you think (and possibly position) for outlier events, then my endeavor has been worthwhile.

Nothing is more obstinate than a fashionable consensus, and my annual exercise recognizes that over the course of time, conventional wisdom is often wrong.

As a society (and as investors), we are consistently bamboozled by appearance and consensus.

Too often, we are played as suckers, as we just accept the trend, momentum and/or the superficial as certain truth without a shred of criticism. Just look at those who bought into the success of Enron, Saddam Hussein's weapons of mass destruction, the heroic home-run production of steroid-laced Major League Baseball players Barry Bonds and Mark McGwire, the financial supermarket concept at what was once the largest money center bank Citigroup (C), the uninterrupted profit growth at Fannie Mae and Freddie Mac, housing's new paradigm (in the mid-2000s) of noncyclical growth and ever-rising home prices, the uncompromising principles of former New York Governor Eliot Spitzer, the morality of other politicians (e.g., John Edwards, John Ensign and Larry Craig), the consistency of Bernie Madoff's investment returns (and those of other hucksters) and the clean-cut image of Tiger Woods.

via http://www.thestreet.com/story/12210901/2/doug-kass-15-surprises-for-2014-part-1.html

January 16, 2014

Doug Kass predictions for 2014

Watch Doug Kass youtube video for his predictions for year 2014

January 14, 2014

Almost everyone is Bullish right now

Virtually all strategists are now self-confident bulls, as gloom-and-doom forecasts have all but disappeared. After more than a year with no reactions of 10% or more, any future setbacks are being viewed by the consensus as "bumps in the road" and as opportunities to buy because (after the correction(s)) we will be "up up and away."

After missing the 25% rise in P/E ratios in 2013, the consensus also assumes that valuations will expand again in 2014. (Note: The average P/E ratio has increased by about 2% per year over the last 25 years.)

January 13, 2014

Doug Kass says he was wrong in 2013

Two years ago, my 2012 surprise list had an out-of-consensus positive tone to it, but 2013's list was noticeably downbeat relative to the general expectations.

I specifically called for a stock market top in early 2013, which couldn't have been further from last year's reality, as January proved to be the market's nadir. The S&P closed at its high on the last day of the year and exhibited its largest yearly advance since 1997. (I steadily increased my fair market value calculation throughout the year, and, at last count, I concluded that the S&P 500's fair market value was approximately 1645.)

January 3, 2014

Jim Cramer's dad inspired him to save money

Jim Cramer has some inspirational words for us all. He says, "I never quit saving, How poor was I, yet I still put away money. On the advice of my father I opened an account at Fidelity with the Magellan fund and would contribute a little every week."

The Mad Money host hit rock bottom early in his career - at the time he was working as a journalist and making next to nothing. After a thief broke into his modest California apartment and stole absolutely everything, Cramer had nothing left and nowhere to go. Cramer was living out of his car.

"I was living hand to mouth, and people would take me in now and then so I could get a shower, change, get a good night's sleep," he explained. At that time in his life, it was a struggle for Cramer just to stay afloat; just to stay healthy. Yet all the while – he continued to put away a little money.

January 1, 2014

Doug Kass thanks Jim Cramer

Since I started writing for Jim Cramer, we have not only dealt with the market's ups and downs, but we have shared some of life's experiences together.

I have defended Jimmy. I have agreed and disagreed with him, all the while with maximum respect for Jim as a businessman, an investor, a friend, an author, a media figure and, most importantly, as a dad.

Jim has a new book out this month: Get Rich Carefully!, and I know he is especially excited about it.

Over the past few years, the man who doesn't want to make friends, but does want to make you money, has introduced the words "skeedaddy" and "booyah" and made them part of the investment world's vernacular. He has graced the cover of national magazines and has become an iconic figure. As such, he stands out, night after night, with non-stop enthusiasm and hard work , giving his best shot in dispensing advice in a reasoned and well-researched manner.

Being such a public persona with strong opinions, he is often the target of criticism (especially on Twitter these days). I admire his work ethic and the way he accepts mostly undeserved criticism like a man and the manner in which he fights back with facts and figures, with such an immense and rich reservoir of financial history and knowledge.

I have learned to appreciate Jim as an investment professional and, more importantly, as a man and as a dad. His drive for perfection has resulted in huge sacrifices. But you wouldn't know it because he doesn't say it. Jim could easily be reaping the benefits of managing a multibillion-dollar hedge fund today, earning an annual income of tens of millions (if not more). Instead, he strives to educate the individual investor.

How many of us would choose the route that Jim has unselfishly traveled?

via: http://www.thestreet.com/story/12174558/1/kass-jim-cramers-pool.html