April 30, 2014

Doug Kass is Long GM & Short Tesla

I'm short Tesla Motors and long General Motors. GM's shares have dropped from over $41 at the end of 2013 to $34.17 recently, down nearly 20% since the recall problem stemming from the ignition-switch malfunctions. It is serious, but GM is intelligently addressing its problem. 

It reminds me of BP's oil spill a few years ago. That, too, created a major investment opportunity. GM has taken important steps, including hiring Kenneth Feinberg, an accomplished attorney with a history of dealing with these sorts of events. And GM is taking a voluntary charge of more than $1 billion for repairs, warranty costs, and other restructuring charges. These events, although extremely unfortunate, have provided a fantastic entry point for the stock.

Market fair value is around 1650

Fair market value for S&P500 

Based on my analyses for different cases for growth, interest rates, and valuations, the S&P's fair market value is about 1650, 12% below where it traded recently.

Corporate Profits

The consensus is looking at $120 a share this year for the S&P 500. But these are anything but normal earnings. They are inflated because corporate profit margins are at a 60-year high, and they are 70% above the average of the past six decades. 

April 29, 2014

Values hard to find

Prices are high, and values are growing scarce. Warren Buffett, based on the words of Benjamin Graham, teaches us that price is what you pay, and value is what you get. 

And my buddy Howard Marks, at Oaktree Capital Management, says that investing success is not a function of what you buy—but what you pay. Last year, the S&P 500's earnings were up only about 5% or 6%, but the index advanced by more than 30%. The difference in performance between earnings and investment returns was an outsize increase of 25% in market valuations, as animal spirits were awakened. 

Since 1990, the average annual increase in the multiple has been 1%. So last year's valuation rise borrowed and has taken away from future market returns.

Article originally published on http://online.barrons.com/news/articles/SB50001424053111904703704579507354252255452 on April 26, 2014

April 9, 2014

Equities not attractive at present levels

I continue to hold to the view that the S&P 500 is fairly valued at approximately 1650 (or about 10% below current levels) and that the expected range in the S&P for the balance of the year should be between 1700 and 1925. With the S&P now at 1850, the risk (150 S&P points) exceeds the reward (75 S&P points) by a factor of 2 to 1.

While I expect equities to be down by 5% to 15% in 2014, I am uncertain as to the timing of a potential downturn.

At best I view 2014 as a year of subpar returns. At worst, a cyclical bear could lie around the corner.

April 7, 2014

History rhymes itself

For now I am positioned market-neutral, and I prefer being reactionary (rather than anticipatory), looking for Mr. Market's price action to give me some direction.

The major market risks include a downgrade in valuations (and P/E ratios), disappointing corporate profits (and profit margins), less vigorous global economic growth (which might be the message of the recent flattening in the yield curve) and the likely emergence of natural price discovery in the capital markets as the Fed begins to taper and ultimately raise interest rates.

The first quarter of 2014 is the first opening three-month period of a year since 2009 that the market has made no progress.

Market leadership is changing, often a worrisome signal.

Previously poorly performing large-cap conservative market sectors are strengthening just as the market leaders have slumped, which is reminiscent of the weakness in large-cap value in 1997-1999 and the firming up in early 2000 right before the market's schmeissing.

The upcoming reporting period might prove to be a market catalyst to the downside.

In terms of comparing the Marches (2009 and 2014), obviously generational bottoms occur only once a generation, but cyclical tops (and bottoms) are entirely other things -- they happen with frequency.

I conclude that stocks, which with the benefit of hindsight were at the generational bottom five years ago, might very well be mapping out a cyclical top in early 2014.

History doesn't repeat itself, but it sure as hell rhymes.

Via- http://www.thestreet.com/story/12572827/3/kass-from-generational-bottom-to-cyclical-top.html

Signs of a bear market

There are definitely speculative excesses in the market right now. I don’t think the whole market is in a bubble. But in biotech and some of the Internet stocks, there’s no question — we’ve certainly got bubble like symptoms. And the I.P.O. market looks like a bubble, and that’s serious, because that’s where the first signs of the bear market that started in 2000 began.

via http://www.nytimes.com/2014/03/30/business/in-some-ways-its-looking-like-1999-in-the-stock-market.html

April 3, 2014

Would not chase Banking stocks at the moment

Of late, while bank stocks have perked up, investors have been ditching short-term Treasury notes in favor of buying longer-term Treasury bonds.

Some strategists and commentators in the business media count financial stocks among their favorite groups. Over the past few days, I have presented some of the concerns mentioned in today's opening missive to these folks, but they push back and say that the sector is inexpensive.

To me, there are numerous reasons why the banking group will not experience a further valuation upgrade -- the most important being the impact of legislation on operating leverage and profit sources.

For the banking industry, after nearly suffocating the world's economies in 2007-2009, it is different this time. Mandated leverage of "only" 12x-15x compared to over 30x (in certain cases) back then presents less profit centers and opportunities for the industry in the present and future.

As a result of these observations/analysis, I would not chase the current strength in the banking sector, and I would consider paring down exposure in light of the sector's recent share price advance.

Article via http://www.thestreet.com/story/12542919/2/kass-time-to-make-a-withdrawal.html

April 2, 2014

Doug Kass on momentum trading

I recognize that there is a body of market participants who worship at the altar of price momentum.

Sometimes, however, when traders and investors blindly follow charts from the lower left to the upper right (hat tip Sir Denny Gartman!), those late to the party get burned, as has been the case recently with the biotech sector.

This brings me to the current infatuation with and rotation into money center bank stocks.

I own only two bank stocks: Citigroup and Northwest Bancshares.

Though the financial sector has recently perked up, one has to question the piling on.

I have spent my life following the financial sector -- I understand the group's profit dynamics.

Banking industry profits are basically a function of several basic variables: the level of loan demand, FICC activity (i.e., trading in products tied to interest rates, corporate credit, mortgages, currencies and commodities), the trend in credit quality, interest rates and the slope of the yield curve.

Loan demand remains tepid, growing slowly. 

FICC activity has contracted and has turned from being a tailwind to being a drag on bank industry profits.

Credit quality has been improving for three to four years.

Story via http://www.thestreet.com/story/12542919/1/kass-time-to-make-a-withdrawal.html