August 27, 2014

Could European weakness affect US stocks ?

The ECB has accomplished a monumental drop in sovereign debt yields through jawboning, but it is clearly behind the curve and should have already introduced quantitative easing.

The problem, as I see it, is that Europe's economic woes are both cyclical and secular.

What has been surprising to me is that as nearly 20% of the S&P 500's profits are dependent on Europe's economic condition, the U.S. stock market has been unaffected by lagging ECB policy and weakening macroeconomic data in the EU.

Indeed, the relative strength in the U.S. economy has attracted global investors to our market, seeing the U.S. markets as something of a safe haven, as money has outflowed from Europe.

A strong U.S. market benefiting from a weak Europe is something to be worried about, as it is a weak foundation for strength in equities. 

August 25, 2014

Doug Kass on Barry Bannister and talking heads

Stifel Nicolaus strategist Barry Bannister appeared on CNBC's Fast Money: Halftime Report today.

To begin with, it is great that CNBC had someone like Bannister on -- as talking heads who have been wrong are entitled to present their views. After all, if the business media only had those that were correct in view on their broadcasts, they would have had no available guests from 2008-2010. (during the Great Recession)

Apparently, Bannister has raised his 12-month S&P 500 price target from the lowest on the Street to the highest, an increase of 450 S&P points in his forecast, from 1850 to 2300.

Bannister was, not surprisingly, self-confident in view. Never did I hear the words "I was wrong" or "I don't know."

I don't even know what to say. Well, maybe I do know what to write. As a generalization, stay away from the self-confident talking heads who display little rigor and whose knowledge base is 3 miles long and an inch deep. They are often wrong but never in doubt.

Never rely on talking heads to determine your strategy and individual stock selections, and that includes me and Jim "El Capitan" Cramer. Always do your own homework. Get advice from multiple channels, and always consider always your risk profile and time frames.

Mr. Market humbles the best of us. When I am wrong, I try to say/write that I have been wrong (as I have been on my market call this year). When I don't know, I say it.

Originally published on

August 22, 2014

Love Muni Bonds - hate Social Media

My favored asset class is still closed-end municipal bond funds, even though they are up by over 15% year-to-date. Discounts to net asset values remain in the high-single-digit area,d and after-tax and taxable-equivalent returns remain attractive.

My least favorite asset class is generally many components of the social media sector.

Though I have a number of individual short positions on, only the most facile investors should be short during this anticipated market decline. Index fund plays such as shorting S&P 500 ETF (SPY) or PowerShares QQQ (QQQ) make the most sense. 

Short-selling requires recognition of the asymmetry of the exercise and that certain stocks (with high short interest) should mostly not be shorted because the pain of occasional short squeezes is not pleasant

August 21, 2014

Sprint Tmobile deal may suggest M&A drying up

The failed deals of Sprint and T-Mobile US and Twenty-First Century Fox and Time Warner --[shows] that the spirited M&A activity may be slowing. (No doubt slowing global growth will stall M&A.) Aggressive share repurchase activity, which has been a clear market prop (and is often a signpost of market tops), also might be in retreat as a result of weakening economies (over there) and evidence of a top in junk bond prices and a low in junk bond yields. So, too, might inversions induced takeovers, which have buoyed market speculation, be a thing of the past if the current administration has anything to do with it. 

For instance, last week Walgreen succumbed to the President's jawboning and dropped its inversion proposal.

Fiscal 2013's valuation surge (when profits rose by about 7% while the S&P 500 rose in value by over 30%) has, in my view, taken away from 2014-2015 investment returns. If the support of robust financial engineering diminishes in significance, valuations are exposed. 

August 20, 2014

Still believe in a down year for stocks

For many months I have projected a down year for stocks, anticipating a broad S&P 500 trading range of between 1700 and 1950 for 2014.

I am sticking to this forecast.

If I had to hazard a guess, I would say that a reasonable year-end price target for the S&P 500 would be in the 1825-1875 area. 

In terms of timing, I believe that we are now on the cusp of a textbook 10% correction from the 2014 highs.

The first test of the S&P 500's 200-day moving average since November 2012 (namely, into the 1860 area) seems possible by the fall.

I am assuming that a second and deeper test to about 1780, representing a 10% correction, will evolve a bit later in the year, which would also a near-perfect 23% Fibonacci retracement from the 2011 low.

Retail investor sentiment has grown optimistic, a contrarian signal. As this chart indicates, retail investors' cash allocation has dropped to the lowest level since 1999.

According to Merrill Lynch, institutional fund managers are also all in.

Complacency (a self-satisfied view that fails to consider negative outcomes) remains an ongoing threat to the bull market. 

I believe that the entrenched strategy of buying the dips and the notion that short-selling is a mug's game will likely be repudiated if my ursine market assessment is correct.

Risk assets are named so for a reason. 


August 19, 2014

Smart traders know history of markets

There was just a very good conversation on CNBC's "Squawk Box", which followed an interview with Gloom Boom & Doom Report's Marc Faber. In the discussion Joe Kernen expressed some concerns regarding certain asset prices while Scott "Judge" Wapner suggested that investors should play the hand that they are dealt and go with the upward trend.

It is true that the smart ones play the hand that is dealt. But they are also students of history and recognize that even the best get duped into believing that the music will never stop. This statement applies even more accurately with the (mis)behavior of retail traders and investors.

In 2007 to 2009 some of the greatest hedge-hoggers got badly tripped up by the belief that the contagion of sub-prime loans wouldn't upset the long economic boom and that there was so much liquidity that the global recovery of the mid-2000's would not be disrupted.

Today there are arguably numerous assets that are inflated from policy and have resulted in overvaluations' cousin -- complacency (self-satisfied views that do not consider adverse outcomes). Arguably, these include but are not restricted to select social media stocks, small-caps and midcaps, the U.S. note and bond markets, sovereign debt yields (particularly in peripheral countries of Europe), and junk bonds.

There is also a widespread belief that corporate profit margins are inflated, and there is confidence in the Fed's ability (and for that matter central bankers around the world) to land the economies safely.

Perhaps, as Benjamin Disraeli once wrote, "What we have learned from history is that we haven't learned from history."

August 18, 2014

Bond price 2014 update and predictions

Due to a change in outlook, I have reduced my large short bond exposure.

The yield on the U.S. 10-year Treasury note closed at 3.03% on Dec. 31, 2013.

As mentioned in my "15 Surprises for 2014," I started the year with an outside-of-consensus view that the bond yields would decline for all of the year, trading in a range of between 2.50% and 3.00%. 

My view was predicated on my projection that domestic real GDP growth would be well below expectations, at about 1.75% (or almost half that of the consensus), and that global growth would only rise by about 3%.

The 10-year yield has steadily dropped throughout 2014 and now stands at 2.395%, slightly below the lower end of my anticipated range, as signs of slowing global economic growth continue to weigh on bond yields around the world.

I had previously expected the 10-year U.S. note to close the year at around 2.75% to 3.00%. I would now reduce that year-end 2014 forecast to approximately 2.75%. While I still expect rates to rise over the balance of the year and into 2015, the climb in yields will start from a lower level than I anticipated and could descend to a lower yield as well (relative to my previous expectations).

This changed expectation lessens the near-term appeal of my short bond thesis, and I have reduced my large exposure to ProShares Short 20+ Year Treasury  (TBF) . 

As a result of this conclusion, I plan to add to all of my closed-end municipal bond funds on any weakness. 

August 11, 2014

Sell the rallies says Kass

The road to investment hell is paved with good intentions

After the largest weekly decline in nearly two years, the markets are now near-term oversold and a (weak) rally is possible in the next few days.

Similar to Pavlov's dog, market participants will be inculcated with the notion of buying the dips. You will hear this mantra from the business media, from investment strategists and even from your financial planners.

It is my view, however, that a more meaningful correction seems likely in the weeks and months ahead. 


August 7, 2014

Doug Kass: David Einhorn basket of shorts have done well

David Einhorn's basket of shorts has probably performed reasonably well, even as we are at record index highs. I have no idea what names he shorted, but LinkedIn and Twitter are down 15% and 26%, respectively, year-to-date, for example. Obviously, there are highfliers that have kept soaring, but I am guessing Greenlight has some solid winners in his basket.

August 6, 2014

Kass examines the Auto Industry and if its peaked

Growing evidence suggests that the automobile industry is about to pause/peak, just like the housing market did 12 to 18 months ago. Few observers are currently focused on this risk.

After turning bullish on the U.S. housing market in 2010, I turned bearish in 2012.

This proved correct as the residential real estate market has fizzled out over the past year based principally on a drop in affordability -- home prices have been artificially buoyed by new-era institutional investors at a time when real incomes have foundered -- and more stringent mortgage credit standards. Surprising many industry observers, these two factors dwarfed the salutary impact of lower mortgage rates.

The automobile industry, too, will hit a brick wall shortly.

In terms of the bigger picture, an extended pause in U.S. housing coupled with a peak in automobile demand will continue to weigh on domestic economic growth and raise questions as to whether the U.S. recovery has reached escape velocity.

Bottom line: I am no longer interested in buying Ford (F) and/or General Motors (GM) on weakness, and I would avoid the shares over the balance of 2014.

Read the detailed reasons for factors contributing to a stall in the auto industry sales at

August 5, 2014

Social Media stocks probably not good for long term investors

I always come back to the following thought when considering all these great new social media platforms: When was the last time you were deterred from trying something that was free? How is this basic issue not discussed more often?

I sure as hell hope people like your thing or service enough if all they have to do is type in their 20 character email address to use it.

If you are selling something at a loss or at cost I would hope you are beating the established players that the market expects to make a profit, right?

Ultimately, then, it all comes down to advertising. Advertising is driven by corporate and consumer spending. There will be some redirecting in advertising spending, but where are the new advertising dollars in a mature and stumbling-along economy going to come from? Real profits will have to come to support all these hundreds of billions of dollars in equity prices that early investors will look to cash out a realized return on in coming years.

A lot of things need to go well for the power of free to pay out all that it is promising.

Trade them if you like, but, with few exceptions, I would avoid investing in most social media stocks at current valuations.I intend to be on the other side of the power of free via, at the appropriate time, putting on outright shorts and long-dated puts in social media and new tech.

Just like when you are stuck at your desk and you get to the free lunch buffet late and there is nothing left but a few soggy waffle fries, long-term investors will likely be disappointed (and maybe even shocked) with returns from current levels.

I am not a believer in social media, new tech, sustainable profit margins of the cloud, the endless power of big data, the optimistic prospects for smart advertising and the like being profit machines for decades.

I am not even a believer that a majority of these companies will be profit machines, ever.


August 4, 2014

Doug Kass: Everybody loves free

When you give away something for free, the prospects for the number of things that you give away look damn good.

I have always marveled at the power of free. For example, it is amazing to behold the draw of free food -- even in the canyons of Wall Street's top banks managing directors and assistants swarm like seagulls to get a plate of wings and cold fries or greasy pizza. It is hard to deny that the free-ness isn't the driver.

Personally, my lunch standards definitely fall at a price of zero compared to full price.