October 29, 2014

Doug Kass sold majority of his Monitise shares

 I have sold most of my Monitise (MONIF) shares, principally as a result of the 15% advance (albeit from the lows) after Omega Advisors' Lee Cooperman defended the stock on [CNBC Show]"Fast Money Halftime".

I have consistently viewed Monitise as a potentially important and disruptive player in the mobile payments and banking industries. Given its leading market position, strong partners IBM , MasterCard and others, thoughtful stakeholders (Omega, Legg Mason, etc.)  and prospects for the potential of a rapid trajectory of sales/profits/cash flow, the ingredients for a home-run stock seemed to have been in place.

I have also characterized Monitise as speculative investment and said the stock should be appropriately weighted in portfolios. The company lives in a rapidly changing and innovative space in which the competitive landscape has the potential for an overnight transformation. Monitise is the back end of the solution in a game-changing industry and there is always the potential that its role will yield less returns than generally expected (in terms of average revenue per customer). 

The longer-term investment case for Monitise remains intact. But given that run-up, the news vacuum until the first half of 2015, the likelihood of persistent tax selling over the balance of the year and the aforementioned unpredictable stock market conditions, I believe (though I might be wrong) I will be able to replace my sold shares with lower-priced stock in the months ahead. 

VIA http://www.thestreet.com/story/12927581/3/where-the-sp-500-is-headed-why-i-sold-monitise-best-of-kass.html

October 27, 2014

May have seen a short term bottom in markets

There are several conflicting market tales that seem to have developed.

On the one hand, the short-term market cycle has likely bottomed and I don't expect last week's downside to be reclaimed this year. On the other hand, the S&P 500 index has likely topped for the year. 

To me, the above divergences suggest that, in all likelihood, The Ali Blah Blah Top is in place for the balance of 2014 and we could be entering a continued period of market volatility over the next few months. 

Getting more specific (and recognizing the risks inherent with such a precision of forecast), if I was forced to guess, the S&P is at or near the likely high for the next two months and that 1850-1875 (on the S&P) might be the low end of the range.  

Using a longer three-to-four-month horizon, the S&P (after the 120-point rise from last Thursday morning) has an unfavorable reward vs. risk, with a potential high at 2000-2025 and a low of 1800-1850. 


October 20, 2014

Too late to sell, too early to buy

In his column on The Street, Doug Kass outlines his reasons for why Ebola, Oil prices falling, ISIS in middle east etc.. have created a higher risk for a recession.

Over the last two months I have argued that the U.S. stock market may have moved from a Generation Low to a Cyclical Top.

The reasons for my market concerns run deep as I see multiple peaks. I have argued that investors should be sellers on rallies.

By contrast, the (very much) consensus view is that the five-year Bull Market in the U.S. stock market can only be interrupted by a sharp business downturn or recession.

Those observers seem to be looking at many  traditional (and historically accurate) leading factors that are currently not signaling such a slowdown and downturn, but rather represent to them a disconnect between the global equity markets and likely global economic growth.  

As such, they argue, the recent market decline is just another opportunity to buy. 

The odds of a recession in 2015-16, according to many that look at those indicators, are less than 15%, maybe even lower.

My Contrary View of Impending Economic Weakness

I would argue that it is different this time and the risks of recession have increased.

-    The Yield Curve May Not Invert Prior to a Recession
-    Stock Prices Appear to Be Issuing Economic Warnings
-    The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
-    The Signal of the Oil Markets Is Negative
-    Expanding Geopolitical Risks Raise Risks 
-    Growing Health Concerns Could Dent Economic Growth 
-    The Growing Dominance of the  U.S. Could Have a Negative Twist  

Bottom Line: Based on non-traditional indicators, economic risks are rising.

To this observer, the risks of recession are increasing relative to market expectations.

At the very least the market's tranquility, demonstrated almost consistently in the five-year bull market, is over.

At the worst, a recession looms over the horizon, an economic downturn that almost no one is anticipating as new and more influential and relevant factors are pressuring global economic growth.

Given my continued market and economic concerns, it is probably too late to sell and too early to buy this market.

Originally published on Oct 15, 2014 

October 13, 2014

Oil could move below cost of production

It is hard, if not impossible, to imagine a world without OPEC. But just as we are constantly trying to find Black Swans before they appear, if OPEC ceases to function or its influence wanes, it could be a possible "Golden Swan" that no one sees coming. The ramifications of this would be profoundly positive for global economies  and markets.

Powerful forces are now forming to suggest OPEC's days are numbered and that, at the very least, its impact will wane.

 -   The Growing Influence of the U.S. on Energy Production -- The U.S., through hydraulic fracking, has become a major oil producer and our imports have fallen, helped by secular efficiency in consuming energy.

 -   Subpar Global Economic Growth -- A global slowdown (influenced by structural headwinds) has served to reduce oil demand, particularly in Europe and China. Oil is priced in U.S. dollars and the dollar rise has made oil more expensive and has moderated consumption.

 -   Leading Suppliers Are Raising Production -- A few major producers are motivated to increase production and steal share rather than cut production (the usual OPEC strategy in times of slack demand). Saudi Arabia did so last week.  Stability of its budget requires maintaining oil revenue (at about $90 a barrel on previous production) rather than cutting it. If prices fall below $90 a barrel, the Saudis indicated last week they will cut price to maintain revenue, worsening any supply glut.

-    Russia's Economic Woes -- Russia (not a member of OPEC) has deepening financial troubles. Oil is its principal export. Its currency is falling and its oil is priced in U.S. dollars. Logic suggests Russia will desperately raise production.

-    Others Have Issues -- Three producers with excess capacity have issues. Iran and Iraq are Shiite entities. If the Saudis surrender share to them, it will help their cause. This seems unlikely. The Arab Spring has left Libya in shambles and it is producing to rebuild.

-    Venezuela Is a Wild Card -- Venezuela could usually be counted on to withhold production. Due to its inflation and recession that is unlikely to happen.

It looks increasingly possible that OPEC has wandered into a perfect storm. 

For one reason or another, members are unlikely to cooperate in withholding production to maintain price. 

Over the next 1-2 years the price of oil may move  below the marginal cost of production. This could translate into sharply lower energy prices and consequently higher consumer real incomes (and spending) than anyone is forecasting. IF this happens, the overall market should be ignited to the upside, with particular strength in the consumer and transportation sectors and with weakness seen in energy production and exploration issues. The relatively positive action of the retailers over the last week or two might be an early signpost that the role of OPEC is diminishing and that the price of energy products might continue to decline.

The bottom line is that a lengthy period (54 years) of the pain of inflated energy prices may now be coming to an end in what might be called a Golden Swan of Lower Oil Prices. 

To say the least, the OPEC meeting late this month should be interesting.

VIA http://www.thestreet.com/story/12906860/1/doug-kass-a-dissolution-of-opec-could-be-a-golden-swan.html

October 7, 2014

Doug Kass increases Short bets on market

Over the last few weeks and months, I have successfully adopted an opportunistic trading strategy, which I have described as "shorting/selling the rips and buying the dips. This strategy is appropriate in a trendless market without memory from day to day.

It's not appropriate if we're entering a trending correction.

I have recently been of the view that the reward vs. risk in the U.S. stock market has been unattractive, so I have been more aggressive in shorting strength than in buying weakness. 

I am now fearful that we are entering a period in which there are mounting market risks and a trending market (lower) has now become my baseline expectation.

As a result, I plan to stick with my shorts rather than trading my shorts.

I have long worried about the bull market in complacency that has seems to have fermented with the sharp rise in valuations in 2013 (in which the S&P 500 (SPY) rose by more than 30% while earnings climbed by only about 8%).  

I see many peaks to consider.

Since early August I have highlighted numerous technical divergences (in the weakness of the Russell Index (IWM) , new highs, the cumulative advance/decline lines, etc.), the schmeissing of the high-yield market (often seen as a precursor to stock vulnerability) coupled with growing evidence of weakening global economic growth (posing a threat to consensus corporate profit forecasts) and other factors (including valuation, sentiment and geopolitics) suggesting that a downward trend and (potential) bear market might be in the early state of developing. 

History also shows that rising volatility in foreign exchange markets may be consistent with bear markets. (A good analysis by Nautilus Research can be found here.)

Economic weakness in Europe has been a worrisome factor that I have steadily highlighted. As I have noted, the EU (and its banking system) face structural headwinds that are not being adequately addressed. 

The European Central Bank, though effecting the euro and pushing European sovereign debt yields lower, doesn't have the hold on its equity markets that the Fed has had. Yesterday, Europe's strongest economy, Germany, reported weak August factory orders. Today, German industrial production dropped by an outsized 4% (compared with consensus of -1.5%). As a result, the German DAX is trading at its lowest level since mid-August, below where the index sold after the September interest rate cuts and 8% below where stocks sold before the June ECB meeting when Draghi took out the heavy monetary artillery.

Over here, the domestic economy recovery (though subpar compared with prior trajectories) has been the recipient of unprecedented monetary largesse that has already begun to lose its effectiveness. The tailwind of QE is about to reverse as the Federal Reserve begins to consider raising the fed funds rate for the first time since June 2006. In doing so, our addiction to low interest rates (in both the public and private sectors) runs the risk of being exposed in 2015.

The advance in the S&P is also growing long in the tooth (having nearly tripled since the Generational Bottom in March 2009). 

Finally, the average company's share price has been eroding for several months, even in the face of the senior indices being close to their all-time highs.

I want to emphasize that most investors should not consider shorting stocks as it requires the sort of risk, discipline and a hands-on approach that many can't incorporate in their personal money management.

By contrast, I have been shorting for years and feel comfortable doing so. (But I do have some core and basic tenets that I comply with in order to deal with an asset class that has -- by definition -- an asymmetric reward vs. risk).

Late yesterday and in pre-market trading this morning I materially upped my short exposure through shorting the indices SPY, QQQ and the IWM. 

As I have been over the last two weeks, I plan to very disciplined in adding any longs over the foreseeable period. All things being equal, my only long additions will likely be in add ons (Bon-Ton  (BONT) , Oaktree  (OAK) , Yahoo!  (YHOO) , Monitise  (MONIF) , etc.).

I have a long list of potential long/buy candidates that I have been researching in recent months but unless share prices drop meaningfully, I will not be initiating any new longs.

Most traders and investors should consider erring on the side of conservatism in this potentially more-challenging backdrop.  


October 2, 2014

Market moves cannot always be explained

Not every move in the markets is explainable, though far too many observers attach a reason for every wiggle and move. Why? I have no clue, though many express a strong understanding in the moves.