November 26, 2014

Doug Kass long BONT (Bon-Ton Stores)

The future looks much brighter. Bon-Ton Stores (BONT) reported disappointing results for the third quarter -- but, as I will discuss, it constituted the last challenging comparison for the retailer.

Comparable-store sales dropped by 0.8%. The end of the quarter was weak, owing to the warm weather -- something that was an industry-wide phenomenon.

As previously mentioned, management is encouraged by the strength of November sales momentum.

The company's projection on earnings before interest, taxes and depreciation has been reduced to a bit more than $150 million. But my guess is that Bon-Ton will beat that forecast, since last year's results were severely impacted by holiday blizzards.

Inventories and expenses are nicely in control, and the company's online business is progressing well. Third-quarter EBITD declined by $10 million -- to $28 million -- but that figure was ahead of 2011 levels. 

Sears' (SHLD) woes should also benefit Bon-Ton, but the company must gain some market share vs. Kohl's (KSS) and J.C. Penney (JCP) .

Moreover, with the calendar more favorable, Bon-Ton should be able to comfortably beat the conservative guidance registered on the conference call. The multiple on enterprise value now stands at the low end of the company's historic range -- at 7.5x. That is appropriate in this business, but it also reflects what I think is likely a bottom, and a peak in seasonal borrowings.

The debt-to-EBITD ratio is above 6x, but borrowing costs are excellent and free cash flow exceeds $30 million -- even at this depressed level of business. Finally, new CEO Kathy Bufano (and her team) should make for an uptick from the prior regime, which failed to stem consistent market-share losses. I added to my Bon-Ton position yesterday on weakness in the shares. 

 Kass was long BONT at article publication time

November 24, 2014

Major economies are in the world are slowing or weak

The disconnect between slowing global economic growth and all-time highs in the S&P continues, and forms a potentially toxic cocktail for investors over the near term. This is why my net short exposure is so high. 

This is the core reason why I am at my highest net-short exposure in a long time.
Doug Kass
Last night, the November Euro PMI (for factories and services activity) unexpectedly dropped to 51.4 (the lowest in 16 months) from 52.1 in October. And 52.3 was the consensus expectation.

A November gauge for China factory activity was also released and fell to a six-month low.

The preliminary PMI from HSBC and Markit Economics came in at 50.0, below the median estimate of 50.2 and lower than last month's 50.4, indicating that targeted monetary easing is failing to boost that region's rate of economic growth.

Russia, Japan, Italy and Brazil are in recession. Germany and France's growth is flat-lining. So, nearly 25% of global GDP is either in recession or showing no economic growth.

In the U.S. -- adjusted for inventories -- the real GDP growth rate is only 2% to 2.5%.

Automobile sales have peaked and plateaued for months, construction activity is moribund, business fixed investment has failed to recover and export orders are now coming under the strain of weak worldwide growth and a strengthening dollar exchange rate.

So, where I disagree with the bullish cabal is that while the U.S. might be the cleanest dirty shirt in the laundry, one has to wonder if the domestic economy can remain an oasis of prosperity in the quarters ahead. 

Originally published Nov 20, 2014 

November 18, 2014

Kass thinks Ocwen shares will go higher

I expect Ocwen and New York State's DFS to come to a conclusion and settle Lawsky's complaints in the reasonably near future.

As previously written, there are signposts that indicate that a settlement could be near. These include a $100 million estimated settlement charge in reported third quarter (which I suspect will be raised slightly in the final agreement) and the possibility that Lawsky will enter the private sector in early 2015.

Equally important, I expect the final settlement to allow Ocwen to grow through additional service platform acquisitions -- albeit at a more restrained pace than in the past.

If I am correct in my view, Ocwen will then be more than a melting ice cube that has only run off value. Some growth opportunities will open back up, and that should be coupled with large expected cost savings by the second half of the year.

Should Ocwen's shares get punished on this news, which was not entirely unexpected, I plan to be a buyer. After all, a deal with Wells was never included in my numbers, nor those of others. 

Doug Kass was long Ocwen at time of writing.


November 17, 2014

Doug Kass on the Market - new Book is out

"Doug Kass on the Market: A Life on TheStreet" is out today. You can pick your copy for $29.95 from your favorite book store.

In this book, Kass shares anecdotes and explains his thinking in investing over a range of market conditions. It has nine sections that describes, where it began, Short-Selling, Lessons Learned, the Sub-prime, credit crisis, Wall Street personalities such as Warren Buffett, Leon Cooperman, Buffett watch. CNBC Jim Cramer.

One of his advice from the book is "Avoid illiquid and heavily shorted stocks. If you don’t, eventually a short squeeze will be the outcome, and there will be heavy losses with it."

The book has been endorsed by several big names including CNBC's Larry Kudlow who writes 
"Dougie Kass tells it like it is as he navigates the capital markets during one of the most volatile periods in history. The ultimate contrarian, Dougie made the call heard 'round the investment world when he predicted 'A Generation Market Bottom' on The Kudlow Report during the first week of March in 2009—amazingly within 24 hours of the U.S. stock market's actual low."

November 11, 2014

Kass Market Update for November 2014

Anyone who had said they had known, three weeks ago, that the S&P 500 (SPY) would rise by 200 points in the next three weeks (in a straight line) was a liar or trying to sell you something. It's the same for those who would have said the S&P would ultimately stand at 2,030 as the 10-year U.S. Treasury yielded under 2.40%. 

There is little doubt that price-momentum-based strategies and high-frequency trading have been exacerbated the sharp climb since mid-October. And, as the Captain Obviouses note in the business media on a daily basis, the seasonal bias favors further strength. A bull market in optimism and self-confidence remains in place. Nevertheless, while it appears a bottom has been put in, the 20-day market rise has eroded the reward-risk ratio for the S&P index during this bull market for complacency. 

Finally, the recent and vigorous market advance might have taken away from the normal year-end seasonal and bullish behavior in the weeks ahead.

I remain net short based on the prospects for slowing global economic growth, and on the structural headwinds to that growth. I also base this on the message coming from the fixed-income markets; on the imbalanced and exclusive cycle of prosperity; on rising geopolitical risk; on the growing ineffectiveness of central bankers' monetary heroin; and on the risks to and quality of corporate profit.

Thus far I have been dead wrong. Market promises have led to joy and hope, and fear and doubt have left Wall Street.

Short SPY, XLP, GM, F. 


November 10, 2014

Oil could go higher according to Doug Kass

The price of oil has fallen to levels below its 40-week moving average, an area that has historically resulted in some price-mean reversion back higher. 

Based on this, late Thursday I took small starter positions in Exxon Mobil, Chevron and Devon Energy. I picked these large-cap stocks because of their relatively strong balance sheets, which would be able to endure further reductions in the price of oil. On further oil-price weakness, I would consider adding some new names. 


November 5, 2014

Doug Kass on Ocwen and ASPS

(On Ocwen and ASPS) -- The circumstances of the last few months have created an attractive reward vs. risk on both stocks for those that are willing to assume continued headline risk. Both companies trade at only approximately 8x earnings.

-I expect Ocwen to trade in a range of between $17 and $30 over the next 12 months. 
-For ASPS I expect a range of between $65 and $95 (at only 10x FY 2016 forecasts).

I anticipate a manageable settlement with the DFS to be announced sometime over the next few months. At that time, the shares of Ocwen and its related companies will likely spike higher, depending on the size and restrictions of the settlement. I expect the likely settlement to be reasonable and less than the market appears to currently anticipate. I also believe that Ocwen might still be allowed to grow through further acquisitions, but perhaps with some restrictions.

Altisource's shares have fallen by $100 a share (from $170) since early December 2013 and Ocwen's shares have dropped by $38 (from $57) since the beginning of this year.

I have reestablished a long in Altisource Tuesday (I am working as a scale buyer under $71) and I have added to my Ocwen long under $19.

Position: Long OCN, ASPS

November 3, 2014

BOJ stimulus news saves the market

To me, Bank of Japan's (BOJ) surprise announcement of more stimulus Friday smacks of desperation.

There are several reasons to believe the market's "risk on" mentality is being exaggerated today.

1. The BOJ move may fail in the face of failing Abenomics and flailing economic-growth prospects.

2. The BOJ move may fail in the face of a deepening and entrenched deflationary psychology.

3. The BOJ move -- causing an erosion in the value of the Japanese yen -- may fail in the face of weakening growth in its major export markets, China and Europe.

It is my view that, were it not for the BOJ announcement and allocation shift, the markets would have lost ground today. After all:

1. September retail sales in Germany disappointed.

2. September U.S. income and spending numbers were weaker than expectations.

3. Most important, employment costs (announced Friday) accelerated to a rise of 2.2%, as compared with only 2% growth in the previous quarter and under 2% in the first. Moreover, the month-over-month change in employment costs came to a rise of 0.7%, the swiftest climb in over six years.

We are experiencing another global liquidity high but, arguably, on fundamentals the market is overpriced now.