December 31, 2014

Doug Kass buying Northwest Bancshares (NWBI)

I am back buying Northwest Bancshares  (NWBI) based on the following considerations:

- The price of crude may be bottoming -- NWBI is positioned in Western Pennsylvania's shale country.

- The recent add-on acquisition is a wise one and expands the bank geographically into the Cleveland and Akron markets. The deal was done at an attractive price.

- The stock has lagged the regional and money center bank groups.

- I continue to admire the holding company's capital strategy of returning capital (dividends) to shareholders.

- A reasonable yield and an active repurchase program.

This is a conservative holding, and my objective is for a 10%+ return over the next 12 months. The bank is a potential takeover candidate and its private market value is likely in the $16 to $17 per share area.

December 30, 2014

Fed has made a mockery of fundamentals

We’re at an important pivot point for the market, and when I think of reward versus risk, I think it’s unattractive for stocks. It’s very unattractive for bonds.

The Federal Reserve has made a mockery of fundamentals. 

All assets are priced against the yield of the U.S. 10-year note. The lower the yield goes, the higher the valuations in the stock market go. There’s really no price discovery, either in stocks or bonds. We’re in this artificial experiment, and it’s a very dangerous path.

December 29, 2014

Monetary policies limit reached in USA

Pretend and Extend in China, Japan and in Europe will be tested as secular debt, demographic and structural headwinds have not been addressed. 

Monetary solutions have gone about as far as they can go -- at least in the U.S. that policy has grown more and more ineffective and has contributed to an exclusive prosperity that has penalized savers and distorted the divide between the "haves" and the "have nots."  

December 23, 2014

Doug Kass on Apple Pay and Apple's future prospects

I have read about a great deal of excitement regarding Apple Pay and the possibility that the application will be a "needle mover" for Apple.

I started using Apple Pay this week and, besides the comfort of the security issue, I see little value added to the application. I would just as well use my credit cards. 

I recognize that credit card companies like the Apple Pay product as it protects them from fraud and Apple gets only 0.15% per transaction. However, in light of the possible threat of market share inroads by Apple, one would think that the credit card providers will shortly "retaliate" with a more secure product and card offerings of their own in the not so distant future.

Even if the market is left to Apple by the credit card companies, the needle will not be moved. Try multiplying 0.15% by any reasonable sales figure and you will see why.

What am I missing here?

I will stick by my short investment case that the current product upgrade cycle, while gigantic in terms of current sales, represents the last major product upgrade cycle in quite a while and that neither the watch or Apple Pay will likely be significant incremental contributors to Apple's sales and earnings.

December 22, 2014

2015 to be a more challenging for stock market

The expanding disconnect between (rising) stock prices and (a weakening in) the real economy might be borrowing against future market gains. Late last week, as the markets fell, I argued that a year-end rally could emerge from the oversold.

Over the last two days a more significant rally than I expected has developed, possibly borrowing (or taking away) from any more seasonal strength.

Anecdotally, some observers who hated the market at last week's depths have turned unambiguously bullish now. I would argue that reward vs. risk (upside vs. downside) is now turning unattractive (for traders that have a time frame of 1-2 months).

I expect 2015 do be a more challenging year than 2013-2014. Valuations have risen quite substantially over the last two years as the disconnect between stock prices and the real economy has been stretched.

One needs only to parse through the domestic economic data that have been released this week (and have generally been ignored as a result of the spectacular climb in global equity markets).

First, the Markit flash services PMI was much weaker than consensus expectations (coming in at 53.6 compared with an estimate of 56.3 and to the prior month of 56.2). Importantly, the drop relative to consensus was driven by the weakest new orders print (53.4 from 55.6) in more than nine months. Input prices declined to the lowest level in mor ethan four years. Payrolls in December, says Markit, should be weaker than seen in recent monthly reports. And the rise in backlogs was at the slowest pace in six months. According to Markit, the manufacturing and services PMIs suggest that 4Q 2014 real GDP could drop below 2%.

Second, the Philly Fed Index also came in below consensus expectations (at 24.5 vs. 26.0E and from 40.8 in the prior month). Most components (including employment, shipments and new orders) were lower than expected, while inventories were at the higher end of estimates.

Though consumer confidence and retail spending have been relatively strong, the above weak reports are in line with the poor PMI report and present a mixed view of the trajectory of the domestic economy as we enter 2015.

Suffice to say, recent data suggest that the non-U.S. economies are also weakening and the chaos in Russia is raising additional risks to the downside.

Let's get back to the equity markets.

After trading like a drunken sailor over the last 10 days, I expect to reduce my activity and, as I suggested, gradually reduce my Value at Risk in the days ahead.

December 18, 2014

Concerns of lower oil prices on economy

Oil Prices Dropping

This is an event -- caused by weakening demand and rising supply -- that I strongly feel will hold negative consequences for the financial markets and for the profit levels of S&P 500 companies.

Subpar global economic growth produces a fragile condition, as more than one-quarter of the world's economies are experiencing a recession or under 1% in real gross domestic product growth. This, in turn, exposes the trajectory of economic growth to numerous exogenous shocks, be they geopolitical, currency-based -- as in a rising U.S. dollar -- or of a multiple-standard-deviation decline in energy prices.

As I expressed over the weekend in The Wall Street Journal, $58-per-barrel oil is sending a signal of slowing global economic growth. It represents, much like Penn Square Bank did in the early 1980s, the potential for contagion risk. It is also vividly underscored by the strength in utilities, in the bond market and in other fixed-income-equivalent equity sectors. 

As chronicled below, there are already substantive signs of stress in the credit markets. 

We have already seen the impact of lower oil prices on a vulnerable high-yield market. Last week, high-yield selling intensified as yields and spreads rose to more than two-year highs. $90 billion of the $210 billion worth of outstanding energy bonds are now trading below $90, and a contagion into non-energy high-yield has begun in earnest. The J.P. Morgan Domestic High Yield Index is now pricing in default rates of close to 5% over the next one-and-a-half years. 

I also remain concerned about energy bank loans. Commercial banks have started to trim the value of oil reserves tied to credit lines, creating pressure on some of the more leveraged energy enterprises through lessened credit availability.

Numerous exploration companies are cutting back exploration activity. I mentioned Oasis Petroleum  (OAS) a week or so ago, but others, such as Petrobras  (PBR) , have announced exploration cutbacks in order to shore up cash and preserve liquidity. Drilling activity has begun to fall rapidly -- and rigs targeting oil are experiencing the largest weekly drop since late 2012.

What has surprised me thus far is that there has been quite limited profit guide-downs in the oil patch. But profit cuts will be coming fast and furious in the weeks ahead. 

During the weekend, the head of the Organization of the Petroleum Exporting Countries (OPEC) said the organization has no fixed price target, but he thinks the decline has gone beyond levels justified by the market's fundamentals. On the other hand, a United Arab Emirates energy minister said OPEC won't change its mind on production "because prices went to $60, or to $40." 

The recent downside oil shock will also create a meaningful economic challenge to those countries that are dependent on higher energy prices. Not only will the price drop adversely impact countries' gross national product (GNP), it will also serve to threaten the ability to meet social spending targets -- and thus holds the potential for both economic (slowing global growth) and social unrest in 2015 and 2016.

December 8, 2014

Is Free money dangerous ?

Free money (and zero interest rates) are the fathers of malinvestment.

Over history, the artificially low cost of credit and central bankers' unsustainable increase in the money supply trigger poorly-allocated business investments.

The dot-com bubble in the late 1990s, the U.S.housing bubble in 2002-07 and the proliferation of those "financial weapons of mass destruction" (derivatives) are past examples of what Austrian economist F.A. Hayek called a byproduct of errant monetary policy, which produced low interest rates and, eventually, misleading relative price signals. causing a boom followed by a painful bust. 

Today, the Federal Reserve and, for that matter, central bankers around the world, have made a mockery of fundamentals as a slowdown in the rate of global economic growth (see overnight data in China, Germany and the U.S. (retail sales)) have coincided with a near parabolic move in the U.S. stock market over the last six weeks. 

Nonetheless, investors' confidence in central bankers' ability to engineer escape velocity and a self-sustaining trajectory of global growth is at a bullish extreme, manifested in relatively high valuations (at over 17x earnings). This comes despite 25% of the world's GDP barely growing (with Brazil, Japan, Italy and Russia in recession) and Germany's and France's flatlining growth and with the U.S. growing at only 2% to 2.5%. 

In light of recent events, we must comment on the price of energy products. The thesis that an oil price collapse of 40% in only a few months is market- and economy-constructive is a weak one and is indicative of the bubble-like optimism of the type that permeates through the U.S. stock market. Do observers really believe that all of a sudden the market has become oversupplied by so much oil?

Free money drives misallocation of capital and overinvestment. This time it washed up in fracking and energy (see below). But energy messes with geopolitics in ways that telecom and housing does not, and this could prove to be much more destabilizing than other bouts of over- investment. It is not like Russia or Iran are going to just go gently into that good night -- they could cause trouble. (Perhaps this even explains why Russia's Putin saw this coming a while ago and why he invaded Ukraine). 

Misleading price signals (manifested in a new all-time high in the S&P Index) are being communicated to market participants. But signs of malinvestment and misallocation of resources have cropped up and represent risk to investors.  

In the mid-2000s the malinvestment of capital nearly took down the world's economic system and stock markets.

Of course, that era was unprecedented in terms of the misallocation of resources.

To the extent that the global growth recovery is sub-par, fragile and vulnerable, the emergence of new and different signs of malinvestment might have a potent and adverse impact on economic growth (especially at the margin) in the years ahead and could be sowing the seeds for the next business downturn sooner than many feel possible.

December 1, 2014

Global economies not strong at the moment

The exclusive prosperity of the U.S. recovery will be felt in the months ahead.

This morning's economic data support the contentions reflected in my opening missive Wednesday. The figure for core durable-goods orders was disappointing: it came in at a drop of 1.3% for October, whereas expectations were for a gain of 1%.

September's number had also reflected a 1.3% slide, that time against estimates for a 0.7% rise.

Weakness in the October report was broad-based. Core shipments were also weak relative to expectations. Inventories grew -- by 0.6% -- and note that October's inventories-to-shipments ratio is now at 1.65, up from 1.59 a year earlier. Meanwhile, personal-income growth and spending were uninspiring. That is surprising to many. Finally, jobless claims rose above 300,000.

The bottom line is that this morning's data are unequivocally poor. A global economic slowdown will be exerting downward pressure on domestic activity and foreign-export demand.

On that point, Hewlett-Packard  (HPQ) CEO Meg Whitman's remarked on the pressures of a rising U.S. dollar in an interview with CNBC's David Faber this morning. Furthermore, the weakness in spending and income is disappointing in light of lower energy prices and improving job growth. As I've written, the exclusive prosperity of the U.S. recovery will be felt in the months ahead.