January 29, 2015

Doug Kass says Monitise trade a learning experience

I sold out of my position in Monitise  (MONIF) , as I have concluded that the company has either misled or lied to investors.

When a trade like Monitise fails, I try to learn from the experience.

It is easy to say, "The charts told us so." In this case, however, a very knowledgeable investor, Omega Advisors, as well as some large corporations -- MasterCard, Telefonica and Banco Santander made sizeable investments in the company. These investors and partners have vast research capabilities and performed extensive due diligence prior to making a commitment to either infuse capital or build a corporate alliance and partnership with Monitise. Nearly everyone who looked under the hood moved ahead with an investment and/or a partnership. 

Not one of them has been rewarded, and all have suffered large financial losses.

Monitise was a speculative investment in the rapidly changing, disruptive and competitive business of mobile payments and mobile banking. The risks of technological change and the emergence of new entrants and product acceptance are high, and so were the potential rewards if the company became an important player in the industry.

Thus far, that has not been the case, and I have lost total confidence (as have others) in the management.

One lesson is that speculative stocks must be weighed relative to one's risk profile given the rapid pace of technological change. Monitise is a constant reminder of this.

It is a far worse a feeling to know that some subscribers have lost money than it is losing money personally.

VIA http://www.thestreet.com/story/13019858/1/doug-kass-analyzes-a-failed-trade-a-requiem-for-monitise.html

January 27, 2015

Doug Kass on Muni bonds

For the last 13 months my largest single sector bet has been closed-end municipal bond funds.

Given slowing global economic growth's salutary impact on bond prices (coupled with an aggressive ECB QE), I see nothing that derails the group over the first half of this year.

I continue to favor this sector both on a relative basis and an absolute one.

Discounts to net asset values still about 6% and non-taxable yields are at the same 6%! 

January 26, 2015

European economies have structural problems

European banks own about 28% of the sovereign euro-zone bond market, and if they sell their bonds to the ECB (or national banks), they would be penalized 20 bps if they deposit the proceeds with the ECB. 

If the ECB buys bonds in a ratio similar to the ECB capital key, 18% would be from Germany, 14% from France, 12% from Italy and 9% from Spain. So, about 50% of all purchases would be in these four countries. 

Lastly, 80% of loans to European businesses flow from banks, not the capital markets. Banks have clearly shown an unwillingness to aggressively lend. At the same time, demand for bank loans has been very slow. Only a liberalization of labor laws, an easing of restrictive regulations and lower tax rates are answers to what ails the eurozone.

In other words, lowering the cost of money is not a solution to the Europe's economic stagnation.

The problems are structural. 


January 19, 2015

Gold as insurance policy

In December, I initiated a trading long rental in SPDR Gold (GLD) at $112.50.

Then, in early January, I wrote: 

The world's economies face structural headwinds, currencies are being debased. Geopolitical risks are rising, monetary policy is losing its effectiveness, while fiscal initiatives are non-existent.

In this setting, gold (a commodity I have long avoided) may start to increase in value.

With bullish sentiment almost non-existent (except some remaining gold bugs), I have and continue to maintain a trading long position in SPDR Gold Trust  (GLD) (which I initiated at $112.50 in mid December).

Though I continue to have problems valuing the commodity, I plan to hold this insurance policy for a while in the uncertain market and economic settings I see. I recently added further to my GLD long based on these considerations:

1. Gold, given the  current issues, could be increasingly considered a currency and not a commodity.

2. Central banks around the world are doing anything they can to suppress the value of their fiat currency vs. all others, with the battle inevitably helping the only currency that cannot be manipulated by central banks: gold.

3. The Swiss National Bank has thrown in the towel in its money-printing regime, realizing it is a battle that cannot be won. This comes just a few months after the referendum calling for the SNB to move back towards their sound money past. All this is gold constructive as it's a repudiation of the perceived virtues of currency depression.

4. India, a few months ago, further eased import restrictions of gold and I expect them to further the relaxation of import tariffs.

5. China remains a voracious buyer of gold and the trend of gold moving from West to East continues.

6. Even Russia realizes that having more gold in its reserves is a key foundation of stabilizing one's currency.

7. The Federal Reserve is expressing some concerns about the impact of a strong U.S. dollar and they are the last central bank to play in the FX war sandbox. So, gold is now in the process of rallying against all currencies and is no longer a non-dollar play.

January 14, 2015

Doug Kass on Europe and QE

ECB Economist Peter Praet has warned in an interview with BoersenZeitung that the decline in oil prices is "de-anchoring" expectations for European inflation to drop below zero "for a longer period in 2015," and has suggested that ECB QE is growing more likely.

So let me get this straight.

Draghi has jawboned interest rates in the EU to well below where anyone had expected in 2014, and that is still not enough, as the European economies are flatlining at best.

Italy's 10-year yield is less than 1.90% (compared to 2.18% in the U.S.) and German Bunds are yielding 0.60%.

What possibly will ever-lower rates do to help the European economies, given their ridiculously and artifically low interest rates today? 

I remain a market bear, particularly in light of the magnitude of the recovery since the mid October lows. At best, we have "borrowed" from 2015 returns

January 12, 2015

Difference between the rich in 1980 vs now

Back in 1980, the richest 1% of Americans captured 9% of national income. Today, the richest 1% receive about a quarter of national income.

January 8, 2015

Doug Kass says Bubbles in Fed

There are bubbles in social media stocks, and there’s a bubble in the bond market. Most of all, there’s a bubble in the confidence that the Federal Reserve can get us all out of this without any adverse consequences.

January 7, 2015

Six Risks with Russia

The consensus view is that lower oil prices will buoy global growth, moderate and contain the rate of inflation, reduce interest rates and permit central bankers to stay lower for longer.

I wanted to do a deeper dive and be more specific in assessing the risks associated with the Russian problem and the possibility of a loan default.

As I see it here are at least six identifiable risks.

Russia defaults: This is not a high probability event as, according to students of that country, Russia has $210 billion in public sector debt. This represents only about 1/10 of Russia's GDP and compares with more than $400 billion in foreign exchange reserves (though how much of this is liquid is being debated).
Russia's economic contraction adversely impacts an already moribund EU economy. In turn, this cripples global GDP: Direct trade between Russia and Europe is relatively small because Russia is not integrated into that region of the world. More risky is an economic slowdown in other energy-dependent emerging markets (some of whom might face capital outflows as oil prices descend). Such a contagion must be closely monitored.

Risks associated with Russian corporate debt and bank loans (particularly to Europe): This risk is a serious one as a levered and already-challenged European bank problem could erupt into a systemic problem and could spread to our economy and financial institutions. For now, according to the sell side, a potential Russian bank situation has been contained as bank loan exposure in Europe to Russia represents about 3-4% of their capital bases and only about 1% of total EU GDP.

Geopolitical risk: This is the big unknown as no one knows what a scared mouse (Putin) might do when faced with a bunch of cats.

The Russian Ruble is overvalued: As expressed yesterday morning, capital outflows and a run of the banks is a big risk as the recent rise in interest rates from 10.5% to 17% has failed to halt a capital exodus and to stabilize the country's currency. Capital controls may be next, but controls rarely have anything but a temporary impact.

Owners of emerging market debt and equity sell their liquid assets: This sort of domino impact must be watched closely because those markets (both debt and equity) tend to be limited liquidity.

I continue to be of the view that the drop in the price of oil may have a more ambiguous net impact on economic growth (relative to consensus).


January 5, 2015

Doug Kass buying small position in Gold ETF

Reflecting my view in Surprise No. 1 in my 15 Surprises for 2015, I am taking a starter position in gold.

I am buying SPDR Gold (GLD) with a $112.50 limit Friday morning. And reflecting my previous view that the price of precious metals is so difficult to predict (and is based more, like religion, in the belief in the commodity) that starter position is quite small.