May 28, 2015

First time home buyers being priced out of market again

As I've stated many times before: If you already own a home, the price increases are great. But those looking to buy a home for the first time are again being priced out of the market -- and that's why the homeownership rate continues to fall. To arrive at a more-healthy, self-sustaining housing recovery, aggressive price gains need to slow.

May 26, 2015

Back in Yahoo shares

I am once again buying Yahoo shares based on the opportunity presented in the stock's decline on Tuesday.

With shares of YHOO and China's Alibaba trading lower and given the ambiguous nature of the IRS statement on Yahoo!'s proposed spinoff of its BABA stake, the upside-downside ratio is finally compelling.

It's important to note that even if the IRS spinout ruling is agreed to (only 33% chance, from my perch), the value of the residual Yahoo! is now slightly negative.

First, a bit of history.

I know Yahoo! well from an analytical understanding. Last year, Yahoo was made a Kass Katch in late September at about $40.

My principal focus was a "sum-of-the-parts" analysis. My main catalyst at the time was an expected tax-free exchange of Yahoo!'s BABA holdings, which was indeed announced shortly after my buy. Within four or five weeks, I sold out the stock for a near $6-a-share gain.

Yahoo!'s shares continued rising toward $52 after I sold -- until Alibaba recorded an earnings and sales miss. Then the stock came back to earth. At that time (when the shares were in the high $40s to low $50s), I debated several bulls like Eric Jackson and suggested Yahoo! should be avoided because of a lack of transparency and opaqueness at Alibaba. 

Eventually, BABA shares tanked from over $120 in November to briefly flirt with $80. But the company recently came in with a much better quarter and the shares have risen about 10% from that low point of about  $80.

Still, as mentioned, the IRS yesterday made a statement that questioned Yahoo!'s ability to spin off its BABA holdings on a tax-free basis.

To me, it's unclear if the IRS statement will affect Yahoo!'s BABA spinoff. (Again, I would arbitrarily give it a 33% possibility.) Moreover, as BABA's share price has declined from $120 to $88, this reduces the downside risk to Yahoo! stock. And so does Yahoo!'s share price drop from $44 to $41!

The bottom line: I believe the BABA spinout will occur, and that Yahoo! shares can return to the high $40s over the next three to six months. But even if the IRS statement becomes a ruling, I see some margin of safety for Yahoo! stock based on my belief that the market is putting zero value on the company's non-Asian investment assets.

Position: Long YHOO 

Originally published on May 20

May 20, 2015

Could buying the dips be over

A sage observer once remarked, "Speculation is going on when someone else is making money and you and I aren't."

Speculation ("mothered" by Fed policy) has been ripe, as hot money has raised the price of financial assets even in the face of disappointing progress in the real economy, rising geopolitical risks, numerous negative macroeconomic events (particularly of a EU kind), multiple signposts of malinvestment and to a host of other factors that, in the past, have adversely impacted financial asset prices.

Valuations, particularly as expressed by CAPE or market capitalizations relative to GDP, have moved towards lofty levels.

Indeed, some have openly criticized those that were concerned as Cassandras and worrywarts -- preferring, instead, to take the position that "the data doesn't matter" (as both good and bad news were seen as good news) and to respond to positive market price behavior.

That approach has paid off handsomely as this has been the correct strategy, with averages tripling since the Generational Low.

The crowds of bulls have outsmarted the bearish remnants, as dips have been bought and even corporations have joined the celebration with a record level of share buybacks. Despite clear corporate history of buying high and selling low, financial engineering has been celebrated and has been a mainstay of the bull market over the last three years.

However, at some point -- and we are likely close -- market participants will confront, and retaliate against, the artificiality of stock and bond prices. 

While no one knows (with certainty) where Mr. Market or the global economy is headed, I remain convinced that the following additional 12 key "big picture" factors could weigh on markets and on the real economy over the balance of the year and into 2016:

  -  Multiple and unpredictable outcomes: There have likely never been in history more numerous market and economic outcomes some of which are adverse and most of which are being ignored by market participants.

  -  Stuff happens: Black swans appear to be happening with greater regularity.

  -  Weak growth ahead: Central bankers' aggressive monetary antics have only produced sub-par global economic growth.

  -  Borrowing from the future: Zero interest rate policy (ZIRP) has borrowed past and present sales from the future, underscoring the challenge of future economic growth.

  -  Unknown consequences of policy: No one knows the consequences of an extended period of ZIRP "punch bowls," often resulting in aberrant behavior and hangovers.

  -  Making no sense: Indeed, if there were no consequences to zero interest rate policy, interest rates could have been held at zero forever -- in the past, as well as in the future.

  -  Stop looking up, start looking down: Monetary overkill (in duration and in the level of interest rates) may produce the adverse consequences of malinvestment. It has resulted in the hoarding of cash and reduction in spending by the disadvantaged savings class.

  -  Uneven and less dependable growth: The "exclusive prosperity" of the haves (vs. the have-nots) is politically unstable, leads to more uncertainty (and unexpected outcomes) and will likely have a negative and more volatile impact on our social system, on the global economy and on our markets.

  -  Tom Friedman has the ticket: Our world has never been more flat, more networked and more interconnected. As such, the notion of an "oasis of prosperity" is not likely rooted in fact.

  -  Trouble ahead, trouble behind: Terrorism and religious radicalism (political and economic) will be more of a threat in the future than in the past.

  -  Treacherous technology: In a paperless (and "cloudy") world, investors and citizens are not likely as safe as the markets assume.

  -  Lack of coordination: Geopolitical coordination is at an all-time low and isolationism seems likely to be a mainstay in the time ahead.

No one knows for sure what factors will impact our markets. But one thing is for sure: When it occurs, a near peak in complacency will be the overriding condition and the absence of fear and doubt will be the overriding emotion.

Historically, these have been fresh conditions that have contributed to the emergence of "contagion" (in which a decline in one asset class impacts another asset class). We will likely soon recognize how shallow and illiquid our markets have become as a direct result of policymakers and in the absence of skepticism.

Safe Havens Become Unsafe

The return of price discovery may have already started in the world's fixed-income markets (as the bond vigilantes have come out of hibernation -- taking the 10-year U.S. note yield about 22 basis points higher in the last two trading days) and it is difficult to envision global equity markets unscathed.

When safe havens become unsafe (and volatile), most investors should be buckled down now in the current period of uncertainty... and complacency.

With heightened uncertainty and rising volatility, the most reasonable strategy is to reduce your portfolio's "Value at Risk."

Position: Long SPY Puts TBF, Short SPY (small), TLT 


May 19, 2015

Confident in J.P. Morgan stock

JPMorgan's shares have more doubled the return of the large bank stock index over the last three months.

Nevertheless, I feel strongly that (1) JPM is among the best positioned money center banks, (2) the bank has the best scale of any major bank and (3) consensus earnings estimates are a bit too low for 2015 and 2016 (with the source of the potential beat in investment banking, strength in the commercial bank and in real estate),

JPMorgan still trades at a modest (5%) valuation discount to its peers.

I expect JPMorgan's shares to trade in the low- to mid- $70s by the same time next year.

The shares were placed on my Best Ideas list on March 26, 2015 at $59.05.

JPM remains on my Best Ideas list. 

May 18, 2015

Short SPY etf

The "Bad News Is Good News" feature of the equity market is getting too entrenched and accepted in investors' and traders' mindsets.

I raised my short exposure further this morning based on the ever-widening chasm between financial asset prices (higher) and the real economy (disappointing.)

The chasm has gotten so large that I am prepared to take some more short-term pain for long-term gain. 

Originally published Friday, May 15, 2015

May 13, 2015

Stocks more expensive than Bonds according to Janet Yellen

[Janet] Yellen didn't slam stocks as materially overvalued. She couched and qualified her comments (as did Warren Buffett last weekend) with the notion that stocks were highly priced but were not as expensive as bonds. In addition, Yellen said bond rates could be moving higher in response to future monetary policy moves.

In essence, she has prepared markets for more risk in the future.

To this observer, she had a right to say what she did and spoke her mind in a balanced and thoughtful manner.

Over history, multiple Federal Reserve chairs have expressed similar views on the capital markets -- as one of the Fed's stated mandates and missions is to defend our economy against the emergence of systemic risk, to monitor systemic risk and to promote financial stability. 

May 11, 2015

Stock returns will be negative this year

I am negative on both stocks and bonds for numerous reasons, the most important of which is the likelihood that (for the fourth consecutive year) global economic growth and U.S. corporate profit growth will disappoint relative to expectations.

Secondly, the chasm between rising financial asset prices and the real economy is ever widening. Thirdly, with fiscal policy inert and uninvolved, the burden of engineering a more buoyant trajectory of growth has been placed on monetary authorities.

Unfortunately, zero interest rates and quantitative easing are now doing more bad than good, disadvantaging the savings class (which has caused consumers to hoard cash and reduce spending), encouraging malinvestment and retarding investment (capital expenditures) in plant and equipment.

I expect a negative return in stocks this year.

When the correction comes, it will probably be broad based. Especially vulnerable are social media stocks that incorporate unreasonable expectations for profit growth. In addition, numerous stocks are vulnerable to secular changes in the business landscape (typically caused by advances in technology).

On the bullish side, I remain positive on selected equities (especially banks) and with certain sectors (e.g. closed-end municipal bond funds). The latter group (funds) has cheapened coincident with the recent rate rise and I have expanded the size of my long exposure as prices have retreated. The size of the rate rise that I am projecting is not expected to be a hurdle to more fund capital gains (on top of hefty non-taxable yields) over the balance of 2015. On the other hand, the rate rise will be large enough to positively impact banking industry fundamentals.

Bonds -- in the U.S. and outside of the country -- are overpriced.

The core reason for my pessimistic view of the asset class is that the 10-year U.S. note yield is discounting an unrealistically low growth rate for real GDP domestic growth. In addition, signposts of a climbing inflation rate are growing more conspicuous and wage growth is beginning to accelerate, while energy prices, rents and other costs (of the necessities of life) are rising.

Outside of the U.S., bonds are particularly expensive.

But with the yield on the 10- year U.S. note having risen by almost 50 basis points in the last few months (to 2.12%), I would not be surprised if rates dropped back a bit over the summer. 
We all recognize the importance of timing in our investment decisions.

It has so far not paid to be anticipatory of the adverse trends impacting both the stock and bond markets and I am holding on to the notion of being more reactive in strategy of expanding my short book.

My short exposure in stocks is still relatively low, particularly relative to my conviction of the negative outlook.

Though I believe that rates will back down in the near term, my short exposure in bonds is more sizable based on my current perception of reward vs. risk. 

Originally published at

May 8, 2015

Real market selling could get ugly

It took five years for the SEC to figure out that one person, trading in his pajamas at his apartment, was responsible for the devastating market drop in May 2010.

This does not exactly engender optimism and raises the specter that when "real" selling occurs, the wheels will come off the market -- and it will not be pretty. 

May 6, 2015

Businesses - East Coast vs West Coast

I asked the question ....on Twitter whether the establishment of CNBC's fancy headquarters in San Francisco marked a top in the technology and social-media industries.

I received quite a lot of responses to my tweet about this possible thin reed market indicator.

My comment was not meant literally. I was just asking the question and awaiting responses by followers.

That said there are several good counters to my question:

    -Bloomberg TV already had a bureau there where it generates several hours of programming each day.
    -More importantly, business and finance are moving to the West Coast -- especially to Los Angeles, San Francisco and, of course, Silicon Valley.

We, or I, have an East Coast-centric view, but the center of power and action have begun to move out there.

May 5, 2015

Doug Kass shorts IBM

Despite a 12% revenue decline and a 2.5% fall in net income, IBM's earnings per share beat forecasts!


1. Over the last 12 months, the company's fully diluted shares outstanding fell by 50 million shares, to 990 million shares. IBM purchased $1.2 billion of its own stock in the first quarter of 2015.

2. IBM did not purchase any shares in the fourth quarter of 2014 because its debt load became so large that it placed the company close to being downgraded.

3. Net debt dropped by over $2 billion in first quarter of 2015 to $30 billion. This was achieved by a sharp $3.5 billion collection (and drop) in receivables being financed, which reduced the company's total assets and allowed it to buy back stock.

4. EPS were further buoyed by the company's net effective tax rate, which dropped by a full 1% to 19.5%

I find it hard to believe that IBM's stock gain will be maintained.

I have reestablished my short at $169.20.

May 4, 2015

Twitter future possibilities according to Doug Kass

Twitter's price weakness after Tuesday's lower guidance offered an opportunity to add to my holdings in the social media company, and I paid $41.30 a share, on average, in pre-market trading on Wednesday.

Twitter faces a long runway of sales, profit and user-growth opportunities, and the company represents an important and valuable strategic asset to a buyer who seeks a foothold in social media.

I believe there are three potential outcomes that will influence Twitter's share price. Given my three scenarios and the probability distributions (below), I calculate Twitter's shares to be fairly valued at about $49.75 a share, or 18% above yesterday's close of $42 a share. Here is my calculus:

    Scenario 1: Twitter continues across its present course. Share price value of between $38 and $46, a midpoint value of $42 a share. (Probability 50%)
    Scenario 2: Disappointed in the recent lack of operational progress, the Board of Directors at Twitter replaces current management. Share price value of $48 to $52, midpoint value of $50 a share. (Probability 20%)
    Scenario 3: Disappointed in the recent lack of operational progress, Twitter puts itself up for sale. Share price value of between $60 to $65, midpoint value of $62.50 a share. (Probability 30%)

While the company's execution has been poor recently, Twitter's move into real time video and Periscope are the future of social media and an important potential catalyst for the company's sales and profit growth over the next few years. The rollout of a quality scoring system will improve direct responses from advertisers over time -- as advertisers pay for better quality leads rather than the quantity of leads.

I originally purchased Twitter in early December at $37 a share and I sold 50% of my holdings at $53 a share in early April.

What's gone wrong for the company is that first-quarter sales fell short and user growth was off to a slow start in the current quarter. Ad click rates (CTRs) declined from the fourth quarter of 2014 to the first quarter of 2015 in a mix shift towards formats with lower CTRs. Ad load was unchanged and app install ads underperformed.

In other words, despite the introduction of real-time video and Periscope, management's execution was poor

What's going right is that Twitter is partnering with Google's  (GOOG) DoubleClick unit. (Twitter is getting closer to Google as this partnership follows Google's adding of Tweets into its search functionality.) DoubleClick, a dominant factor in the display ad space, competes directly with Facebook's Atlas Ad Server/Measurement Platform. It will allow advertisers on Twitter to "measure when conversions result from views and other actions on Twitter."

A new attribution model will give advertisers on Twitter a better sense of tracking and will allow for better conversions as well as make Twitter ad inventory available through DoubleClick Bid Manager (a widely used ad-buying platform that supports many online ad exchanges).

The adoption of Periscope's live streaming app has, as I expected, been exceptional, with more than 1 million signups in the first 10 days. The company is now working with Apple (AAPL) on a Spotlight search integration deal. Twitter plans to begin counting users of its SMS follow service as monthly average users -- a figure currently at about 6 million.