June 30, 2015

Greece could see economic Depression

Tourists in Greece
My guess, in our investment world of short sound bytes, is that few have looked into the Greek proposal and understand the ramifications of the possible compromise on the country's economic growth.

Last night I reviewed the pension plans (early retirement to be gradually curbed over the next 10 years), the general retention of a value-added tax, tax hikes for high earners, a special corporate tax and luxury tax hikes, defense spending cuts, rules of primary budget surpluses, debt rollover, and so forth.

A depression for the region is likely in the cards.

June 29, 2015

Bank stocks in multi year bull market

While I am keeping all of my bank stocks on my Best Ideas List and within the context of my cautious market view (I am adding to my Direxion Daily S&P500 3X EFT, SPXS, this morning), I am taking a bit more off the table in the group.

That said, I continue to believe the rally in bank stocks will be a multiyear affair, and those with longer-term time frames should consider holding on to core positions.


VIA http://www.thestreet.com/story/13199785/1/yield-curves-a-pending-greek-depression-and-the-next-unforeseeable-catastrophe-best-of-kass.html

June 24, 2015

Doug Kass on Airbnb high valuation

According to The Wall Street Journal, Airbnb is raising $1 billion in a funding round that values the short-term-rental company at $24 billion.

That's higher than the $21 billion valuation of Marriott International and only Uber has a higher valuation among startups.


June 22, 2015

Greece has defaulted before too

According to my research, the first Greek default occurred in fourth-century B.C. when the 13 city states of the Delian League borrowed money from the Temple of Delos and defaulted on most of their loan. 

Greece's financial history is one of repeated defaults on sovereign-debt obligations. Most led to market dislocations, but limited or no long term systemic damage. In modern times, the country has been in default for nearly 90 years -- or about half of its history as an independent nation.

There have been at least five separate defaults in the modern era. The first occurred in 1826 during the early days of Greece's fight for independence. Defaults then recurred in 1843, 1860, 1894 and 1932 during the Great Depression.

That said, Greece isn't the worst country in terms of repaying its bills. For example, Venezuela and Ecuador have each defaulted on their debts on 10 different occasions.

Still, I hear many in the media incorrectly suggest that Greece is a "one-off," and that a default would have a limited impact on markets.

Perhaps that was true in 400 B.C. -- or even in the 19th or 20th centuries -- but in today's flat, networked and interconnected world, no country is an island of Delos any more. History over the last four decades has demonstrated that increasingly, "contagion" is the natural consequence of country defaults.

As Greece begins to slip into the abyss of capital controls and default, we've already seen signposts of contagion as the bond-yield spread between Germany and other Eurozone states is widening.

The France/Germany 10-year spread has almost doubled in the last three trading days. European and U.S. equities have also begun to roll over, and Chinese stocks are also taking a spill.

Take it from me: Greece will eventually default, and Greece banks will fail.

Here's the sequence I expect:

   - European central banks and the ECB will take meaningful hits and will implement a nonsensical scheme to deal with the writeoffs.
  -  Other banks (which are all leveraged) will also take writeoffs on inter-bank lending and repos.
  - Berlin will blame Athens.
  -  Athens will blame Berlin.

Upon default, the euro could experience a beatdown and the U.S. dollar might rip higher. That will serve as a "tightening" move in America, placing pressure on commodities and emerging markets worldwide and exports and corporate profits here at home.

Treasuries will likely rise in price and drop in yield, while a decline in global stocks seems probable.

Most importantly (at least to me) is the possible contagious impact on Spain, Portugal and Italy -- where yield spreads will widen and yields will continue to gap higher, as I've addressed in the past. In the extreme, even the EU's existence could be in peril.

Sell-side brokerages interpret a Greece default -- their ideas are bountiful and their concerns are limited, as they see the problems as contained. But no good will come from Greece's financial problems in a flat, networked and interconnected (and, over there, a leveraged) world.

And in a world that already has liquidity issues, there likely will be other unintended consequences that we know not of yet today, as well as deep-rooted secular headwinds. Think, for example, about possible dislocations in the derivatives market.

My advice? Don't take Wall Street's brown acid, and err on the side of conservatism.

Tactically, as I've recently written before, I would favor the cash and bond-equivalent market sectors (REITs, utilities, closed-end municipal-bond funds, etc.) over cyclicals and industrials this summer.

In the broadest sense, my view remains that we're currently building a broad and important market top, and my baseline expectation is that we're now making a transition from bull market to a range-bound market.

To me, the next stage on both fundamental and technical grounds is a move towards a bear market/correction, which is coming into clearer focus.

VIA http://www.thestreet.com/story/13188395/2/more-greek-drama-airbnb-vs-marriot-takeaways-from-the-fed-best-of-kass.html

June 18, 2015

Chinese stocks worries Doug Kass

There's little question that Chinese stock prices have outstripped fundamentals. According to an excellent Economist report, median P/E on the Shanghai Composite is 75x.

After failing to reflate China's property market and in light of more signs of a slowing deceleration in domestic growth, Chinese authorities have turned their attention to inflating their stock market -- encouraging speculation in a host of ways. That includes liquidity injections through monetary easing, as well as urging people to reallocate assets into stocks and away from property, savings and wealth-management products.

Chinese brokerage accounts are growing exponentially in response, with 8 million new accounts in the first quarter alone, according to The Economist. Average daily trading volumes are also hitting new records.

With small "floats" and a system that's characterized by opacity, secrecy, corruption and limited regulation, many Chinese stocks have been pushed up to Space Balls' "Ludicrous Speed."

The Shenzhen Composite index has tripled over the last 12 months, and the Chinese averages have been climbing parabolically since March. (Here's a 12-month chart of the iShares China Large-Cap ETF  (FXI), which demonstrates China's relative and absolute outperformance.)

Daily market moves of +4% have now become routine, but numerous stock frauds of companies whose shares are up more than five-fold are being uncovered every week.

As The Economist found, one pet-food company trades at 220x earnings, while a sauna maker sells for 285x earnings and a manufacturer of fans goes for 730x earnings.

The magazine also reported that 100 Chinese companies have changed their names this year. A hotel company rebranded itself as a high-speed railway company, a fireworks manufacturer became a peer-to-peer lender and ceramics specialist became an energy company.

Kemian Wood Industry, a composite-floorboards manufacturer that faced a slump in its end markets, recently saw its share price briefly double after the firm changed its name and revised its focus to online gaming, according to The Economist. The magazine said China's state broadcaster recently accused the company of "fabricating themes and telling stories" in order to inflate its share price. (The firm denied the allegations.)

This week's potential disaster is Hanergy Group.

On CNBC two days ago, Muddy Waters' Carson Block raised concerns about Chinese stock frauds in China, calling this the largest "pump and dump in history."

What really shocks me is that many otherwise-sober observers have accepted the Chinese market's ramp-up as understandable and reasonable. One market watcher called it "a change in psychology," with share prices "moving from the lower left to the upper right."

Sometimes what's front of us is mistakenly accepted as normal even though it's absurd on so many bases. It's abundantly clear how inflated the Chinese bubble is.

As Credit Suisse put it: "(China's) equity market price momentum has decoupled away from earnings revisions which remain deeply embedded in negative territory."

I recently added the Chinese stock-market bubble to my list of 13 intermediate-term concerns.

Shorting FXI looks like a good move, but I don't have the stomach to do so and I certainly can't calibrate the timing of such as short. That said, I'm seriously looking at FXI puts.

When the bubble bursts -- and it will -- a long shadow will be cast over the Chinese economy, as leverage has played a crucial part of the rally.

Margin buying has increased more than five-fold in the last 12 months to over $325 billion, according to The Economist. Moreover, the magazine found that "umbrella trusts" (in which banks lend to wealthy investors) have added more debt to stock buying. The Economist said that Credit Suisse estimates nearly 10% of China's market capitalization is funded with credit -- nearly five times the developed world's average.

As David Clayton-Thomas once sang:

"What goes up, must come down."

VIA http://www.thestreet.com/story/13177647/2/wal-mart-apple-banks-china-stocks-doug-kass-views.html

June 17, 2015

Avoiding housing related stocks

For emphasis, the outlook for housing worries me and I would avoid most housing-related securities:

Interest rates have to rise only slightly to adversely affect housing, as many are locked into low adjustable's and teasers, so they are less likely to "move up" to larger and more expensive homes, as they can no longer replace low-level mortgage rates. 

June 15, 2015

Doug Kass thinks Apple stock has topped

The nearly unanimous view is that the news from Worldwide Developers Conference was a net positive for Apple.

I respectfully disagree. To me, there was no "wow" announcement, nor were the announcements that were made significant enough to support further strength in the Apple ecosystem.

My view is that we're well through the last important upgrade cycle for the company's key phone product now, and that neither Apple Pay nor the Apple Watch will move the sales-and-profit needle enough to support AAPL's current price.

To me, Apple is "over-owned" and investor sentiment toward the stock is high, as manifested in its elevated price-to-earnings multiple relative to other hardware companies.

I still view Apple as an electronics company. Although the bulls see it as a precursor to more of a computer-programming platform (and there's some truth that sentiment), that path won't be a smooth one. The business landscape is more competitive, and perhaps not as profitable as some project.

So, I see "Peak Apple," and I added to my Apple short yesterday.

Position: Short AAPL

Article Originally published on http://www.thestreet.com/story/13181239/1/a-tart-take-on-apple-a-media-blather-index-and-seeing-upside-in-banks-best-of-kass.html

June 11, 2015

Interest rate rise could hurt housing

A half-percent rise in mortgage rates takes away about 5% in purchasing power from buyers because buyers almost always buy the maximum they can afford, using contemporary mortgage guidelines.

So on the average new house, every 50 basis points in interest rates equals about $16,000 in buying power -- which on builders, in particular, comes right out of their margins, not as much on sales volume because new home sales volume is already so low. On resales, it simply results in lower sales volume.

Bottom line: The surge in interest rates is a headwind for housing. We saw this movie at the end of 2013, which turned into a demand dip, year over year in 2014. 

via http://www.thestreet.com/story/13176133/2/fear-of-losing-liquidity-and-a-song-to-go-with-it-housing-market-worries-and-a-peek-inside-his-retirement-account-best-of-kass.html

June 10, 2015

A look inside Doug Kass retirement fund

For what it is worth, my personal retirement account (nontaxable) has the following mix now:

* 35% -- U.S. 30-year bond

* 30% --  iShares 20+ Year Treasury Bond ETF (TLT) (about 20-year maturity)

* 20% -- Blackstone - GSO Strategic Credit Fund 

* 15% -- Cash

This mix reflects my age, health, risk profile, earnings capacity and the composition and value of my other assets.

Equity: I have no equity exposure at this time.
Other Position: Long TLT, 30-year bond, BGB 

via http://www.thestreet.com/story/13176133/2/fear-of-losing-liquidity-and-a-song-to-go-with-it-housing-market-worries-and-a-peek-inside-his-retirement-account-best-of-kass.html

June 8, 2015

Markets looking calm on the surface but below could be different

Today the market is like the anecdote about a duck. It looks serene gliding across the pond, but underneath the surface it's furiously paddling. The market is like that: you look at the price chart of the S&P 500 (SPY) and it just keeps gliding higher, while underneath the surface there's massive turmoil.

   - New 52-week highs have been declining on every rally since February;
   - S&P 500 stocks over their 200-day averages have shown lower highs on every rally since last September;
   - Health care and technology are the only major sectors even close to maintaining breadth and momentum;
   - Utilities peaked in January's last week and are now nearly 10% below that top;
   - Energy stocks topped out in April 2014 and today are about 21% below that peak;
   - Transports made their highs in November and last week broke major support levels, standing 17% below their highs.

This paddling of the market's feet under the water's surface is typically a sign of a maturing market, but there's nothing typical about today's market. A market without memory from day to day -- in which big up days are routinely followed by big down days (and visa versa) -- isn't normal, although it's become the norm.

At the same time, volatility measures have been extraordinarily low, but the volatility of individual securities has been very high. Nor have index/group/sector breakouts had any followthroughs, although breakdowns have also been kept to a minimum.

How do we explain the serene market above the water's surface and a volatile market just below?

Perhaps the major individual and sector/share price volatility is a function of pronounced takeover activity that's now at record levels. Or perhaps it's the importance of financial engineering (share-buyback activity) that explains all of this.

Or maybe the market's inconsistencies and developing changes are a function of the markedly increased role of high-frequency trading, price-momentum strategies and the dominance of ETF trading.

The key question today is whether one believes that this "duck paddling" -- narrowing market participation and erosion in a number of leading sectors and stocks -- is a precursor of a larger correction, or whether the recent weakness is a healthy consolidation in preparation for another leg higher. 

Market history would say it's not "different this time," but the atypical nature of a market that's being smothered by massive liquidity and zero interest rates also merits consideration. Even with this unprecedented monetary stimulation (and ever more "cow bell"), subpar global economic growth has been the mainstay. For as Deutsche Bank recently commented, if Fed members "were brutally honest, what vestiges of optimism remain in the domestic sectors could quickly evaporate."

No doubt these are unusual times.

As The Oracle of Omaha remarked at this year's Woodstock for Capitalists:

    "We've done a lot of things that weren't in my Economics 101 class, and nothing bad has happened except that people who've kept their money in savings have gotten killed. But it's hard for me to see that if you toss money from helicopters, there isn't inflation. But I've been surprised by what has happened. We're operating in a world that Charlie (Munger) and I don't understand."

    -- Warren Buffett, 2015 Berkshire Hathaway (BRK.A) (BRK.B) annual meeting 

Based on market history, all this subsurface activity and deterioration would unequivocally be negative. But to some degree, the same could have been said a year ago. To still be grinding upward thanks to the world's central bankers (and other reasons) is nearly unimaginable.

In the 1999 to 2000 dot-com bubble things were out of sort. Valuations were stretched dramatically and overall participation was narrow. But the groups that were working were growing dramatically and some even exponentially. Yes, investors should have been discounting an eventual Post-Y2K deceleration, but at least in that era we had substantial top-line sales growth.

Today, we're trading at similar overall median stock multiples for many companies, but with only 2% to 4% revenue growth ex-energy. Margins have likely peaked and global growth is subpar, even after massive stimulus.

    "If we get normal interest rates, stocks will look expensive."  - Warren Buffett, 2015 Berkshire Hathaway annual meeting 

And yet I still listen to intelligent money managers say things like: "But where can I make money?" or "Bonds are just as risky if not more risky than stocks!"

When people argue that they aren't making money in bonds, it assumes that they won't lose money in stocks -- which is, frankly, totally inane (if not insane). 

Numerous acquaintances in the hedge-fund business tell me that they're scared because they could lose 10% in bonds. At the same time they don't think stocks can go down more than 10%.

They ask in light of this, "Why sell stocks?"

"T.I.N.A." ("there is no alternative") has been the bullish mantra for years. And in a bull market characterized by zero interest rates, there's no alternative to zero -- until stocks deflate and investors grow concerned that the return of capital eclipses the objective of seeking a satisfactory return on capital.

We're not at maximum bullishness -- that passed a year ago. Though the overwhelming view by most market participants is that "stocks could pull back, but not enough to justify getting out of them," I will state without qualification that we are now at maximum complacency.

It's almost as if Daffy Duck has taken over the market's pond these days. Let's call this the Summer of Looney Tunes. 

Originally published at http://www.thestreet.com/story/13172333/3/kass-this-market-looks-as-serene-as-a-duck-but-theres-turmoil-underneath.html

June 3, 2015

Stock market experts on TV are too confident

We need more Jeff Spicolis in the investment business -- people who are unsure of themselves and can say: "I don't know!"

Yesterday, I came back from some research meetings and found the S&P 500 up by about 20 handles, the polar opposite of the previous day's 20-handle fall.

I tuned into the business shows for a market recap but was amused by how many self-assured market observers "knew" -- after the fact -- that Wednesday's reversal would occur.

I wish I were that smart. Although I did cover many of my shorts on Tuesday, I had no clue that the market would recover.

Frankly, as I've repeatedly written, the only certainty in investing is the lack of certainty. It's for that reason (and out of respect for my and my investors' capital) that I've been plus or minus "market neutral" for months now. There are simply too many possible adverse economic and market outcomes -- which makes, for me, an unattractive reward-vs.-risk equation.

I see this self-confidence of "after-the-fact" analysis all of the time in the business media, on Twitter, Facebook and elsewhere.

My advice has been constant -- avoid those who are self-confident of view and who provide ready explanations to daily market moves.

Why? Because 
1) they probably aren't managing significant amounts of money (and in some cases don't have any assets at risk at all), 
2) their observations are almost always "after the fact," 
3) they explain the turnaround on variables that are just plain dumb (often simply making stuff up), 
4) they're probably trying to sell you something instead of providing value-added investment input, and 
5) they never say "I don't know."

The investment world and the media that cover it demand endless opinions that most people have limited information on. I describe this as being 3-miles wide and 1-inch deep. Sometimes the respondents just make answers up. Other times the questions and answers are simply scripted in advance and the rapid-fire responses are mistaken for thoughtful and deep analysis. (Which they're not.)

My pet peeve is the singular question that's routinely asked of business TV's "talking heads" as they parade before the media at 3:45 p.m. and 6:00 p.m. every day. They're always asked the same inane question: "Why did the market do what it did today?" 

In a market that's without memory from day to day (and that often ends the session based on the last program standing), that's an impossible question to answer. It also underscores the simple-minded attitude of the questioner, who -- instead of asking probing questions -- asks lame, simplistic and standard ones.    
The market's wild and uncorrelated swings so far this year have elicited numerous self-confident responses about the causality between news and prices. They're irrelevant and inaccurate because this market has been trendless.

We do see rare expressions of truthfulness, but they're few and far between. The last one I can remember was from my friend Josh "Downtown" Brown of Ritholtz Wealth Management, who answered a question on CNBC's "Fast Money" earlier this year with the words: "I don't know."

I guarantee that you won't hear that very often from TV guests, as many believe they wouldn't seem smart enough if they were honest with us. Instead, most simply make up stuff. Knowing the likelihood of the question, they have their talking points all summed up before they appear. Many even underscore their reasons behind a market's daily move with such confidence that even I believe them at times.

The fact is that snark and made-up opinion far too often envelop the business media in place of facts and figures.

Equally infuriating is the confidence shown in delivery of said snark. Sometimes the reason for this is out of necessity, as media appearances are typically brief. Nevertheless, in a world characterized by an absence of certainty and an interrelated and a complicated market mosaic, too many TV guests attach self-confident reasons to randomness.

In summary, I would characterize a lot of the pabulum in the business media as instantaneous entertainment rather than rigorous analysis. 

VIA http://www.thestreet.com/story/13168013/2/kass-explains-whats-wrong-with-stock-market-tv-pundits.html

June 2, 2015

Dont short or go long Shake Shack, Go Pro

To me, Shake Shack is a short, but given my core tenets of short selling -- never short when the short interest exceeds 7%-8% of the float and when the short interest is a multiple of the daily average trading volume -- I am a spectator in this yo-yo.

And today, the yo-yo is -$10.

My advice? Avoid SHAK (on either the long or short side) -- like the plague.

Just like GoPro (GPRO). 

June 1, 2015

High end housing will do well in this economic recovery

On Fast Money: Halftime Report, Scott Wapner asked why all the panelists were unanimously bullish on housing. The gang gave a number of reasons: rates won't rise too rapidly, household formations are climbing, an improving labor market and pent up demand were among many factors. 

Respectfully, I hold to a different and more cautious view:

  -  While the high end will benefit from an "exclusive" economic recovery that has aided the well-to-do -- higher home prices have sowed the seeds to reduced affordability and will hurt mid-level priced housing sales activity going forward. (The issue has not been the cost of capital or the level of mortgage rates for years).

  -  Interest rates have to only rise slightly to adversely affect housing, as many are locked into low adjustables and teasers, so they are less likely to "move up" to larger and more expensive homes as they can no longer replace low-level mortgage rates. Mortgage credit is no longer freely available (as was the case eight years ago) as mortgages standards having been raised materially, so yesterday's no doc/lo doc mortgage of $250,000 (rates low or zero) is today's equivalent to a $450,000 mortgage (when normalizing the "terms").

I would avoid housing-related securities.