July 29, 2015

Be wary of earnings being reported

As we move deeper into the earnings report season, please keep the following in mind: As a skeptic, I would compare the EPS season to Monty Python's "Twit Olympics," where contestants compete by jumping over matchbook covers.

In other words, investor relations departments manipulate consensus sell-side EPS forecasts so they can be beat by modest amounts, usually by a penny or so. This helps to explain why about 69% of reports are "beats" on a consistent basis.

The biz media is breathless about these reports, which are actually highly choreographed.

Among the dim-witted upper class depicted in Monty Python was Nigel "Incubator" Jones, whose best friend was a tree and who was a stockbroker in his spare time.

Remain skeptical of most earnings reports as they are judged against choreographed expectations.

July 28, 2015

Capital preservation should be priority for Investors

For the balance of the summer, and perhaps longer, the primary consideration of most should be preservation of capital.

For the more aggressive, like me, a short exposure is appropriate. However, this is a function of one's risk profile and appetite.

The U.S. dollar's advance and its impact on exports and corporate profits, the investment ramification of strengthening deflationary forces, the market's narrow leadership, the continued mania in social media stocks (abetted by high-frequency trading and other price momentum-based strategies) and private equity valuations, subpar global economic growth, elevated price-earnings multiples and other factors are the sources of my concerns.

I would maintain above-average cash reserves and be quite selective in new purchases by always judging reward versus risk.

I am now at among my highest net short exposures in some time.

Position: Short SPY

July 27, 2015

Citigroup stock prospects have improved

My principal take on second-quarter results is that profit visibility has improved at  Citigroup, thus laying the foundation for both an attractive earnings growth case and a price-to-earnings multiple improvement story that may close the 10% valuation discount of Citigroup relative to its peers.

A larger-than-expected loan reserve release largely led to the 10-cent earnings beat in the second quarter.

Most of the other components were in line.
-    Core revenues were on target at $19.2 billion.
-    Consolidated expenses were under control.
-    Fixed income, currency and commodities (FICC) was slightly better.
-    Equities were slightly weaker.

Citigroup raised guidance for the full-year efficiency ratio in its global consumer bank back toward the higher end of the range.

Capital is solid, with a Basel III ratio at 11.4%.

After experiencing outsize EPS growth of more than 20% this year, 7% to 9% annual earnings growth is anticipated for 2016 and 2017.

Citigroup is trading at about nine times my 2017 estimate of $6.50 a share and only at about 0.7 year-end tangible book value in 2017, which makes it one of the few money center banks trading at under book value.

In response to a healthy profit progression over the next few years I expect C's dividend to increase from an annual rate of 20 cents a share to 70 cents.

My 12-month price target is about $65 to $67 a share. But more importantly, the three- to five-year story has improved.

Position: Long C 

via http://www.thestreet.com/story/13223082/2/netflix-citigroup-and-the-banks-doug-kass-views.html

July 23, 2015

Was right selling Gold in May

I had a "protection policy" of holding gold through the SPDR Gold Shares ETF (GLD) back in February, but sold this hedge in May at about $116.50.

Well, GLD is trading this morning at around $110.75.

I got a lot of pushback on my gold sale back in May (principally from technicians), but I feel comfortable with my fundamental decision.

Gold has moved irregularly lower since my sale (it's now under $1,200 an ounce) -- and if I were still long on GLD, I'd have had no clue what to do here on the metal's weakness. In my mind, that confirms my decision to sell in May.

July 22, 2015

Here's why Netflix could be a SELL from here

I don't have a dog in the Netflix hunt. However, if I was fortunate to have owned Netflix going into the quarterly earnings report Wednesday evening, I would consider selling it today.

The narrative below is not intended to be a comprehensive analysis of the company, but rather is meant to point out some general issues facing Netflix and its investors over the next few years that currently may be ignored and, to me, are sufficient reasons to sell the stock.

On a split-adjusted basis, Netflix's shares have risen from $7 a share to $116.40 a share over the last three years.

On Thursday alone, when the stock rose by nearly $18 a share, Netflix's capitalization grew by almost $8 billion, to almost $50 billion. As a means of comparison, the market cap of Sony Corporation  (SNE - Get Report) is only $33 billion and the market cap of Yahoo  (YHOO - Get Report) is $13 billion under that of Netflix. Netflix's market cap is now nearly one-third that of Comcast  (CMCSA - Get Report), only $20 billion less than the $69 billion capitalization of Twenty-First Century Fox  (FOX - Get Report) and is within $25 billion of Time Warner  (TWX - Get Report).

In premarket trading Friday morning, Netflix's shares gained another $2 to nearly $118 a share.

Clearly the bulls are stampeding based on a subscriber count, both in the U.S. and outside of the U.S., coming in far better than consensus expectations.

Driving the better sub count is a currently great content offering by the company. But, absent from the dialogue -- perhaps because many NFLX bulls are Internet analysts and not entertainment analysts -- are the following factors:

  -  The profitability of new subscriber additions represents a fundamental question in valuing Netflix. Most of the excitement surrounding the company is the size and current low penetration of the addressable market. Netflix's strategy is to sacrifice profit over the next few years in order to generate substantial sub growth. But, this begs the question of how much profit will be achieved by generating additional subs. Thinking about the lower profit in terms of a customer acquisition cost compared to the value of the customer acquired would suggest this may not be a very good business decision.

   - Content is expensive and costs are escalating -- to an estimated $5 billion in 2016. The company does not offer estimates of the cost of self-produced content.

   - No ratings for the consumption of Netflix content are available. To be blunt, most of the content enthusiasm is generated by analysts who have some affiliation with investment banking. It is clear that Netflix's "House of Cards" is wonderful -- but is it $8 billion wonderful?

   - Not all self-produced content makes it. That is part of the explanation why content producers sell at only 10-15x EBITDA. Forgotten by the Netflix bulls is that a self-generated production such as "Marco Polo" costs more than $100 million. It has been reported that a second season has been ordered; we shall see about that!

  -  Consensus earnings estimates have tumbled. First- and second-quarter reported earnings have failed to meet expectations and analysts' earnings per share forecasts have been slashed for 2015-2017. Consensus 2016 EPS is nearly 50% lower than projections by analysts as recently as 90 days ago.

  -  Valuation is rich -- maybe beyond so! The shares trade at nearly 150x reduced estimates projected for next year as the company spends to grow subs.


The investment case for Netflix continues to be pushed out into the future as profitability and cash flows have consistently disappointed.

Investors appear increasingly willing to judge the company not on traditional metrics of earnings, but rather on how much Netflix is willing to spend.

As Greenlight's Einhorn has further remarked, in all likelihood the success of the company's spending spree will not be known within the investment time horizon of many of the traders and investors who are involved in the shares today.

I might very well be early in the view I have expressed this morning, and/or it might take higher interest rates or some other factors to end the current infatuation with tomorrow in Netflix.

It's a lonely feeling not owning Netflix -- but it was mighty lonely, too, being negative in early 2000 on the Internet stocks.

I would also add that with the benefit of hindsight, the exceptionally smart investor Carl Icahn recently sold out too early in Netflix -- but in the fullness of time his decision might prove to be very wise.

From my perch, investors in Netflix are again partying like it is 1999-2000. But, history usually rhymes and investors have forgotten the pain inflicted in the euphoria of 15 years ago.

Sell Netflix.
Position: None 

July 20, 2015

Russell 2000 weakness could be sign of unhealthy market

I heard someone in the business media earlier today dismiss the Russell 2000's weakness as noise.

I'm not so sure that I agree.

The iShares Russell 2000 ETF  (IWM) is down 0.67% today and the S&P has flatlined, but the Nasdaq 100 is the "World's Fair." And the Nasdaq's sharp rise is occurring with more decliners than advancers.

Such narrowing of the market is typically an unhealthy condition -- but there's nothing "typical" about this market at all.

Position: Short SPY (small), QQQ (small)

via http://www.thestreet.com/story/13223088/1/gold-twitter-and-tech-stocks-doug-kass-views.html

July 16, 2015

Risk reward not favorable to buy stocks right now

 I continue to subscribe to the notion that while we face numerous possible economic and market outcomes, many of them are adverse. And with equities so elevated, the reward-vs.-risk quotient is unattractive. You need to have a damn good reason to buy any stock this summer.

July 15, 2015

China downturn will affect US markets

I recently have written that is next to impossible for the U.S. to remain an "oasis of prosperity" in a period of tumult and chaos in financial assets and in economies.

There is no way that we will be insulated from Latin America, China, Russia and Europe's woes.

Of late, China is a clear trend of decelerating domestic economic growth, and the overt speculation in its stock market has taken center stage. I warned of this back in early June.

The first indication of a negative impact on the real economy from non-U.S. problems -- and it will be soon -- will be a ratcheting down in high-end residential real estate prices and activity in the U.S.

With a nearly 11-year supply and with 85% of the buyers being foreign, Miami, Florida, will likely be the eye of the real estate hurricane.

Real estate maven Mark Hanson recently has issued his own warning on the South Beach, Florida, housing market.

Position: None 


July 14, 2015

NYSE computer glitch another reason to becareful of buying stocks

.... NYSE computer glitch will put another dagger into the heart of the retail investor. It simply doesn't engender confidence.

Just as the "talking heads" who dismiss China, Greece, Russia and Latin America as market threats, those who dismiss computer "glitches" as non-consequential should be locked in a closet away from children (and investors who act like children).

The business media has come to the NYSE's defense today. I'm not surprised that the media aren't going to the bathroom where they eat, but I don't share their view. The NYSE is at least partially responsible for today's outage.

July 13, 2015

Short Apple shares is Doug Kass biggest position currently

My most important takeaway today is the observation that Apple  (AAPL - Get Report) -- "The Market's General" -- has been shot.

Apple's shares dropped $2.50 at one point today, breaking below $120 a share and moving through some key technical support.

Whether the shot is fatal or just a flesh wound can and will be debated.

Jim "El Capitan" Cramer thinks the wound is only superficial, but I have more serious concerns that extend to the intermediate term.

Of immediate concern is that Apple's second-largest market is China, and the potential negative "wealth effect" from lower stock prices there must now be considered.

But an even more important factor may be that if the current market malaise turns out to be a more-severe decline than many expect, Apple is likely to serve as an ATM for investors who want to raise cash.

The bottom line: Apple's shares - which represent my largest individual equity short -- have been hospitalized. The diagnosis remains unclear, but stay tuned to see how far the mighty might fall.

Position: Short AAPL


July 7, 2015

TV talking heads reporting on Greece

    "Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway."    - Warren Buffett

With every macroeconomic event, nearly every "talking head" has a view.

Greece is just another of a long list of events that "requires" instantaneous reporting. But opinions are like noses (anatomy part changed to allow for publication!) -- everyone has one.

Consider the depth of knowledge of commentators when they offer glib and self-confident recommendations based on events such as Greece.

While there are exceptions, I just listened to a trader on the floor of the New York Stock Exchange who offered a confident view of Greece.

Most of these self-proclaimed authorities are three miles long and a few inches deep in knowledge of the subject matter; they've spent minutes -- not hours or weeks -- learning about the event.

And that includes yours truly.

    "A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the forecasting."     -- Warren Buffett

VIA The Street

July 6, 2015

Long BGB and GM - Short CAT

Blackstone/GSO Long Position Gains Affirmation

I have previously mentioned why I have purchased and am adding to Blackstone / GSO Strategic Credit (BGB):

"I'm buying the Blackstone/GSO Strategic Credit closed-end fund (BGB) with a $16.15 limit in my non-taxable personal retirement account this morning.
The 12.3% discount to net asset value (the NAV was $18.46 a share as of yesterday's close) is close to the widest it's been over the past year. Average discount to NAV over the last 12 months was just 10.6%, while the current yield is 7.8% and leverage is 32%."

Position: Long BGB

Things Are Down Today Down on the Farm

With corn and wheat prices lower, Deere, Caterpillar and the rest of the ag-related complex are following suit.

CAT remains on my Best Ideas List (short).

Position: Short CAT

GM's Sales Stall

General Motors (GM) has missed consensus expectations for its June auto sales.
I've been wrong so far about going long on GM, but I'm sticking with the position.

Position: Long GM

VIA http://www.thestreet.com/story/13207932/1/general-motors-caterpillar-bgb-doug-kass-views.html