May 31, 2016

Current Banking sector rally may not have the legs to continue

The iShares 20+ Year Treasury Bond ETF was +$0.80 at last check as bond prices rise and yields fall. The 10 and 30 year Treasury yields are both lower, the yield curve is flat and the two-year/10-year Treasury spread is basically at a multi-year low.

There's no sign whatsoever of the yield curve steepening, even though that's what the bank sector's bulls have cited to justify the recent rally in financials.

In other words, waiting for the yield curve to normalize might be like waiting for Godot! While I continue to believe that banks offer outstanding value on a multi-year basis, I'd recommend traders and investors who have six-month time horizons or less consider selling off a portion of their bank holdings.

As you probably recall, I took all nine banks on my "Best Long Ideas" list off of the rundown back in mid-March.

It turns out that I was early in selling off the stocks three months ago. But while I continue to believe that banks offer great multi-year value, I see a number of threats for the sector over 2016's balance. These include:

Overly Optimistic Earnings Estimates
I still believe that analysts' 2016-17 earnings forecasts for banks are too high (although only modestly so).

I note that the two-year/10-year U.S. Treasury spread recently went below 100 basis points, or more than 150 basis points under what we saw a few years ago. That's bad news for banks, which rely on credit spreads to make money.

Unfortunately, my baseline expectation for the next few quarters is that we'll see the yield curve continue to flatten. After all, the Purchasing Managers Index and other recent indicators point to U.S. growth that's disappointing relative to expectations.

A Rally That's Already Happened

Banks have enjoyed a spirited rally recently. But to me, the time to buy banks stocks was months ago, when share prices languished out of disinterest.

A Tame Fed

I still expect that we won't have any Federal Reserve rate hikes this year. That's a non-consensus view, but if I'm right, continued low rates should be bad for banks.

Fair Valuations

Bank-stock valuations are reasonable right now, but they're no longer cheap.

And given the fundamental headwinds that I see for the sector, it's hard to envision banks enjoying much expansion to their multiples from here.

Political Problems
I expect financial firms to face renewed political threats from both Democratic presidential candidate Hillary Clinton and her Republican rival Donald Trump.

The Bottom Line

Add it all up and I see few catalysts for bank stocks away from a rotation into the space. Frankly, I don't see much rationale for this strength to continue."


Position: Short XLF


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May 26, 2016

Here is how you can analyze stocks the Doug Kass way

Always be creative in your research process. Most people simply interpret and analyze the same fundamental and technical data, view research from similar sources and attend the same conferences and management presentations. In other words, most players are simply talking to each other!

I call this "Group Stink." While the investment world has never before been this transparent, remember that:

-    We're inundated more than ever before with the same data.
-    The technicians are all reading the same charts.
-    The fundamentalists are all interpreting the same data and listening to the same eternally optimistic company managements.
-    Much of the business media report the same pablum over and over again from the same commentators and "talking heads" (who are usually just "talking their book" anyway).

I've tried over the years to differentiate my research by employing creativity and a lot of hard work to deliver proprietary views. Most of the time, this has served as a productive and profitable exercise.

How I Analyze Stocks

To begin with, I conduct ongoing channel checks and bottom-up research, often with offbeat contacts who typically don't spew the company line. That's why I sometimes disappear for hours at a time in between diary postings. This isn't easy -- it's labor intensive, and sourced by nontraditional contacts that I've developed over years.

Secondly, I take all company-management interviews that I see in the business media with a healthy dose of skepticism."

Let me explain in greater depth how I do research, using an example that I remember quite well from 26 years ago.

I used to do harness racing, but I broke my legs, nine ribs and eleven vertebrae in a near-fatal accident during a July 1990 race. This left me in a wheelchair and body cast for nearly two years.

While convalescing, I took it upon myself to do research on Marvel Entertainment. Among other things, I simply called numerous comic-book stores from my hospital bed in New York. This research ultimately developed into a negative cover story on Marvel for Barron's. 

Anyone willing to spend the time and be creative can do good, independent research. In fact, you have to these days -- because as I noted above, company managements rarely provide good, objective information or express negativity. To paraphrase Warren Buffett: "They lie like ministers of finance on the eve of devaluation." The same often applies to sell-side analysts, too.

Lending Club's fall 
Let's look at troubled LendingClub (LC) as another example for how you can do independent research.

For those unfamiliar with LC, the firm operates an online marketplace that aims to connect consumers, small businesses and other borrowers with investors who are willing to loan them money. The goal is to allow everyone from banks to hedge funds to high-net-worth individuals to offer such things as personal, educational or medical loans.

LendingClub stock got as high as nearly $30 a share in late 2014, giving the firm about a $15 billion market capitalization as numerous hedge funds got on board with this seemingly new and disruptive idea. But since then, LC's price has dropped by almost 90%, as this chart shows.

Let me share how I avoided buying the stock back in late 2014, when many money managers were loading up.

During LendingClub's heyday, I certainly wasn't going to take what the CEO said in his frequent appearances in the business media. Instead, I did my own primary research, just as I did with Marvel Entertainment.

How did I do that? Simple -- I became a LendingClub customer.

I deposited $5,000 with the firm in November 2014 to see how the company's investment process worked and how profitable it might be. I set up an automatic-investing account and picked a mix of the available loan-quality categories (from "A" to "F"), putting about 20% toward each.

But within a year, two of the 15 loans that I made had to be entirely charged off. All told, my total internal rate of return, or IRR, for the first 15 months was an abysmal minus 1.31%! So, I knew that there was less than meets the eye to LendingClub's business.

My experience also showed me that sometimes, disruptors aren't really all that disrupting. In essence, LC is just a combination of an on-balance-sheet lender and a traditional investment bank that packages loans to sell to the marketplace.

All told, I concluded that there simply wasn't enough peer-to-peer demand to fund LendingClub's growth, so I avoided the stock (although I wish now that I had shorted it).

You, too, can do this sort of thing from home -- in your pajamas. All it takes is some time and a little creativity!

May 24, 2016

Markets could end up down more than 10% for this year 2016

I remain in a pessimistic mode, but a practical one. Trading around positions seems to be a reasonable strategy given what expect for 2016's balance -- a choppy, newsy and even random market that's governed by machines and algos.

I continue to expect low-double-digit percentage declines for the S&P 500 for the year as a whole. Ergo, I'll be a short seller on any market strength. I still believe that stocks began making an important and major market top in May 2015, and that what we've seen since has just been a part of that process.

Of course, the market might be due for a bounce in the near term, so I responded accordingly yesterday by reducing my short exposure.

The Fed
Despite growing expectations for the Federal Reserve to boost rates at its June or July meetings, I still don't foresee any rate hikes this year (as I expressed in December in my 15 Surprises for 2016).

The Fed's June meeting is simply too close to Britain's "Brexit" vote, and I expect greater visibility of a U.S. economic downturn to appear by July. Did you see the carnage in many fixed-income sectors over the past two days -- particularly in closed-end municipal bond funds? Remember: When sentiment turns, liquidity dries up. Ergo the expression: "Sell when you can, not when you have to!"

Valeant Pharmaceuticals 
Valeant received another notice of default from bondholders Thursday. I would avoid Valeant's shares, as I believe things could end badly there.

Apple
I've been quiet about Apple over the past few weeks. The shares are trading in the $90s, buoyed by Berkshire Hathaway and its purchase of about $1 billion of AAPL stock.

But my bearish thesis for Apple remains intact, and I believe Berkshire will be proven wrong. I give the stock a 12-month target of about $80 a share vs. Thursday's $94.20 close, and I'll consider shorting more AAPL in the $95 to $100 range.

I continue to believe that Apple won't eclipse its 2015 earnings-per-share peak for years, given the conclusion of the iPhone's last important upgrade cycle and the absent of any needle-moving new products. The New York Times' James B. Stewart discusses the concept of Apple as a value play in an interesting recent column, but I respectfully disagree. As CNET reported, the Android just blew past the iPhone.

Retail's Winners ... and Losers
I'm simpatico with Jim "El Capitan" Cramer that Amazon and Walmart will ultimately win the retail battle.

But I suspect that I'm even more negative than Jim is on the rest of the bricks-and-mortar space, where I see numerous "value traps." I have no longs in retail space and one major short: Nordstrom, which has been very good to me.

I also recently shorted Foot Locker, which l'll have more to say about next week. I expect to launch even more shorts in the sector on any strength in the weeks ahead.

Do Your Research
My big theme yesterday was on the importance of doing your own research. After all, few "experts" saw the retail sector's recent carnage coming, even though the evidence for it was right in front of us.

Consider how unlikely it is to succeed in delivering great investment returns when you participate in what I call "Group Stink." (This is one of the reasons that I see Peak Hedge Funds.)

I'll admit that doing your own research is hard work, but think about how much research goes into Jim Cramer's hard-hitting CEO interviews on Mad Money.

And remember, be wary of the self-confident -- especially many of the business media's "talking heads." Many are trying to sell you something, and they're often not being honest with themselves or us. And frequently, their knowledge of a given company is "miles wide and inches deep." As I noted yesterday, you can do your own independent and innovative research while in your pajamas!

Miscellaneous
As I've mentioned previously, a lot of high-profile stocks are rolling over these days. So, I'd recommend avoiding Apple, Ford, General Motors, Netflix, Starbucks and Walt Disney even though they might seem "cheap."

I'm short on all of them, and my diary is filled with critical analyses of each one. As always, the most important factor that I see is slowing secular profit expectations for them all.

Position: Long SH (small); 
Short: IWM, AAPL, F, GM, SPY (small), QQQ (small), SBUX (small), DIS (small), NFLX (small), FL (small)

via thestreet

May 23, 2016

Quants are making money while Hedge Funds are facing more redemptions

As I've previously written, Mr. Market has more moves these days than a shortstop who's batting .110. Stocks have lost their predictability and reliability as economic variables seem to have the opposite effect from day to day in the market that's without memory from session to session. Wall Street seems to have more twists and turns than Donald Trump has former girlfriends and wives.

Let's look at some of the problems:

As I've previously written, the market mechanism is broken -- influenced in part by the dominance of quant strategies that are agnostic to private-market values, balance sheets and income statements. Machines and algorithms have replaced traditional financial analysis and active money management.

The inability of everyone from small investors to large hedge funds to react to this has doomed many people's investment performance, which has important market and fund-flow implications.

A market with little natural price discovery and lots of central-bank largesse disenfranchises both individual and institutional investors. Monthly net redemptions are continuous as retail investors leave the markets in droves.

And for those small investors who do remain, ETF's are becoming the investment vehicle of choice. Single-stock stories that have historically served as the market's foundation are becoming endangered species as individual investors focus on diversification and liquidity given today's extreme volatility.

Institutional investing's profile is changing as well. Hedge funds, which until recently had been the market's dominant players, are being dis-intermediated amid under-performance and high fees. American International Group, MetLife, Lincoln National and other life insurers are reducing their hedge-fund exposure, exacerbating the industry's woes.
Future of Human Evolution ?

As a result, hedge funds are scrambling to deal with never-ending redemption's, making it tough to hold the longer-term investments that had previously boosted the industry's results.

And the "funds of funds" that serve as feeders to the hedge hoggers are suffering even more than the hedge funds themselves are. After all, these funds' second layer of fees has become unacceptable to many investors in the wake of today's subpar aggregate returns.

Declining fund flows, investor-class exodus, slower global growth and more-competitive business landscape are all combining to create numerous industry- and company-specific potholes.

They've also contributed to the decline and fall of some of the greatest investors of all time. Several legendary hedge hoggers are electing to close up shop in recognition of the aforementioned threats and headwinds. They're too smart not to recognize how unplayable and unbeatable the markets have become.

Even Berkshire Hathaway and Warren Buffett have failed to meaningfully beat the S&P 500 in seven of the last right years. Berkshire's portfolio is looking more and more "Old Economy" these days, and the recent addition of Apple is just another example of how The Times They Are a Changing' for the Oracle of Omaha. Berkshire's huge stake in IBM (IBM) hasn't played out particularly well, nor have big bets on Coca-Cola (KO) and many other holdings.

Deteriorating fund flows aren't the only headwind that markets face. Disruption is taking place in retail, lodging, banking, entertainment and many other industries. Company efforts to reinvent and respond amid subpar top-line growth and today's sluggish global economic environment are, to state the obvious, more than challenging.

I'd like to continue my analysis by looking at how the Federal Reserve is contributing to this:

The Fed Tries the Ol' Razzle Dazzle

Central bankers continue to depend on their old tricks, using dated policies and ever-cheaper money to try to respond to new headwinds.

But this has only helped the bond and stock markets push aside natural price discovery. Quant strategies have been disruptive to the markets, rendering both fundamental and technical analysis less useful.

April Consumer Price Index shows that the Fed is achieving its inflation target. But the central bank should be careful what it wishes for. Higher costs of living can threaten the average Joe and Jane's disposable incomes as wages continue to stagnate. The Fed's trickle-down policies have been a failure over the past decade, as the benefits have only trickled up.

Central Banks Can't Save Us

The markets are trying to grapple with a complex confluence of events and disintermediation of investor and asset classes. For instance, we're seeing:

- Sub-par global economic growth.

- The rising occurrence of "black swans" and growing political and geopolitical uncertainties.

- The disruptions of many companies and industries.

- The lost influence of retail and especially institutional investors (i.e., "Peak Hedge Funds"). This poses a profound threat to the market.

- The rising role of machines and algos that tend to exaggerate short-term price momentum.

- Artificial stock prices in a world of monetary-policy largesse and fiscal-policy inertia. This will eventually fade, but if it does so in an absence of self-sustaining growth and "escape velocity," it'll be "Katie, bar the doors!" for stocks.

Add it all up and we're likely to see more volatility, less predictability and a market that could continue to chop up most investors and many traders. Unfortunately, I see no change for the better in sight on any of this. In fact, I see more possible adverse and market-unfriendly outcomes than at any time in my investment career.

The Bottom Line

Those with the right fortitude and risk profile should consider shorting the markets as a hedge against a fuzzy future, but shorting isn't for everyone. Given today's unpredictable markets (where the only certainty is the lack of certainty), most players might want to simply sit on the sidelines with larger-than-normal amounts of cash.

Personally, I plan to be a seller on any strength. I have three longs on my "Best Ideas" list right now, but 21 shorts. Many stocks look shortable to me, but few meet my standards to buy.



via realclearmarkets

May 18, 2016

Valeant stock is still risky for a bottom fishing buy

Jim Cramer clearly outlined the key risks facing Valeant Pharmaceuticals (VRX) in his column. Key among these are a possible rollback in pharmaceutical prices, coupled with a likely large increase in research-and-development costs. That could expose VRX's cash flow as having little margin for error given the requirements involved in servicing Valeant's more than $30 billion of debt.
Bill Ackman is one of the largest shareholders of Valeant
Moreover, Barron's highlighted over the weekend the lack of quality in Valeant's earnings (i.e., the wide spread between GAAP and non-GAAP reporting). The magazine concluded that on a GAAP basis, Valeant's shares are expensive -- in the stratosphere when it comes to valuations.

This is a marked contrast to recent protestations that Bill Ackman of Pershing Square (a major VRX shareholder) made on CNBC recently, claiming that the company's shares are actually cheap. "The value of the assets is much greater than where the stock [currently] trades," he said.

In an extensive interview on Mad Money last night, Jim asked new Valeant CEO Joseph Papa some hard-hitting questions that had to be asked in order to properly evaluate VRX as an investment.

Jim's accounting questions were particularly focused, but Papa deflected (he basically said investors should look at VRX's pipeline). Jim's questions regarding the need to sell assets also went unanswered. However, these questions are at the core of determining the investment case for or against Valeant.

I should add that while I'm not all that familiar with Papa's background at his former employer Perrigo (PRGO), he seems to have done a good job as CEO there. However, I though his decision to reject a generous, $26 billion bid from Mylan (MYL) for PRGO in 2015 was clearly wrong-footed. In fact, his choice to leave Perrigo in its current state and assume the Valeant CEO job seems enigmatic and cryptic to me.

The Bottom Line
Although Papa seemed like a stand-up guy in his interview with Jimmy last night, I felt the new Valeant CEO wasn't all that impressive. Papa appeared not to be all that informed (although he said he did his due diligence), and he wasn't prepared for the line of questioning that Jim delivered. Overall, he didn't really answer many of Jimmy's questions.

Now, Papa might be the tough executive that VRX needs and simply didn't want to disclose his strategy or specifically address Jim's pointed queries (which would be understandable given that it's early in the new CEO's tenure).

However, I think more questions than answers remain after last night's interview. Papa might be Valeant's savior, but his plans to right the ship and convince investors that cash flow and earnings are relatively intact remain undisclosed.

Without that knowledge, I'll continue to recommend avoiding Valeant shares. I wouldn't suggest "bottom-fishing" the stock here, even if VRX's price and valuation appear tempting to Bill Ackman.

In my view, asset sales loom ahead in order to satisfy Valeant debtholders by providing a margin of safety to service the company's sizable debt load. I also expect likely future asset-impairment charges and writedowns.

And lastly, I believe that Valeant's core earnings power will be diminished -- perhaps materially so -- relative to management's recent guidance and analysts' consensus estimates.


Position: None


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May 17, 2016

Apple invests $1b in Chinese rival of Uber

-Apple (AAPL) announced a $1 billion investment in Chinese ride-sharing company Didi Chuxing. Is CEO Tim Cook serious?
Uber's rival in China

-Monsanto (MON) became a possible takeover target of two different German companies. This led me to re-establish a medium-sized position in rival fertilizer company Potash Corp. (POT) . I plan to buy more at current prices today.

- I remain manifestly bearish and deep into the ursine territory. My net-short exposure is as high as it's been in two years.



Position: Long HIG, DD, OAK, SH, POT; Short XOM, BRK.B, EWU, FXI, CAT, SPY, QQQ, IWM, JWN, DIS, CMCSA, LNC, MET, NFLX (small), TSLA (small), SBUX (small)

May 16, 2016

Market topped out in May 2015

I remain anticipatory and manifestly bearish and substantially short in my portfolio.

Few stocks represent adequate value to me based on reward vs. risk.

This week's and last week's action continue to signal a large and important market top -- a continuing process that began in May 2015.

I fully expect market technicians to be reactionary in joining my fundamental concerns for an exacta (old horse racing bet/term.)

My advice? As Michael Conrad said in "Hill Street Blues," "Let's be careful out there."


May 11, 2016

Doubling down on Auto manufacturer stocks

I can't emphasize more vigorously than I have in the past few months how big a mistake I believe buying automobile stocks might be in the mature automotive cycle that I think we're currently in.

In fact, I recently doubled my auto shorts following better-than-expected results -- i.e. those in the rearview mirror -- from Ford and General Motors.


Of course, it's almost tautological these days to go long on F and GM based on their apparent low valuations relative to trailing 12-month data -- but you could apply that same logic to most cyclical stocks.

As an example at the other extreme, look at the sharp advance that we've seen in cylical stocks over the past three months from almost infinite price-to-earnings ratios. The expression is: "Buy at the Sound of Canons and Sell at the Sound of Trumpets."

Watch the continued fall in used-car prices and the increase in new-car incentives (which rose to 10.3% of average transaction price during April) as signs that the auto cycle has peaked.

To me, "Peak Autos" is as clear as the road ahead.

Position: Short F, GM


via thestreet

May 9, 2016

Apple and Berkshire still a short

Apple chief Tim Cook appeared on Mad Money last night for a lengthy interview with Jim Cramer, but his interview did nothing to dissuade me from my fundamental short thesis for the stock.

Shares have fallen for the past eight sessions, stockholders are justifiably concerned and AAPL remains one of my favorite shorts on my "Best Ideas" list. It seems like I've for some time been a lone wolf in adopting an ursine view of Apple's sales-and-profit outlook. In fact, I've been consistently criticized and attacked for holding a negative view of the world's most beloved company. (For example, a Fortune magazine writer last year leveled an ad hominem attack on me, although the publication quickly rescinded his most serious accusations.)

I noted in yesterday's opening missive that Warren Buffett and Charlie Munger of Berkshire Hathaway, responded well to questions put to them at this weekend's shareholders' meeting, but that the queries were weak and nonrevelatory.

By contrast, Jim Cramer asked hard-hitting questions last night that Apple's CEO mostly whiffed at by delivering rather vague, glittering generalities and standard responses. Of course, good investing stories don't need to be sold -- not by Cook, and not by Carl Icahn or any other current or former large Apple investor. And while iconic stocks die hard, paradigm-shifting business people like late Apple CEO Steve Jobs are next to impossible to replace. We all remember Jobs, and one of last night's messages to me was that Cook is no Jobs.

The current Apple CEO emphasized a long-term, bright outlook for Apple -- but frankly, I've never heard a top manager not say that his or her company's intermediate or long-term outlook looked bright. But the business landscape constantly changes in the interim as new competitors line up and the threat of commoditization surfaces.

Apple faces some unique threats, like the Chinese government's business attitude and uncertain regulatory atmosphere. That was Icahn's alleged reason for selling his large AAPL stake, but Cook glossed over such threats.

The CEO did admit that the company's near-term outlook is deeply dependent on one product, the iPhone 7 series. But nothing I heard changed my view that Apple's product-upgrade cycle will now elongate after the unprecedented success of the iPhone 6. That was likely Apple's last important product upgrade, and the company seems unlikely to ever repeat that success.

Cook's answers to Cramer's questions also often fell flat in substance. For example, he replied to questions by saying things like: "I think that in a few years, we will look back and people will say: 'How could I ever have thought about not wearing this [Apple] Watch?' ... People love our products."

As to new-product opportunities, Cook seemed to subscribe to the notion that if Apple builds it, customers will come -- even though the high-end smart-phone market has become mature.

The CEO also said investors shouldn't just look through the lens of the United States, and that the overall market doesn't have to grow for Apple to succeed. Instead, he said investors should be more attentive to "switchers" from Android phones.

Frankly, I remain unconvinced. I see Apple's competition as mounting in intensity -- and representing a threat to sales, pricing, profits and margins. Stated simply, I don't see any present innovation or prospective creativity at Apple that will bring Cook's statements to reality for either the iPhone or the Apple Watch.


The Bottom Line

After the interview, Jim Cramer wrote in his column:

"I have been a big believer that there cannot be a bottom until we get some analyst capitulation. We get that, then we get give-ups, we get give-ups and we don't go to Gilead-like levels. Without give-ups, though, I think you get more of what we have had even after the Icahn interview because without more buys-to-holds there's no upgrade firepower. I have seen this movie before. We need abandonment and spurned love before we really get to terra firma. I don't see it yet, but I sense we soon will."

I agree. Apple's shares have not yet met terra firma, and with last year's record earnings not likely to be eclipsed for years, the stock's outlook looks poor to me from both a relative and absolute standpoint.

Indeed, Facebook and Amazon are already challenging Apple's position as the world's most popular company. For many like myself, Apple is already a distant third.


Position: Short AAPL and BRK.B 



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May 4, 2016

Talking heads cheerleading of Facebook is beginning to sound like Apple in 2012

It is disturbing how so many who readily are given a media platform so quickly forget and discard discussions in the stocks or in the arguments that no longer conform to their point of view or outlook. They just seem to move on with a changing narrative.

In the iconic Cocoa Puffs commercial, Sonny the Cuckoo Bird attempts to concentrate on a normal task and ends up coming across some reference to Cocoa Puffs (usually described by the adjectives "munchy, crunchy, chocolatey") and bursts with enthusiasm, exclaiming, "I'm cuckoo for Cocoa Puffs!"

Today, talking heads are cuckoo for Facebook (FB) , but they conveniently ignore or reference their "yesterday's Facebooks." Facebook's shares have risen by nearly tenfold from a few years ago, and the sound of today's enthusiasm (as if you almost can't lose) is eerily reminiscent of the chorus that we heard regarding Apple in September 2012 and again 15 months ago in early 2015.

In "You Cant Be Serious, Man," I wrote:

And for every great earnings report from the likes of Facebook, we're seeing multiple negative releases -- from Apple, Coca-Cola, Netflix, Procter & Gamble, Starbucks, etc.

Are they serious, man? And who do they think they are kidding?

Beware of changing narratives and the loss of memory.

George Soros once told me that all stocks are like soap -- you take a shower with them and they ultimately dissolve.

I do know one thing for certain -- the reward versus risk for Facebook is far worse than it was back in 2013, and investors should not forget The Law of Large Numbers and that success creates the largest headwind, and Schumpeter's gale of Creative Destruction as it relates to the last Facebook, Apple.

Post script: As I write this column, Carl Icahn has just announced that he has sold his entire Apple position. Which seems to prove my point. Sic transit Gloria ... and caveat emptor.


Icahn tweet from August 2013 
Tweet from Jan 2014



via thestreet.com/story/13551928/3/amazon-facebook-and-apple-doug-kass-views.html

May 2, 2016

Most economists did not expect the recent BOJ announcement

I continue to be struck these days by investors' deranged acceptance of current monetary policy as the norm. Few are fearful of zero or negative interest rates' adverse ramifications and disruptive impacts.

As I put it Wednesday:

"Two decades from now, we'll likely look back at 2000-2016 monetary policy with disbelief that investors swallowed and accepted it."
-- Doug's Daily Diary (April 27, 2016)

The aberrant and unsound have become justified and excused, while malinvestment has become a mainstay as markets reach for yield.

As an extreme example of this, consider China's recent insane commodities trading, which defies all explanation. There are numerous other distortions in the marketplace as well.

Non-thinking consensus and acceptance have become the norm these days. And as I noted yesterday, when combined with central banks' easy monetary policies (i.e., "money for nothing"), the crowd is beginning to resemble the Mad Hatter from "Alice in Wonderland."

I opined Wednesday that global equity markets have become severely distorted by central bankers gone wild, and that we'll someday look back at all of this in disbelief.

But while price distortions can continue for some time, markets always ultimately regress to a mean. I believe that in this cycle, the return to natural price discovery will be a painful process that will hit global markets and investors by surprise.

Business TV's "talking heads" can rationalize the irrational all that they want with terms like "price is truth," but the rubber band between stock prices and the real economy has been stretched beyond most investors' wildest imaginations. This is happening even as it grows more clear that monetary largesse is losing its effectiveness in the United States, Europe and Japan.



Wednesday night might have been something of a fulcrum point, as global markets took risk off. The Nikkei 225, the European markets and S&P 500 futures all fell overnight after the Bank of Japan held off on further monetary stimulus despite weak Japanese economic data and falling consumer prices.

Instead, the BOJ:

    -Kept Japan's benchmark rate unchanged at -0.1%.

    -Retained its current monetary base target, maintaining the same pace of asset purchases.

    -Delayed the timing to reach the bank's 2% inflation target.

Most economists had expected little policy change from the Japanese central bank. But markets had been pricing in all sorts of "monetary goodies," from accelerated equity ETF purchases to a doubling of government-bond purchases to LTRO-style lending to banks.

In the absence of such moves, the Japanese yen rallied by the largest amount in five years against the euro and the biggest gains seen in roughly a year against the U.S. dollar.

The Bottom Line

"Guessing what governments do next at this moment in time is not a good way to play these markets. Hoping that there will be more stimulus will lead to disappointment, because hope isn't a very good strategy." 
-- Andrew Clarke of Mirabaud Asia Ltd., talking to Bloomberg about the BOJ decision to stand pat (April 28, 2016)

The trend has long been your friend in this market, but you should stay alert for any inflection point and change of direction. Make no mistake about it, extreme monetary policy has inflated global equity prices; just look at how the Nikkei, Europe and the S&P 500 futures all fell after the BOJ disappointed markets.

If central banks ever normalize monetary policy and/or the currency train derails, expect all asset prices to lose their current moorings and retreat -- something that looks inevitable from my perch. To think that the powers that be can orchestrate tranquility when debt levels are where they are and economic growth isn't self-sustaining seems imprudent to me.

That's why it remains my view that May 2015 marked the start of a broad, important market-topping process -- and nothing that I've seen so far this year has altered that outlook. So, I remain very committed to the short side.

Position: Short SPY


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