Doug Kass Turns Bearish: Zigging When Others Zag

While we haven't covered the musings of Doug Kass in a while, we found his latest piece on TheStreet.com to be timely and insightful. Some of you may remember that Kass, noted short-seller and manager of hedge fund Seabreeze Partners, was very bullish back in March and essentially nailed 'the bottom' as a great trade. Our hats off to him as that was an excellent market timing call. He seems to zig when others zag and this occasion is no different. While bullish sentiment is reaching highs and everyone seems to think that risk has abated from the markets, Kass thinks otherwise. He is bearish now and points out many signals telling him to be so, writing:

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

Insightful stuff from Kass and it will be interesting to see if he can time the market so perfectly yet again. We wouldn't doubt it, as we've been noticing much of the same rampant bullishness amidst a still tepid economy. When everyone is headed one direction, tides almost always find a way to change. We also note that Kass joins prolific hedge fund manager Paul Tudor Jones in the act of calling for a pullback. Last week, Tudor noted that he thought the current market euphoria is a bear market rally.

Kass posted up his 'signs needed for a market recovery' back in February and it's interesting to look over them again. While some of them have partially come true, there is still plenty of room left for improvement. For those of you interested in more of Kass' thoughts, we posted up Kass' model portfolio update back in the middle of June. We'll check back in on Kass' bearish call in a few months, but our guess is that he'll be right on this one as well.

Source: TheStreet

Read more here.

Comments

[John Galt:]

He makes a good case and a lot of the smart posters on SA have the same sentiments.

Aug 14 09:02 AM

[WheelsComin...:]

And you have the ALT-A and option ARM resets coming, with some states having over 50% of homes already underwater. The green shoots are starting to smell like something else....

Aug 14 10:08 AM

[Prudent Man...:]

Those signature only notes issued by the U.S. Treasury are a reality. Unemployment is a reality. Foreclosure, abandonment of homes, delinquent loan payments are realities. Unfavorable balance of trade is a reality. Lower retail sale are a reality.

Perceptions and optimism are emotion.

Is the price gulf between reality and emotion justifiable? Taking the "yes" bet and using the myth of discounting (see early 2000 and 2007) is taking a high risk for low return. You may win small or lose big.

Aug 14 10:19 AM

[Prudent Man...:]

On Aug 14 09:02 AM John Galt wrote:

> He makes a good case and a lot of the smart posters on SA have the
> same sentiments.


John Galt, as you advise: Check the premise for contradicitions. If there is one contradiction it is invalid.

Dagny

Aug 14 10:22 AM

[DonFurio:]

D. Kass is very good, although he could change his position at any time. I do think that the heavist resistance won't be until S&P 1300 because that's around where people feel like they get their money back.

Aug 14 10:24 AM

[jeffz:]

Right on!

Aug 14 10:44 AM

[Donald Ingram:]

You can bet if Kass has let the general public in on his change of attitude as he views the markets, he has already changed his position in those markets.
I would be very wary of trend/price/volume direction in these markets at this time. Personally I'm standing on the sidelines safe. Waiting for the trap door to open and deliver some high value, cheaply priced stocks. Don't be late to the party. Keep your trailing shorts tight.

Aug 14 11:22 AM

[whidbey:]

Love Kass

he has derailed more trains than gang of mail bandits. I wish he would not do anything to tip the cart right now. It is good to let the bulls get over involved; it will make the next run more measured and less dangerous to ride.

Anyway he is right and next time will likely be my time to play.

Aug 14 01:03 PM

[expat in China:]

its 2Pm Aug 15!

Ge is subjected to HFT look at it what a fning joke

Aug 14 01:54 PM

[Russ Wetherill:]

Peering forward a little bit into 2010, it may be a very tumultuous year. Twelve months from now we will likely have double-digit unemployment, still rising foreclosures, a commercial mortgage crisis, and be in the middle of a mid-term election. None of this bodes well for corporate earnings and stock prices.

Aug 14 03:02 PM

[Suzanne H.:]

I wouldn't hold my breath for 1300, be careful. A case can be made that we could have already seen the top or are very close to it at the 38% fib retrace, or another possibility after a retrace to 950/920/870 area setting up a bear trap as the market bottoms and rallies to 50% retrace at 1100 for a bull trap before breaking the march lows afterward. However, if we don't hold 870 then the case for a rally to 1100 becomes a low possibility. My models have seen this as only a bear market rally with an initial target at the 1011-1015 (can follow legacyfunds.wordpress.com/ for more details) and possibly 1120. The quant driven strategies all see the same thing, and the exits can become overcrowded very quickly.

I am bearish and have gone slightly net short this week. It is possible that I am early, and my stops aren't far away so the smallest rally will get me out. At the very least follow some moving average for each holding and if it violates it, get out/ask questions later. If it goes back above then get back in even if at a higher price. Over the long run you will save more by avoiding the bigger declines vs. the small whipsaws.


On Aug 14 10:24 AM DonFurio wrote:

> D. Kass is very good, although he could change his position at any
> time. I do think that the heavist resistance won't be until S&P
> 1300 because that's around where people feel like they get their
> money back.

Aug 14 06:43 PM

[E Nuff Sed:]

This has gotta be the most eagerly anticipated correction in the most hated bull market in history.

Aug 14 10:14 PM

[enigmaman:]

Kass, nailed the bottom and turned bullish going into it and now says, the worm has turned, I agree because his thought process is and has been so far correct as it relates to this recession.

One point he didnt appear to make is the big "fly in the recovery ointment " the current Feds 0% policy, how does the economy grow out of this recession in a rising interest rate environment? The old adage " Dont fight the Fed" works for when they are lowering rates, buy what affect will this have when they are raising rates, which they have no other option. Seems to me this will put a damper on all aspects of the economy that is needed for any recovery. Sure the Fed says they dont see any reason to change policy in the near future, but that depends on what they mean by "near" How long before they will have no choice in the matter

Aug 15 09:20 AM

[Ames Tiedeman:]

If you overlay the chart of the DOW from October, 1929 to March, 1930, it looks almost exactly like March 2009 to August 11th, 2009. Both periods were 5 months. Both periods experienced a 50% recovery in the DOW. What do I think well happen next? Answer: The markets will be hammered in September and October. In April 1930 the market started a 24 month bear market that broke the previous low set in October, 1929. Paul Tudor Jones is correct. This is a BEAR MARKET RALLY. How low do we now go? No one has a 100% positive answer but one must look at history. History does not lie.

Aug 15 10:30 AM

[Ames Tiedeman:]

Further, We blew up a credit bubble and the American consumer has stopped spending. Goldman Sachs has suggested the U.S. Saving rate will go to between 6-10 % from -4%. Go study the 1970's, We are headed backwards, people.

Aug 15 10:36 AM

[doubleshortetf:]

Kass is one of few gurus I respect and follow.

Should have listened to him when he went bullish on the banks 6 weeks ago too.

Aug 15 01:33 PM

[curious cat:]

when crazy is driving, i don't get in and wear a seatbelt. i just don't ride with him. when sane takes the wheel, again, let me know.

Aug 15 04:42 PM

[Ralph Hunkey:]

Interesting and Excellent........I agree fully......I have already begun to exit the market and take the gains......I am looking for at least a 11,000 top.........Am I dreaming?.........

Aug 15 10:02 PM