Doug Kass Goes All In Short

Noted shortseller and Seabreeze Partners hedge fund manager Doug Kass has had impeccable timing recently. Market timing is a b*tch, but Kass has flipped that statement upside-down and made the market his b*tch.

Back on the March lows, Kass was calling 'the bottom' and buying when everyone else was calling for the end of the world. This time around, he's calling for a top in the market for the year and has been assembling a short position. His contrarianism is the polar opposite this time around as he writes,

To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices. As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons.

We first noted Kass' bearishness a few weeks ago and he has since deepened his stance. He brings up great points and it really has all the elements of another great contrarian call. Time will tell and we'll wait and see. Back in the beginning of March, we penned a piece entitled, Ranting, Raving & Contrarian Signals to highlight the extreme bearish sentiment as if the world was imploding. We have been considering penning a piece again on this topic, only in reverse. Looks as if Kass has beat us to it and we'll gladly let him take that honor.

His point about mutual fund inflows is exactly what we were recently looking at as well and we tweeted about these inflows. Many a contrarian will say that when the retail/'dumb' money rushes in, it is time to get out. Another interesting statistic was the fact that hedge funds have had high net long exposures for the first time in forever. And, as we also tweeted about, hedge funds were *buying* financials hand over fist the past few quarters. Today, we also saw a unicorn and bigfoot; that's how crazy things have been getting.

In order for the market to truly recover, many fundamental problems must be addressed. Kass outlines his signs needed for a market recovery and it's a great reference to have. But in the mean time, he lists 10 things that will weigh on the economy:

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 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.

He ends this list by stating that he is looking,

over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed.

Now that you've seen the rationale for Kass' shift in sentiment, we now want to turn our focus to a timeline of Kass' sentiment as compiled by our friend FirstAdopter. We've mentioned our 'tweets' a few times in this article and we further want to highlight the utility of Twitter as it pertains to financial markets. The rest of this article is a guest post by FirstAdopter, whose blog and twitter we've been following for some time now.

Doug Kass is widely regarded as the guy that called the exact bottom in March by Barrons, New York Times, and CNBC anchors. Here are some tweets from his Twitter Feed. I will let them speak for themselves:

SP500 August 26th 12:17PM: 1027

SP500 August 10th: 1007

SP500 August 5th: 1003

SP500 July 28th: 980

SP500 July 22nd: 954

SP500 July 2nd: 896

SP500 June 19th: 921

SP500 May 8th: 929

SP500 April 29th: 874

SP500 April 16th: 865

SP500 March 26th: 833

SP500 March 18th: 794

Actual Low Close of SP500 March 9th: 677

SP500 February 26th: 753

SP500 February 18th: 788

SP500 February 12th: 835

So there you have it, Kass calls the top and is bearish for now. We'll wait and see if he has made not one, but two amazing market calls within the span of a year. Thanks again to FirstAdopter for the guest post.

Hopefully this highlights the great quick insight you can gain in 140 characters or less via the Twitter platform. There's an entire finance focused group of posters on there (including yours truly) that has assembled via the great community at Stocktwits, so definitely check it out and join in (Also see our post on Stocktwits & Twitter here).

Last, but certainly not least, make sure you read Kass' latest piece where he elaborates on his 'top' call.

Comments

[CautiousInvestor]

He got cautious back in June at which time he said there there is little causality between advancing stock prices and an improving economic recovery. He made a thesis, based upon much of what you mention, that the trajectory of economic growth will be shallow and will likely disappoint the equity markets during the second half of 2009. He also argued that the specter of rising taxes and higher interest rates in late 2009/early 2010 will likely impact an already fragile recovery in the economy and in the markets.

2009 Aug 30 08:45 AM

[logicalthought]

January 15th, 2008, @ $26.94/share:

www.thestreet.com/s/ka...

2009 Aug 30 08:50 AM

[frugalandpuzzled]

If you made that timeline in GRAPHICAL format overlaid onto the S&P, it would be 1000x more effective.

2009 Aug 30 09:20 AM

[LKofEnglish]

he also called a collapse back in 2006 I believe and then went all in by 2007 just before it actually did collapse. he needs to be awfully right right now imagine.

2009 Aug 30 10:49 AM

[untrusting investor]

Once again Doug Kass is very likely right on the money. However, not so sure his timing will be as "spot on" this time with the downturn as it was with the recovery rally in March/09. He is likely right that a major correction will happen, but it may not happen until 2010, even though Sept/Oct/09 is probably a much more logical starting correction point. The Fed/Treasury and their massive liquidity push aided by trading operations by GS, JPM, HFT, and others has been an incredible support factor in the recovery rally. It is just not apparent at this point what catalyst will bring the fear back to overwhelm the large liquidity buy support being provided by the big trading operations. Maybe it will be the reigning in of liquidity in China, which has been claimed to be moving into speculation in Asian stocks and real estate, and Asian markets will lead the sel-off. Guess we will all find out how accurate Doug Kass is with his forecast and timing over the coming months.


On Aug 30 08:45 AM CautiousInvestor wrote:

> He got cautious back in June at which time he said there there is
> little causality between advancing stock prices and an improving
> economic recovery. He made a thesis, based upon much of what you
> mention, that the trajectory of economic growth will be shallow and
> will likely disappoint the equity markets during the second half
> of 2009. He also argued that the specter of rising taxes and higher
> interest rates in late 2009/early 2010 will likely impact an already
> fragile recovery in the economy and in the markets.

2009 Aug 30 11:42 AM

[Magician]

He called the top in financials and the market starting in APRIL
It's almost september and the fins are up MASSIVE
He went all in short on July 2nd with S&P at 896 and its now up almost 15%
Kass SUCKS imo.
But watch, when we get the INEVITABLE, blind man can see its coming RETRACE he will will pimped all over the business media for being right again.LMAO

2009 Aug 30 11:53 AM

[Ricard]

Actually, looking at his own twitter feed, looks like he was getting cautious as early as April. IMHO that's a huge difference...it means he missed almost the entirety of this bear market rally.

He may have made one call correctly, but he certainly has lost a good amount mis-timing the top.

All in all, I fully agree with his reasoning for the short. I resisted the urge to short/hedge/cover back in April by just convincing myself that any pullback would have given me more opportunities to buy. However, given the massive size of this bear rally, I've either closed my positions or fully hedged them against what I see this winter...mainly Doug Cass's 10 points coming to fruition.

At that point, I hope more buying opportunities manifest themselves.


On Aug 30 08:45 AM CautiousInvestor wrote:

> He got cautious back in June at which time he said there there is
> little causality between advancing stock prices and an improving
> economic recovery.

2009 Aug 30 12:35 PM

[tagthatstock]

im just glad to see Kass loose his azz after his childish pump on april 1, 2008 with his april fools joke. real bears dont joke because they have to actually work for their trades since the market is 90% biased long/bullish.

on april 1 2008 kass lost all respect from the bear community and its no wonder he is actually a team member of bullside pumper jim cramer.

is the market toppy/overvalued here? yes and that can go on for sometime until bulls get tired of lower returns and start taking profits.

as for the bulls and the bears recent data says 99% of traders are long and all but 2 fundies are low on cash as longs. the 2 fundies with cash are active in the bottom of the european ipo market so you know they are not 'following the herd' btw,,,,they also beat the market up and down over the past several years.

anyway,,,,,,bulls pump it until you cant find another sucker to buy and bears pump it before you short it.

2009 Aug 30 01:35 PM

[punk_ash]

does not sound too impressive to me. He is probably playing with other people's money. Winnings are ours and losses are yours. Nice business model. The best business model is investment management.

2009 Aug 30 02:21 PM

[Jason Tillberg]

" Market timing is a b*tch, but Kass has flipped that statement upside-down and made the market his b*tch." That made me laugh!!

2009 Aug 30 02:56 PM

[David Van Knapp]

If those tweets reflect what he was actually doing, where does he get his reputation for making great calls? Yes, he nailed the March low, but he started taking profits within 3 weeks and shorting by the end of April. The market's been going up for almost 6 months since the March lows. That's not a good series of calls.

I think it's fair to question the honesty of those tweets, and/or his intentions in now calling a top. If he's in deep short, he'll profit if the market listens to him. Unlike small fry who blog, tweet, and write articles, this is a guy with a big reputation who has the ability to move markets with his words.

2009 Aug 30 10:40 PM

[Moon Kil Woong]

How about this: We are addicted to low interest rates so any recovery with inflation will be greeted with rising interest rates and smackdown any sustainable recovery. Japan has been battling this for decades now. You would think we could learn vicariously, but I guess the Fed is too dumb to do that.

Thus although Cass may be wrong about a meltdown, he is certainly probably correct that there won't be a strong recovery. I personally don't reccomend going short until the government blows all its stimulus funds next year. Bet on the hangover ony after the fireworks and the party.

2009 Aug 31 02:47 AM

[BSexposer]

"SP500 July 2nd: 896

Allin short $$"

Oops!

2009 Aug 31 10:36 AM

[C.S. Jefferson]

Kass is someone to pay attention to, but if there is accuracy in those positions it's clear he was getting squeezed a long way.


Being short as a thesis can be right, but timing it is a dangerous, dangerous game to play!

2009 Sep 03 02:26 AM

[C.S. Jefferson]

Bang, zoom, straight to the moon! I can only hope we see another colossal short squeeze coming around the corner!

It makes almost too much sense to short at these levels when the market has moved so fast in an unsustainable upward trajectory...

Then again, to be a true contrarian, you'd almost have to take the other side of the obvious doom and gloom trade and stay long.

It's a lot cheaper to hedge with the VIX being relatively tight and stay in the game by being long these days. To me, the risk to reward justifies being long and hedged

2009 Sep 04 12:43 AM