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Doug Kass's Killer Shorts - Barron's

About a year later, I'd say Kass's calls look pretty far off the mark. He seems like the kind of guy who's more interested in being contrarian and looking smart than making the maximum amount of money. All of his shorts were atypical calls and few are down more than the SPY (down ~35% since his article) while many have outperformed the SPY significantly.

If one had a short bias as of last May, one could have done much better shorting just about any financial other than BRK/WFC/AXP - look at BAC, C, WM, AIG, FNM, FRE, WB, etc over the year. I know all about hindsight, but if your thesis is that financials are s**t why would you short the strongest and ignore much weaker companies still trading at decent prices? Why not short people who are in the same business as BRK with more leverage and less competence?

Likewise in consumerland: if the consumer is weak, why would you short toothpaste and cereal instead of cars and luxury goods? You could have done much better shorting GM or most clothing retailers. Auto sales can fall a lot faster than cereal sales and GM has been obviously over-levered and unprofitable for years, yet the shares were over 20 a year ago (I was surprised too).

He also totally missed the fact that commodities were in a bubble last spring/summer. Short CHK, FCX, etc.

Overall it seems that Kass overlooked the fact that the best shorts are companies with broken business models, over-exuberant speculative action, or excessive leverage - you want some chance that the stock explodes completely if you're going to take the risk of shorting. While you might make 10-20% shorting companies that will experience moderate but survivable business declines in the worst economic conditions in decades, this is a pretty terrible short list given the shorts that were available last year. It would seriously take you a while to find worse shorts than these - even MCD, WMT, and most utilities are down over 1 year. I didn't make any short calls last year, but I'd like to think that even I would have stumbled across one true disaster in a list of 10 shorts a year ago. None of his picks have even come close to blowing up.

American Express Calls Investment Banks' Bluff

Oh yeah, one more thing: price matters. You only talk about your subjective opinions of the companies, with no regard for the price they're selling at. Every major financial is still available at a discount to historical prices, reflecting the fact that they aren't out of the woods yet and some will never make it out. To make a useful assessment you have to compare price to value. The price has bounced so fast in the last week because prices were ridiculous. Now the next development is harder to call, but it's not a clear-cut sell/short situation with some potential bargains still out there.

American Express Calls Investment Banks' Bluff

The only thing you're right about is the one objective part of your article: Citigroup's results are horrible. The fact that they're participating in a rally led by profitable companies like BAC and WFC is just an indication that a lot of investors aren't reading the reports and instead trading financials as a basket on momentum.

Otherwise your article is emotionally-driven and short on facts. You don't tell us anything insightful about credit quality or earnings drivers for these companies. AmEx is a bit different from companies in the mortgage business, since AmEx loans are collateralized by people's desire not to have a low credit score (almost irrelevant, in today's environment of scare credit and more pressing financial concerns) whereas mortgage loans are collateralized by the roofs over people's heads (fairly valuable for most people, and a forecloseable asset in the event of default). When someone defaults on an AmEx loan, the whole thing the company can collect is one more name and address to sell to the collection agency for pennies on the dollar. When someone defaults on their mortgage, their bank gets a house, which should eventually be worth significantly more.

Also your comparison of AmEx cardholders to V and MC cardholders is spurious because most people have no more than 1 AmEx card (since they're issued by only one company) and many V/MC cards (since they're issued by every bank, stores, lenders, etc.). Also, even if your data point were comparable, I'm not quite clear on how people who charge a lot present less credit risk than people who charge a little, absent any information on net worth or income.

I understand that banks have exposure to second liens and uncollateralized consumer debt, but they have much less of it and much more stable business than a pure credit card company.