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Doug Kass on Rallies and Corrections, and Two Ideas for the Coming Weeks

Doug Kass is one of my favorite investors, and he writes pretty regularly.  I agree with his argument that the market is very likely to be overvalued right now and destined for a correction in the not too distant future:  http://seabreezepartners.net/letters&id=879&catid=15.

Preparing for an upcoming correction

The course of prudence should be take profits, put together a larger-than-normal cash position (Kass has said that would like to be at 50% cash right now: see the last line in this post: http://seabreezepartners.net/letters&id=875&catid=15 ), and prepare for a correction by making a "target list" of companies that look they could "go on sale."

Large-cap Value

Among others, I'm interested in Merck (NYSE:MRK) and Eli Lilly (NYSE:LLY).  Jeremy Grantham of GMO has been pointing out out that "quality," large-cap brand name stocks haven't appreciated in the rally, and both of these stocks seem to have good cash positions, pay substantial dividends, and haven't appreciated.  I need to do a little more reseatch, but think of it this way:  you could buy LLY right now for 8 times earnings and get paid of over 5.5%, or you could buy Spider shares (NYSEARCA:SPY) at 13 times earnings and 1.75% dividend.  

Municipal Bonds

I'm also interested in municipal bond Closed-End Funds.  There is a lot of interesting writing out there right now about what's behind the fall in bond prices, and SeekingAlpha author Simon Lack (another role model), doesn't think it's a good time to get in the market because he sees real liquidity risk for the next year.  On the balance, I think that defaults won't be as big a problem as investors are predicting, I think that future rising interest rates are already being "priced in" for the most part, and I'm not worried about falling Net Asset Values (NYSE:NAV) on the closed-end funds because I think these drops represent the absence of buyers rather than increased credit risk.  I'm still looking around for good funds, but so far MTT and NUV look like good candidates.  I'd appreciate any suggestions!  (Right now, I'm only looking for non-leveraged CEFs.  In an environment of declining asset values, I think the leveraged CEFs will be a good investment, but I think they will come in a lot cheaper after another quarter or so of falling NAV.)


Disclosure: I am long MRK, LLY, MTT, NUV.

Additional disclosure: I own long long calls on Merck, and I may buy shares in the other securities mentioned in this article in the coming days and weeks.