Financial Advisor Update

Return to Article

Kass: Giant Positions = Giant Losses

Doug Kass

"The bend in the road is not the end of the road unless you refuse to take the turn."

-- Anonymous

After all:

• The Giants' first Super Bowl win in 1987 was followed by the October 1987 stock market crash.
• The second Giants' Super Bowl win was achieved in 1991, a year in which Citigroup (C Quote) almost failed and the U.S. economy fell into its deepest recession in decades.
• To make matters worse, the last ticker tape parade in New York City occurred when the New York Yankees won the World Series eight years ago, and the Nasdaq began its 73% free fall that year.
• So, it follows that the Giants' third Super Bowl win this year will proceed another stock market disaster.

To put this into perspective, let me start by explaining my charge as a dedicated short manager.

Though some like to pigeonhole me, I am not a permabear on the economy or on the markets.

Rather, my approach of developing a variant (and short) view on much-loved companies, industries and/or markets is essentially the mirror-image of long-biased managers. Ideally, I produce non-correlated and excess returns (i.e., alpha).

As I have written, though I am a dedicated short, I remain "permanently flexible." My day job is to create a conservative short book that attempts to isolate companies/industries whose business models are exposed to challenges (especially of a technology-kind) and to short those stocks that are likely to miss consensus profit expectations.

Despite the risk/reward asymmetry of shorting and the long-term gravitational pull of equities (i.e., higher), mine is an absolute return strategy in which I can spend a lot of time or some portion of my portfolio out of the market in an attempt to insulate my short book from losses. To put it in baseball terms, I wait for the right pitch. So a thoughtful assessment of the capital markets is handy with regard to my objectives.

That said, the more I participate in the media, the more I recognize that it is predominated by permabulls. When things get tough, as we watch daily on Sir Larry's "Kudlow & Company," long-biased investment managers and the "talking heads" in the media fall back on the statement that "stocks do well in the long run" as concerns regarding an acceleration in the world's credit crisis, a housing industry in disrepair, a consumer who is levered and spent-up and a domestic economy likely in recession are all conveniently swept under the rug -- as if those concerns were almost irrelevant to investors.

On Monday hedge fund manager Barton Biggs was interviewed on CNBC. I have long admired him. He was frank in his market outlook -- namely, it could go either way. We need more Biggs, less Steins.

Stated simply, too many pundits lack objectivity (and consistency). And like some on this site and elsewhere, permabulls, permabears and those who generally invest at the altar of momentum express an unwarranted degree of conviction, which seems silly considering the market's sheer volatility and given the fundamental economic uncertainty.

It is for this reason (and others) that I have encouraged smaller than usual investing/trading positions and opportunistic trading.

Of course, the statement that "stocks do well in the long run" is a tautology. It is a needless and a redundant repetition of the same theme and an empty and vacuous statement usually composed of simpler statements in a fashion that makes it logically true whether the simpler statements are factually true or false. For example, the statement: "Either it will rain tomorrow or it will not rain tomorrow."

I am not a great fan of this orthodoxy/dogma. It does us no good.

I am a great fan of the power of logic of argument and thoughtful and thorough analytical dissection, as I related in my Feb. 1 opening missive.

I am a hedge hogger. My primary charge is to make money for my limited partners. My secondary job on RealMoney Silver is to explain to subscribers the logic behind my portfolio and economic strategy.

I am not in the game to be steadfast and inflexible in approach nor to be dogmatic.

Whether you believe in Goldilocks or whether you believe that the stage is set for substandard stock returns, as I do, this morning's advice is, above all, to stay committed to your decisions, but also to stay flexible in your approach.

Remain independent. It's your money, not theirs.

And the stock market's fall is not the fault of the New York Giants; it's a function of investors' unrealistic expectations for U.S. corporate profit and economic growth.