NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among his posts this past week were entries about the week that was, parsing the data and the effects of quantitive easing.
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That Was the Week That Was
Originally published on Friday, May 24 at 12:06 p.m. EDT. Let's review. My look back at the week's daily diary highlights borrows its title from a popular 1960s BBC comedy show hosted by David Frost. Monday began with a song (or my version), "Mr. Market Keeps Singing a Happy Song," in which I summarized fundamentals that are out of tune with the current market -- namely, rising valuations in lieu of real economic improvement, the printing of money as a panacea, the belief in a free lunch and market optimism by the dominant influential investor class. Also, Caterpillar (CAT) reported sluggish dealer sales in an 8K filing, while Altisource Portfolio Solutions (ASPS) continued to make new highs adjusted for its Altisource Asset Management (AAMC) and Altisource Residential (RESI) spinoffs. On Tuesday in "The Home Run Hunt," I examined the tactics used for finding the next big thing on the heels of Tumblr's acquisition by Yahoo! (YHOO). Some of my peers look to play into earnings calls, earnings surprises or technical, while my focus is typically on the fundamentals. After discovering Ocwen Financial (OCN) spinoff Altisource Portfolio Solutions and later its spinoff Altisource Asset Management, I began my search for the next home run, which I believe is Monitise (MONI.L), a London Exchange-traded disruptive innovator in the mobile payments industry. Speaking of Ocwen, the company had positive comments this day at a Barclays conference, including remarks on mortgage growth, lower costs, cash flows outpacing earnings and better recapture rate on HARP loans. We saw Treasuries rally, thanks to comments from Bullard, and the market continued its advance.
I posed the question "Are Valuations Peaking?" on Wednesday. The Federal Reserve Bank of Chicago's Index of National Economic Activity, which was -0.53 compared to the prior month's reading of -0.23, and the Citigroup U.S. Economic Surprise Index's drop from +40 in January to -18 confirm unambiguously that the economy is slowing. The disconnect between fundamentals of GDP, corporate sales and profits (weak and disappointing) and share prices (strong and euphoric) has widened in recent weeks with the S&P 500 trading at 16x forward earnings vs. a long-term average of 15x over the past five decades. The market's valuation (P/E ratio) appears stretched, supporting my thesis that its risk/reward is unattractive at these prices. Lowe's (LOW) and Target (TGT) missed on earnings despite my observation that the savings rate has pushed forward retail sales. Bernanke gives his testimony and discusses the possibility of tapering in the next few meetings if the economy continues to improve: "A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or eroding the economic recovery and causing inflation to fall further." The 10-year yield hits 2% during these comments. I sold out of many of my long-standing long positions, including Freeport-McMoRan Copper & Gold (FCX), eBay (EBAY), Disney (DIS), Colgate-Palmolive (CL), Chubb (CB), ExxonMobil (XOM), Prudential (PRU), Procter & Gamble (PG), PepsiCo (PEP), Oaktree (OAK), MetLife (MET), Lowe's, Lincoln National (LNC), Loews (L), Home Depot (HD), Ford (F) and General Motors (GM). Momentum stocks slid big, including OpenTable (OPEN), Zillow (Z), Herbalife (HLF), Green Mountain Coffee Roasters (GMCR), LinkedIn (LNKD), SodaStream (SODA), Netflix (NFLX) and lululemon athletica (LULU).
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