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Bear Case for Retail; Beware the Cult of Momentum: Best of Kass

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 the posts this past week were entries about the retail situation and the cult of momentum.

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The Bear Case for Retail
Originally published on Friday, Aug. 16 at 7:58 a.m. EDT.

In " Retail Faces Defining Week," Jim "El Capitan" Cramer outlines his concerns about the retail sector.

I am in complete agreement.

On July 15, I initiated a short in the Market Vectors Retail ETF (RTH) -- I also shorted Home Depot (HD - Get Report) and Lowe's (LOW - Get Report) on July 25, both of which I foolishly covered on Aug. 1.

[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/12001302/1/retailers-must-adapt-to-a-changing-consumer.html"><em>Retailers Must Adapt to a Changing Consumer</em></a>]

I feel confident in this negative sector view based on the following observations:
  • Most important, the U.S. savings rate is at a more-than-five-year low. In other words, the 2012 and early-2013 strength in retail sales has borrowed from future retail sales.
  • Over the past few months durable purchases (autos and homes) have been relatively robust while apparel has been weakening. The former purchases are typically financed while the latter are not. This suggests to me that personal tax rate hikes, stagnating real incomes, insecurity over the economy and the jobs market are beginning to take a toll on the average Joe, especially when he needs to pay cash and can't finance a purchase. I have been trying to short VF Corporation (VFC - Get Report), as a high-priced proxy for the apparel sector all week and will continue today).
  • The retail sector has outperformed the market over the past several months and is vulnerable.
  • Higher interest rates have caused a collapse in refinancings, which has historically served to buoy household income and spending. This is occurring at a time when incomes are stagnating while the costs of the necessities of life are increasing (what I have described in Barron's as the screwflation of the middle class). With interest rates rising, I expect this contribution to household incomes to deteriorate further.
  • The most important headwind to the consumer is rising gasoline prices, which will press the consumer's real income more.
  • Listen to Citigroup's (C) second-quarter conference call in which the bank expects weakening North America consumer business.
  • Finally, retail optimists continue to point to aggregate jobs growth. My response is that the job growth is occurring in low-paying and temporary jobs (i.e., this growth is of low quality). Just look at the average hourly earnings in the last BLS report; they were down.

The recent weak retail sales and profit guidance from Macy's (M - Get Report), Wal-Mart (WMT - Get Report), Polo Ralph Lauren (RL - Get Report) and Nordstrom (JWN - Get Report) are clear signals that we should expect less-than-consensus personal consumption expenditures in the second half and that retail stocks will likely suffer. And the mix change -- that is, strength in durables (hard goods) and weakness in non durables (soft goods) -- augurs poorly for future retail sector profitability.

At the time of publication, Kass was short RTH.


Beware the Momentum Cult
Originally published on Thursday, Aug. 15 at 1:32 p.m. EDT.

Beware of those who worship at the altar of price momentum.

Because, in the main, they are a fickle bunch of lemmings.

I am sorry to be so blunt.

Simply watch CNBC/Bloomberg or read Tweets and daily newsletters today, and you will find even the most glib and self-assured bulls turn on a dime when stock prices move south. It's almost as if they had no memory of what they said or wrote in the day or weeks before!

[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/11997493/1/rochesters-rise-amid-kodaks-demise.html"><em>Rochester's Rise Amid Kodak's Demise</em></a>]

Indeed, last night I received an email from a prominent "talking head" and good pal (I will not name him out of the respect I have for him over the years) who basically ridiculed the logic and conclusions in my "Top 10 Reasons Why the Market May Have Peaked for the Year " post from Tuesday. He actually implored me to change my mind.

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