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Bond Yields Trend Lower; Investment Fairness: 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 items about why bond yields are continuing to trend lower, the uneven playing field for investors and the inquiry into Ocwen.

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Bond Yields Continue to Trend Lower

Originally published on Friday, April 25, at 7:38 a.m. EDT.

Despite some positive domestic economic releases, bond yields continue to trend lower this week -- the yield on the 10-year U.S. note is back down to 2.67% -- and the gap between rising P/E ratios and the market's message of future subpar domestic economic growth continues as well.

Several reasons why the (beginning-of-the-year) consensus expectations of rising fixed-income yields continue to be wrong include:

  • Liability-driven pension plan buying.
  • There is a developing correlation (over the near term) between rising bond prices (and lower yields) and declining equity prices. So if a stock market correction develops, bond prices will likely climb (and yields will likely continue to contract).
  • Evidence that the important housing sector continues to pause and the continued ratcheting down of domestic economic growth forecasts for the first six months of 2014.
  • Competition from surprisingly low European yields, as the European Central Bank considers the start of a broad-based asset purchases and other conventional and unconventional easing policies.
  • Demographic trend support (as the maturing baby boomers seek the safety of income).
  • The failure of trickle-down economics to support the stead of the middle class (who are still experiencing only modest income gains).
  • Fear that accelerating inflation -- the CRB index is up 11% year-to-date -- will impede growth.
  • Rising fear of geopolitical risk (now in the Ukraine) is putting a flight-to-quality bid under bond prices.
  • Growing evidence that the recovery in the Japan and China's economies are more muted than previously expected.

While I continue to view shorting bonds as very attractive on an intermediate-term basis, the above headwinds represent a challenge to the thesis over the near term.

As to the investment implications, as I mentioned previously, a second wind to the prices of closed-end municipal bond funds is likely, and a flattening yield curve remains a profits challenge to the banking industry.

At the time of original publication, Kass was long TBF, BTT, BKN, ETX, VCV, VPV, VGM, NAD, NMA, NMO, NRK, NPI, NPM, NQU and NQS; short TLT, BAC, WFC and JPM.


A Twisted Sense of Investment Fairness

Originally published on Wednesday, April 23, at 9:27 a.m. EDT.

In "Kill the Quants" (ad infinitum) I have continually argued against the unfair practices of High Frequency Trading, a group of traders who have an unfair advantage over most other investors.

This week, Bill Ackman's Pershing Square hedge fund announced it has purchased a large investment in Allergan  (AGN) and, with a partner, is planning to acquire the company.

To me, Bill Ackman's actions do not meet the spirit of the law. 

In substance, Bill has traded on inside information. 

But, technically speaking, insider trading is not illegal (according to current SEC regulations).

That said, Bill Ackman's acquisition of Allergan stock is not (to this observer) representative of a player on an even playing field with the rest of us (investors and traders). 

No wonder the average investor feels disenfranchised, disaffected and unfairly positioned.

At the time of original publication, Kass had no position in the stock mentioned.

  

Ocwen Probe Ramped Up

Originally published on Tuesday, April 22, at 9:30 a.m. EDT.

Benjamin Lawsky, the Superintendent of the New York Department of Financial Services has ramped up the probe of Ocwen  (OCN), it was learned yesterday.

At the core of the probe is that, according to Lawskym, "Hubzu appears to be charging auction fees on Ocwen-serviced properties that are up to three times the fees charged to non-Ocwen customers." Those fees "ultimately get passed on to the investors and sturgugling borrowers who are typically trying to mitigate their losses and are not involved in the selection of Hubzu as the host site."

Ocwen has responded to the probe by saying that it is fully cooperating and it plans to "fully address the questions raised by the DFS in our response to the letter, which we will plan to provide by April 28."

Ocwen's shares traded lower on the news.

I have several observations: 

  • I expect the company to deal directly with the New York Department of Financial Services rather than making public statements and being tried in the court of public opinion.
  • It is unclear how many homes Lawsky's claims address. My guess is that the tripling in fees refers to a small group of homes.
  • My belief is that if Hubzu charges more to properties serviced by Ocwen, it likely has to do with additional services provided compared to non-Ocwen properties by Altisource.

 I am a buyer of Ocwen on this weakness.

At the time of original publication, Kass was long OCN.

 

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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