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Economy Not in Recession; Short in May and Go Away: 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 whether the economy is in a recession and signs of a market topping process.

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The U.S. Economy Is Not in a Recession

Originally published on Thursday, May 1, at 12:14 p.m. EDT.

I have respectfully (and strongly) disagreed with Roger Arnold on his assertion that the U.S. economy is in recession on Columnist Conversation.

All the high-frequency economic data point to an above-2.5% second-quarter 2014 real GDP print.

Another example today is the manufacturing ISM, which came in at 54.9, slightly better than 54.3 expectations and above the March number of 53.7.

The beat was driven almost entirely by the employment gauge, which was up from 51.1 to 54.7. New orders were flat, production was basically flat, inventories inched up very slightly, and backlogs declined from 57.5 to 55.5.

Pricing pressures abated a bit with the prices paid index falling from 59.0 to 56.5. Finally, exports and imports both rose.

Importantly, the report shows that 17 of 18 industries reported growth in April with the quotes from various respondents being generally positive.

Overall this report points to continued growth, with no major acceleration or deceleration but a decent underpinning with an improving job market.

In no way does this indicate that the domestic economy is in recession.

No way, no how.

That said, I continue to look for subpar economic growth after the weather-related second-quarter bounce in GDP.

 

Short in May and Go Away

Originally published on Wednesday, April 30, at 7:44 a.m. EDT.

Signs of a market topping process abound:

  • As at previous market tops, signs of bubbles and excess speculation are ubiquitous.
  • Market leadership is changing, consistent with two other periods that presaged market corrections (1972-1973 and 1999-2000).
  • Bank stocks are typically a good market bellwhether, and they are falling both absolutely and on a relative basis in 2014.
  • Bullish investor sentiment remains elevated and overly optimistic. (Note: Investors Intelligence bulls remain at about 50% while bears have only risen from 15% to 21%.) The buy-on-the-dip mentality continues to be the overriding investment mantra, with few expecting a serious decline.
  • Market participation has narrowed this year while the overall averages have climbed, a classic technical divergence.
  • Bears are an endangered species after dealing with a five-year period of ever-rising stock prices. There are no (except for perma-bears) emboldened bears out there now, because their ranks have been diminished. As a result, there is no apparent market cushion provided by the ursine cabal.

On Tuesday morning I pointed to evidence of speculative excesses and emerging bubbles, a condition apparent at most market tops.

As I mentioned late yesterday, Twitter's  (TWTR) weak average user and use data for the quarter is yet another example of the bubble in the momentum names and social media sector, in which grand and unrealistic expectations have been juxtaposed with ridiculously high valuations.

In looking at the destruction of social media stocks over the last two months, it is clear that investors and traders purchased positive price momentum in the social media sector without knowledge of fundamentals, company economics and, most importantly, without a sense of value.

Plain and simple.

Worshiping at the altar of price works -- until it doesn't.

New tech and social media companies are nothing more than information aggregators driven by advertising that have been insanely overpriced.

Twitter, as measured by its short interest, is among the most hated. There is a reason why investment bankers priced its IPO only a few dollars more than the initial indication -- they couldn't get a higher valuation.

Twitter may be a great platform and concept, but the brain power and luck it will take to make it a sustainable $10-billion-plus company will be greater than what it took to create it from scratch.

Despite the recent drop in the NasdaqFacebook  (FB) still possesses a $140 billion market cap. Twitter's capitalization exceeds $24 billion. LinkedIn  (LNKD) trades at a market cap of more than $19 billion and a cool 750x earnings. Salesforce  (CRM), which has been an awful stock, still has a $32 billion market cap (with financial statements that belong in the clouds because they are so damn confusing). Tesla  (TSLA), down $60 from its high, is still priced as if gasoline won't have a commercial use in five years. Zillow  (Z), although its commercials are touching, is priced at 20x sales, and last time I checked, it sells advertising and subscriptions. Then there is Yelp YELP, a collection of restaurant (and other) reviews, clocking in at 20x revenue.

(YELP)Bottom line: Avoid the whole social media space and cover your ears when talking heads, people in flip flops with MBAs and those walking into traffic on their smartphones tell you otherwise.

As to the broader market, short in May and go away.

At the time of original publication, Kass was short TSLA.

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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