Doug Kass Chats on AOL, Aug. 13

Doug Kass chatted on AOL's MarketTalk, hosted by Sage, on Monday, Aug. 13 at 12:30 p.m. EDT.

Comment: Live from Florida, please welcome Doug Kass, general partner of Seabreeze Partners and Kass Partners, and columnist, TheStreet.com, Inc.

Doug can answer questions about market conditions, portfolio strategies, the economy, and more. Visit Keyword: TheStreet.

Question: Does it appear that the European Central Bank (ECB) may begin to more aggressively ease rates to prevent a slowdown of economic growth in Europe?

Doug Kass 3: My view is that a general reduction in rates overseas is increasingly likely, as well as improved prospects for domestic rate cuts in the face of deteriorating economy.

Sagecalc: Are you now bearish on the home construction companies such as Lennar [LEN], and why?

Doug Kass 3: Yes, in this weekend's Barron's, I was interviewed by Alan Abelson. I would say that, in general, we have to be alert for disquieting plots that might negatively impact the markets even further than it already has.

And even more important we have to be on alert for possible events that are currently being ignored.

My greatest investment fear is not that technology spending won't turn around next year, for it will.

Nor is my fear that mutual funds inflows will turn into redemptions, for they won't.

My greatest investment fear is that the turnover of the existing housing stock declines abruptly and then existing home sales turn down.

Consequently, already inflated home prices may plummet and the consumer would fold up his spending tent.

Home building stocks have been outstanding market performers over the last 12 months, having risen by over 70% on average vs. a decline in the S&P 500 and vs. a decline in the S&P Building Products Index.

I am gravely concerned.

Question: Mr. Kass, which home builders do you see as most vulnerable?

Doug Kass 3: I see them all vulnerable across the board. The merchant building business is a homogenous industry, commoditylike in its cycle, so all the builders will be hurt.

Sagecalc: Would multi-family housing REITs be unaffected in your scenario?

Doug Kass 3: I don't follow the REIT industry closely, but I would avoid Real Estate Investment Trusts which would be geared to the residential housing industry, including multi-family exposure. And especially if the exposure is at the high end of the home price market.

Question: Oil riggers have been decimated over the last six months, yet the price of oil is twice as high than a year ago, and with most nations well into an economic slowdown, the future looks good. Any opinion on SLB, rig HAL. Thanks.

Doug Kass 3: I thought most of the year that the oil drillers were unattractive based upon the economic consequence of lower business activity and as it translates into lower consumption.

That said, the disappointing gross domestic production has been to some degree reflected in a) lower crude prices and b) lower oil drilling and oil-related stock prices.

So I would say, at this point, that the energy sector is muddle-valued, a term I use to express that a group is neither overvalued nor undervalued.

Question: Has President George W. Bush played any role in the market's fall and lack of confidence?

Doug Kass 3: The trends that are in place reflect cyclical developments in the market, and in the economy, which transcend Bush's presidency.

Sagecalc: Going back to the energy sector, should one even avoid the more conservative major integrated oils?

Doug Kass 3: I see little risk in that sector of energy. The stocks are supported by relatively high dividend yields, and relatively low price/earnings ratios in my view.

Question: The auto parts manufacturers have done well, yet analysts say the industry is just getting out of a dip and things look well for the future. SUP has invested for the future and has done well.

However, with so many auto rebates, could the auto market be OK?

Doug Kass 3: I think that the automobile supply markets profits prospects are excellent, but I feel that the stocks are somewhat ahead of themselves.

The group has exhibited superior performance and in a difficult stock market environment. I would take some profits.

Question: Doug... I am certain you learned very few of your market reading skills at Wharton, so, how did you learn to see tomorrow's prices... from my side of your writings, you seem to be very good at "knowing"!

Doug Kass 3: I'm an advocate of contrarian thinking.

My job as I see it is to assess what the prevailing market bias is regarding individual market sectors.

Once I can develop a logical argument that contradicts the prevailing view, then I can make a very profitable investment move.

Question: Hi Doug. Rob Fraim here. Comments on your HDI short? Classic perception vs. reality situation.

Doug Kass 3: Good morning, Rob. As you know, I think Harley is headed for a crash.

My judgment is based upon the evidence that I have in hand that motorcycle inventory levels at the retail level are rising to uncomfortable amounts.

Question: Doug, what do you think about clothing retailers like the Gap? Good prospects over the next year?

Doug Kass 3: If you go back to my comments regarding the consumer and my concerns reflecting the balance sheet, I, too, would be negative on consumer-related stocks for the time being.

Question: Doug, thanks for the AOL and HDI calls. Can you recommend a good site for short info besides ShortInterest.com?

Doug Kass 3: Good question. Unfortunately, there is no comprehensive site available to the individual investor which is not costly.

Question: Do any of the CLECs make it or do the baby bells just let them declare bankruptcy and pick up the pieces?

Doug Kass 3: I believe that they're history.

Comment: If you are a contrarian, then you must be viewing the tech and telecom sectors as very interesting.

Doug Kass 3: I've thought for some time, beginning in late March/early April, that technology stocks were sold out. Indeed, a fantastic move in the stocks occurred in the second quarter.

Market prices had adjusted to reflect diminished and more realistic expectations.

That big second-quarter run-up is now in the process of being corrected. Fear has replaced greed, return of capital has replaced return on capital as the dominant motivator.

And increasingly, Wall Street analysts have given up hope, especially in technology, of a late 2001/early 2002 recovery.

I believe in the very near term it will be time to get greedy again with regard to technology issues. But it will take time and patience.

Sagecalc: Are there any issues that are worthwhile longs at this point?

Doug Kass 3: Yes. It's my view that the stock brokerage stocks, very much out of favor today, represent attractive value.

Question: Doug -- is there a risk that interest rate cuts do not reenergize the economy as free equity creating overcapacity and not rates are the issue this time, and do we have a chance for an "L" shaped recovery, not a "V" or "U" shaped as people hope?

Doug Kass 3: Anticipate that we will have a period of slow growth for an extended period of time. Well out into the future.

Question: What do you feel about FNM and FRE? Will these get hit if the housing industry takes a hit?

Doug Kass 3: I'm currently doing work on Fannie Mae and Freddie Mac, and what I see I don't like.

That government-sponsored agencies, FNM and FRE are also subject to the cyclical concerns I have regarding home builders.

Question: Doug, how about the power producers like CPN?

Doug Kass 3: I don't understand that group, and certainly didn't understand the market's euphoria.

Question: Doug, enjoy reading your column. Can you please tell me your short- and long-term view on SUNW. Thank you.

Doug Kass 3: Sun Micro, neutral short term. Positive long term.

Comment: Thank you for joining us today, Doug! We have been speaking with Doug Kass, general partner of Seabreeze Partners and Kass Partners, and columnist, TheStreet.com, Inc.

Doug Kass 3: It's a pleasure having everyone as an audience.

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