Strategy for the Moment; A Canary in the Real Estate Mine: Best of Kass

In highlights from this week's trading diary and posts, Kass discusses his current market strategy, and why the Miami housing market has him seeing bubbles.
By Doug Kass ,

Many are claiming after the fact that they anticipated and fully understand the rally we've seen this week following the Paris terrorist attacks and the Federal Reserve's clear indication of a December rise in interest rates. But I don't have a full explanation.

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.

This past week, Kass talked about why this elderly bull market reminds him of his own aging body, and why the tech transformation hitting retail is destined to spread much further across the economy.

My Current Strategy

Originally published Nov. 19 at 8:30 a.m. EST

For numerous reasons, I anticipated some stability and even a possible recovery in an oversold market. We'd been down six days out of seven leading into this week, but frankly, I'm startled by the magnitude of the rally that we saw on Monday and Wednesday.

But as I mentioned yesterday in Columnist Conversations, discipline trumps conviction. So, I took some trading losses and covered the ETF shorts I had taken out late Monday and Tuesday.

I remain bearish on equities for fundamental, valuation and sentiment reasons -- but for now, Mr. Market has a mission. And when the market moves in ways incomprehensible to me, the best thing to do is be like Chance the Gardener in Being There and just watch (with a reduced short exposure). My mantra remains: "Live to fight another day."

In the meantime, I expanded my long exposure to bank and retail stocks this week. Four banks are on my "Best Long Ideas" list, and in the retail sector, I'm particularly attracted to Bed Bath & Beyond (BBBY) - Get Report , Walmart (WMT) - Get Report and Macy's (M) - Get Report . (M and BBBY are also on my "Best Long Ideas" list.)

As an aside, I've carefully gone through Macy's income statement and balance sheet and it wouldn't surprise me if private equity is circling the company now and determining a buyout's feasibility.

Position: Long C, JPM, BAC, FITB, STL, MSL, SONA, BBBY, M, WMT

The South Beach Housing Bubble

Originally published Nov. 18 at 9:25 a.m. EST

"Down the Ave I'm strollin'
Like Tony Montana high rollin'
Tequila shots at the Delano
Boogie on down at the Cameo
The house is rockin' oye que calor
Go mamacita shake it on the dance floor."

-- Bonde Do Role, Miami Beach

A housing cycle's terminal phase always ends the same way -- a speculative fever in which new and marginal buyers enter the market and boost buyers prices to unaffordable levels. Speculative buyers (maybe we should call them "lemmings") then come in and push prices even higher until the market reaches an inevitable top.

We've all seen this movie many times before. And as we saw in 2006, these housing bubbles typically start on either the East or West Coast, then leak into other areas of the country.

Such is the case today in Miami's important, trend-leading South Beach market.

Last week, word emerged (but was largely ignored) that South Beach's October sales fell 20%, with pending sales off 28% and inventories up 20% to a bearish 15 months of supply. But the number of housing units either approved or already underway is greater than what South Beach saw at the last cycle's peak nine years ago.

Accordingly, housing demand must rise more than four-fold from current levels there to absorb all of supply.

Here are the specifics from real estate maven Mark Hanson:

South Beach sales are down 20 year over year, while pending sales are down 28% year over year and supply is up 20% year over year to 15 months of supply:

South Beach prices are up 13% year over year and 59% from three years ago -- but how?? Demand is supposed to precede price. Only in bubbles do prices diverge with demand to this degree:

South Beach sales are down 16% and pendings down 47% from three years ago, highlighting how profound the recent weakening trend is:

Dade County's sales are down 14% year over year, but the number of available units has risen 5% to 7.2 months of supply. Prices are only up 4% year over year, which makes sense, as the county represents a much larger base. It's also a leading indicator to South Beach due to transactional volume -- until South Beach gaps down and takes the lead by a long shot once everyone realizes the downtrend:

The Bottom Line
It is not different this time in the U.S. housing market.

A South Beach housing bubble is bursting -- but no one is paying attention to this important and disturbing leading trend for real estate.

Position: None

At the time of publication, Kass and/or his funds were long C, JPM, BAC, FITB, STL, MSL, SONA, BBBY, M, WMT, although holdings can change at any time.

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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