Kass: Don't Count on a Second-Half Rebound

Yesterday's earnings shortfall from Ambac and volume dropoff from UPS make the comeback story seem highly unreasonable.
By Doug Kass ,

These blog posts originally appeared on RealMoney Silver on April 24.

7:33 a.m. EDT

"Earlier expectations have turned out to be optimistic, and the environment continued to deteriorate." -- Michael Callan, Ambac (yesterday's first-quarter 2008 conference call)

Thanks, Mike. Helpful, really helpful.

Yesterday, monoline bond insurer

Ambac's

( ABK) shares dropped by nearly 50%, to close at $3.46 per share, after losing almost $12.00 per share, or $1.6 billion, in the recently completed first quarter.

Remember Ambac's management has consistently blamed short sellers for the company's problems. Of course, the joke (on investors) remains that Ambac still has an AAA rating.

Yesterday's shortfall helps to explain the still sloppy share price action in the financial sector. It also helps to explain why I continue to remain a market skeptic, why I rarely take for face value corporate managers' opinions and forecasts and why I don't let share prices (of the broad market or of specific companies) shape my fundamental views. I try to do the opposite.

"We see no signs of economic strengthening in the second quarter." -- Kurt Kuehn, UPS CFO (yesterday's first-quarter 2008 conference call)

For those who think that Ambac's woes and the woes of the broader financial sector are ring-fenced and isolated, consider that

United Parcel Service's

(UPS) - Get Report

first-quarter volume

declined

-- only the eighth time in its 100-year history.

It is for these reasons and many more that a second-half economic rebound is looking more unreasonable.

The Sunshine Boys were out in full force last night on "Kudlow & Company," and the content of the show continues to be proof positive that too many worship at the altar of price momentum rather than, as they should, at the altar of fundamentals, which, from my perch, are eroding.

Like

Warner Wolf

used to say, let's go to

the

tapes

of last night's "Kudlow & Company."

Bunge Jumping

8:22 a.m. EDT

In the past I have written up the dos and don'ts of short selling.

One of the single most important tenets of successful short selling is to avoid shorting based on valuation/price and to avoid stocks with high short ratios.

Case in point: ag/fertilizer/corn company

Bunge

(BG) - Get Report

, the short interest of which rose by almost 4 million shares this month.

Bunge reported a large beat and substantially increased guidance.

The shares will gap higher this morning, and those who are short run the risk of moving from hedge fund palaces in Greenwich to small studio apartments on Moshulu Parkway in The Bronx.

Favorite Long and Short

9:52 a.m. EDT

Favorite long:

UltraShort Oil & Gas ProShares

(DUG) - Get Report

.

Favorite short:

ExxonMobil

(XOM) - Get Report

Agribusiness, Materials and Energy Losing Steam

9:57 a.m. EDT

The major theme this morning is that the market is clearly not getting physical as a conspicuous and broad-based share price decline in ag, fertilizer, materials and energy has surfaced -- even in the face of better-than-expected first-quarter earnings releases this morning.

As both Uncle Vinnie Farrell and I mentioned on "Kudlow & Company" last night, a change in market leadership is typically associated with corrections, not new bull market legs.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.

At the time of publication, Kass and/or his funds were long the UltraShort Oil & Gas ProShares and short Ambac and ExxonMobil, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.

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