This commentary originally appeared on Dec. 20 at 9:30 a.m. EST on Real Money Pro -- for access to all of legendary hedge funder manager Doug Kass's strategies and commentaries, click here.
The point I have been trying to make over the last week (that has clearly not been heard!) is that we are already seeing the benefits of the eurozone's plans to defuse the debt contagion and crisis in the form of lower (in certain cases, much lower) sovereign bond yields.
It is why, coupled with the dour investment sentiment and improving high-frequency domestic economic statistics, I have been expanding my net long exposure.
I am fully aware of the structural problems of a debt-laden European economy (who isn't?) and the disparate interests of the 17 members of the EU that is a headwind to a cohesive policy aimed at stabilization of the crisis. But the underlying problem in the eurozone is well-known by now, and quite frankly should have been a cautionary sign to market strategists a year ago and six and three months ago, as they would have avoided many of the stock market's problems in 2011.
Steve Liesman quite accurately and succinctly said last week, financial calamity occurs when the problems (and depth of the consequences) are not known, not when the problems are universally known.
The eurozone Cassandras are out in droves now, supported by an ailing stock market, Draghi's hard line and Lagarde's ominous rhetoric. But so were the U.S. Cassandras out in droves during our domestic bank, debt and financial crisis of 2008-2009, yet much of those threats were overcome with aggressive policy -- and aggressive policy is inevitable in Europe, as the tension is kept on the weaker members of the EU until they respond responsibly in a fiscal sense.
And, already, as measured by lower sovereign debt yields, policy
having a positive impact.
The perma-bears missed the March 2009
(666 in the
). Throughout the market's ramp over the past two and a half years, observers such as Nouriel Roubini have been in denial, wearing blinders that block out the recovery in stocks, and they have been very wrong in expecting a U.S. double-dip.
I am sorry, he and others plainly screwed up.
As I wrote in
Despite the anxiety in the markets and the downside risk to the world's economic growth entwined in the European debt crisis, I remain of the view that a credible plan to stem the debt crisis in Europe has just begun and that European and global leaders and central bankers will all come to their senses and intervene in a massive way.To me, the chances are awfully good. After all, the alternative is unimaginable for the eurozone's economic health and political stability.In markets, politics, society and sports, change always come out of extreme conditions.Markets: Bull markets are borne out of poor economic news, uncertainty and dour investor sentiment, while bear markets are borne out of good economic news, certainty and excessive investor confidence.Politics: Political change often occurs during economic reversals (2008 Democratic tsunami and the Tea Party) and foreign policy disappointment.Society: Social change is often the outgrowth of economic dissatisfaction (the Arab Spring and Occupy Wall Street).Sports: Team lineups are changed and coaches are replaced when performance fails and win/loss records don't meet expectations. (The NFL's Denver Broncos were 2-5 two months ago when quarterback Tim Tebow got the call to start. The rest is history. Six straight wins before yesterday's loss to the New England Patriots, and the Broncos still hold the divisional lead at 8-6.)So, I expect change will continue to occur in Europe, though the path will be bumpy, and some important changes have already been agreed upon. More will come.Thus far ignored by the world's stock markets are some positive elements of the EU summit meeting, which, though slow-moving (should have been expected!), appear to have measurably taken tail risk off the table for Europe. The first steps of greater fiscal integration and sanctions against countries that violate agreed-upon debt and deficit rules have been taken and addressed. As a start, each of the 17 countries in the EU will introduce balanced budget amendments coupled with structural deficits capped at 0.5% of GDP (with cyclical deviations to 3% of GDP allowed). Automatic correction mechanisms will be triggered if member countries violate the debt and deficit rulesDespite the (justified) gloom and doom in Europe, investors have ignored the mildly positive short-term action in sovereign debt yields last week. (At negative sentiment extremes, as was the case of the U.S. stock market in January 2009-February 2009, there is always disbelief at an inflection point of change.)Ironically, European bond yields (excluding Italy's 10-year note) fell across the board and across the curve last week. Spanish two-year yields move to the lowest level in seven months, and yields have halved since November. France's two-year yield is the lowest in 13 months. According to Miller Tabak's Peter Boockvar, the euro basis swap and Euribor/OIS spread dropped last week. European economic statistics, too, were better than expected as reflected in a modest tick up in Germany's ZEW six-month expectations outlook and a slight improvement in the eurozone's manufacturing and services index (from 47 to 47.9).The eyes of investors around the world remain fixated on the policymakers in Europe. I continue to be more optimistic than most that (out of necessity) the needed and more dramatic policy initiatives will take the form of large-scale ECB intervention in the sovereign bond markets (in the weeks and months ahead) aimed to set in motion a positive feedback loop between investors' bond buying and the receding risk of sovereign default.
Peter Boockvar's brief communiqué below modifies my earlier remarks:
Peanuts, beer, three-year loans here!Today, European banks tell the ECB how much borrowing they want to do at 1% for three years. Tomorrow we'll hear how much they took and forecasts are about 300 billion euros. While some are still speculating that banks are buying short-term sovereign debt after selling it for the past few months, yields in Spain, Italy, Belgium and others are down again.Also, another good Spanish sale of short-term bills is helping sentiment. Spain sold three-month debt at a yield of 1.74%, well below the 5.11% paid last month, and they paid 2.44% for six-month bills vs. 5.23% in November. The Spanish two-year yield is falling to a 17-week low, and the 10-year is at a 10-week low. There is confidence in the new Rajoy government's will and ability to get through tough reforms, as it will certainly be easier than for the previous socialist government. Italy's two-year yield is at a seven-week low. Germany's December IFO business confidence number unexpectedly rose to 107.2 from 106.6, led by the expectations component.Also in Europe, the euro basis swap is narrowing to a two-week low, and Sweden cut interest rates by 25 basis points as expected. The ECB did fully sterilize its 211 billion euros of purchases.In Asia, the Shanghai and Sensex indices continue to trade poorly, but the Kospi bounced after yesterday's Kim Jong Il-induced selloff.
Change is coming in Europe, and in the fullness of time, the aggressive policy employed in the U.S. three years ago will land on its shores.
In the meantime, unusual value in stocks has developed, and I am exploiting that opportunity even as the stock market's tone is terrible and as most classes of investors run for the hills and de-risk.
Is it painful to watch stocks reverse lower every day over the last week of trading? Of course it is. But no one ever said investing should be easy.
Remember: Bull markets are borne out of poor economic news, uncertainty and dour investor sentiment.
A dispassionate accumulation of stocks is what I believe to be in order now.
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.