Doug Kass fills his blog on RealMoney Pro every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- What's coming for U.S. stocks and the economy
- Why Disney is so optimistic about China
Click here for information on RealMoney, where you can see all the blogs, including Doug Kass'--and reader comments--in real time.
The Winter of Our Discontent May Lie Ahead
Published at 8:07 a.m. EDT on Sept. 22.
Now is the winter of our discontent
Made glorious summer by this son of York;
And all the clouds that low'r'd upon our house
In the deep bosom of the ocean buried.
--William Shakespeare, 'Richard III'
Stocks rallied vigorously after Janet Yellen's relatively dovish comments Wednesday afternoon. This occurred despite the general recognition that central banks are losing their effectiveness in terms of catalyzing economic growth
Though, with a small net short position, I am not fighting the Fed in a sizable way, the seeds for a bear market are being put in place; however, the timing of that drop remains uncertain.
Several questions and observations regarding the Fed and the market's reaction come to mind this morning:
- What does the Fed know? We started 2016 with a consensus view of four interest rate hikes by the Federal Reserve (though I suggested there would be none!). Despite a halving in the unemployment rate and that the real level of core inflation has been running at about 2% for nearly a year, the Fed to date has balked at any rate increase this year.
- Who cares what the Fed knows? I and others have chronicled the remarkably poor forecasting record of the Federal Reserve. For four consecutive years that august body of more than 100 economists has been among the worse prognosticators extant. For now we are prisoners of the Fed's views with its pretense of knowledge.
- In all likelihood the Fed will find a way of not doing anything over the next year on the rate front.
- The Fed and other central bankers have encouraged the greatest distortion and speculative bubble in fixed income in centuries. This glorious bubble in bonds, when it bursts, will substantively slow down financial engineering that has buoyed our markets, produce the largest amount of investment losses and risk-off moves as the carry trade is reversed in history, and will likely bankrupt numerous large banks, especially of a European Union kind. .
- The Fed has turned its back from reality with a straight face and has lost its effectiveness and is soon likely to lose investors' confidence. It's the Ah Ha Moment.
Of Algos and Men
"As happens sometimes, a moment settled and hovered and remained for much more than a moment. And sound stopped and movement stopped for much, much more than a moment."
--John Steinbeck, 'Of Mice and Men'
While numerous investors, particularly those that base their trading and investing on volatility and price-trending statistics, have rejoiced in the decision to hold rates and the Fed's dovish rhetoric, a Minsky Moment is likely at hand sooner than later.
This is what happens at inflection points in the market: The most obvious signposts of risk are dismissed because, after all, stock prices are advancing.
But greed is also rising coincident with rising stock prices and with the price/earnings ratio of projected 2016 S&P 500 GAAP earnings at nearly 25x and more than 18x non-GAAP earnings.
I have little interest in being long equities. The consensus view of 2017 S&P EPS for the fifth consecutive year is probably too high as profit margins are now clearly mean reversing in a period of subpar global economic growth.
Finally, political and geopolitical risks have never been greater.
The winter of our discontent may lie ahead.
Position: Long SDS; short SPY small, TLT
Disney Upbeat About China, Sports Content
Originally published Sept. 21 at 1:22 p.m. EDT
- Disney sees a healthy consumer in the U.S. and no sign of a consumer slow-down or issues with consumer spending.
- Lower fourth-quarter income due to the calendar.
- Sees MLB BAMTech investment for ESPN as a high-quality acquisition. Twitter (TWTR) - Get Report did a good job last week streaming the live NFL game, and that platform was powered by BAMTech.
- ESPN has a treasure trove of digital rights for 99% of sports it covers that are not currently being exploited monetarily on new platforms.
- For primary leagues, deals with major sports leagues like the NBA offer barriers to entry for competitors. No one can monetize sports better than ESPN because of its subscription fees and ability to access multiple platforms. New entrants are interested in gaining rights, however, as direct competitors to current sports content owners (Fox (FOXA) - Get Report , Time Warner (TWX) , CBS (CBS) - Get Report , etc.), they will have difficulty monetizing rights because of how expensive sports rights currently are.
- Moving forward with subscription-video-on-demand platforms, Disney aims to make access to content easier and all in one place because "the consumer doesn't want to look in multiple places for content."
- The opening of the Shanghai theme park has been fantastic. The company is not updating specific numbers, however. If not for recent poor weather, the first 100 of days of traffic would have been best opening for any park in the company's history. Shanghai is a tourist destination for the rest of China, and attendance so far has been dominated by people visiting from outside of Shanghai.
- Zika concerns have not impacted theme parks in Orlando whatsoever.
- The company is currently building multiple large Star Wars attractions in Florida and California.
- Success at the box office is due to the company's focus on creating quality over quantity. Tent-pole films work very well in China, and the company aims to create more of them. Disney believes in full ownership and full control of content. Outside money is of absolutely no interest to the company when it creates content and films. Since acquiring Pixar, Marvel and Lucasfilm, the average global box office gross from each film has been slightly less than $800 million. Disney is creating a Star Wars universe, continues to build on Marvel universe. Rogue One, the next Star Wars film, will debut in December.
- Primary programming approach will not be all that different than it is today, this year the company will be presenting 55,000 hours of live sports. Live sports products will form the basis of ESPN no matter what platform ESPN sits on. Disney has discussed strengthening studio programming and has made some personnel changes to reflect new direction.
- Company is looking to make it easier for consumers to access content on mobile platforms, and looking into different ways to make accessing content more personal.
I remain short Disney. DIS shares are trading about $1 lower today to approximately $92 a share. The chart looks awful, and the chart appears to be "rolling over," as I have consistently noted over the last few months.
The shares were placed on my Best Ideas List on Nov. 27, 2015, at $116 a share.
Position: Short DIS
At the time of publication, Kass and/or his funds were long/short XXX, 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.