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The Best of Doug Kass

Find out where this short-seller sees a bear market.

The self-proclaimed "anti-Cramer," Doug Kass, anchors

Street Insight's

"The Edge," a diary about stocks and investing. As a dedicated short-seller, Kass can seek out the bear market in any environment.

This week, he discussed

merger murmurs


the falling sky


the good old days



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Merger Murmurs

Originally published on 2/20/2007 7:52 a.m. ET

Back in early February, I wrote

Ten Rumors that Could Rock Stocks, in which I suggested that a number of merger deals were imminent.

Among those that I mentioned were



, which was acquired a week later by India's Hindalco Industries, and a

Sirius Satellite

(SIRI) - Get Sirius XM Holdings, Inc. Report


XM Satellite Radio


merger. On Monday, the companies announced their intention to merge.

Over the weekend, I heard (from multiple sources) about two additional rumors of blockbuster deals, one in health care and one in finance:

1. In health care, I am hearing of a deal for provider




2. In finance, I am hearing of a deal for credit card purveyor

Capital One

(COF) - Get Capital One Financial Corporation Report


What's in your wallet (portfolio)?

Signs of a Market Top

Here's an interesting factoid: The percentage of issues in the

S&P 500

above their 200-day moving average is at the highest level since March 2004. This leads me into this homage to David Letterman, as I offer you my "Top 10 Signs the Market Has Topped."


. I have gained 19 pounds since September, and on Friday, I sold my personal portfolio of blue chips and bought potato chips. (I was at a Democratic fund-raiser in New York City last week, and I saw Al Gore, but I didn't recognize him. I asked my friend, "Who is that skinny guy?")


. My best friend, Dean the Dream, will no longer open the emails that contain my daily opening missives on The Edge; they get him too depressed. (The only person who is responding to my instant messages these days is Fred Hickey, the High-Tech Strategist.)


. To help with my nervous sweating during market hours, I now wrap myself in Bounty paper towels.


. I have been called almost daily by

Bloomberg TV



to represent the bear case. The segment bookers have explained to me that there are no bears left to interview.


. After lecturing in his graduate school business class at Yale University in January, even permabear Dr. Robert Shiller told me I am too bearish on housing.


. When I request to borrow stocks (to short) from my prime broker,

Bank of America

(BAC) - Get Bank of America Corp Report

, I have begun to hope the borrow will be denied.


. I get irate when I listen to the bullish (and seemingly glib) case for equities made daily in the media. (Worse yet, the bulls are starting to make sense to me.)


. I have finally run out of cheap tequila in my bar, which I drink most evenings on the cold linoleum floor, so in order to reduce my level of anxiety, I have doubled my daily Zoloft intake.


. My 14-year-old niece, Natalie, asked me at my birthday party last Sunday: "Uncle Dougie, why don't you ever


stocks; it's dumb not to, isn't it?"


. Last week I ordered three "Mad Money" Jim Cramer talking bobble heads from NBC's Universal Store online, but they couldn't be sent out, as they have been backordered for three months.

The Sky Might Be Falling

TheStreet Recommends

Originally published on 2/23/2007 8:50 a.m. ET

A see-no-evil, hear-no-evil equity market has obscured a cracking foundation of support -- the extension of credit. Like market and popular fads, credit is cyclical, and since the end of the last century it has been plentiful. In all likelihood, the extension of credit will be less plentiful in the future -- as historically has happened whenever we've enjoyed a bounty of liquidity.

I alerted readers early to the developing fungus in subprime lending months ago. Not surprisingly, the perma bulls, buoyed by an unrelenting bull market, denied the existence of this turn in credit quality and experience. Bears like myself were seen as Cassandras -- incapable of seeing a glass half full.

We warned that years of abusive mortgage lending were destined to lead to rising credit losses and

debt downgrades

, and we called attention to the vulnerability of subprime (the BBB-tranche of the ABX Index), which at the time was trading

near par

at 100.

As the subprime problem

became more obvious

, the talking heads and brokerages, which package subprime loans, said that the problem would be contained.

Meanwhile, the price of the BBB- (subprime) tranche of the ABX Index steadily declined from par to the low 80s. "Don't worry, be happy" was the clarion call of the bulls, the logic being that a healthy economy and rising employment would contain the problem. (This was the same argument espoused by real estate bulls when addressing the housing boom in early 2005, and that argument turned out to be incorrect. Affordability stretched to a point where home buyers were simply priced out of the market; it was not predicated by higher interest rates or a general lack of prosperity.)

Indeed, credit contractions and credit crises typically come in periods of prosperity -- they occur when least expected as leverage and lending are abused. Such was the case with the implosion of the junk bond market in the 1980s and in the failure of Long Term Capital in the late 1990s.

Those who pooh-pooh the potential contagion of subprime lending say that we have not yet seen expanding credit losses in prime mortgage lending. Unfortunately, we will, as even prime borrowers partook in the teasers that produced the rapid growth in the mortgage market. But teasers are just that -- not permanent -- and re-sets will produce strain and credit losses in the prime market in the months to come.

As my stock Bible says, defaults beget reassessments of risk. This begets a pullback in lending and a turn in the credit cycle, which begets an economic contraction.

So even more important than rising prime mortgage lending credit losses, foreclosures and delinquencies is the impact that a more circumspect mortgage-lending community will have on consumer spending. In each of the downbeat homebuilder conference calls over the past week, managements emphasized that mortgage lenders were reining in credit. And my contacts with originators in the subprime and prime market lending communities confirm the current pullback in lending -- and the more stringent standards being imposed.

The chart below, provided by Goldman Sachs, the Department of Commerce and the Federal Reserve Board, shows the relationship between credit availability and real personal consumption expenditures, and it speaks volumes about the future for consumer spending ... and, in time a overall reassessment of risk and credit spreads.

The macro risk is not foreclosure per se, but the impact on credit availability and spending.

Source: Department of Commerce, Federal Reserve Board

In closing, perhaps we should again listen to the smartest man in the room, Sam Zell, who rendered his opinion of the credit cycle in his holiday greeting this year:

"Capital is raining on my head.
Everything is liquid, we're awash with cash to spend
The flood has drowned returns,
'Cause assets keep liquefying, monetizing, raining... So I just did me some Econ 101
Seems like we've gotten out of
Liquidity abounds,
But relative yields keep falling as capital keep raining. What lies ahead: we're old
The western world is aging, we'll need income
From our pension funds
Where is it coming from?
The yields we see won't fuel no party. Tho' capital is raining on my head.
Interest and inflation rates are narrowing their spread
To have what textbooks said
Ratios that we're used to
Have been squeezed by so much cash flow. The world is monetizing faster every day,
Illiquid assets assets alchemized
To currency in play
Competing for return.
Black gold prices rising, still more money chasing assets...
And this is one thing I know
To get things back to normal.
It's a long haul
That's global.
Yields won't improve 'til growth soaks up this liquid free fall. Capital keeps raining on my head.
So much is out there that the world is out of whack.
When will we see balance back?
It's going to be a long time 'til returns meet expectations
We need to be prepared for slim annuities..."

-- Sam Zell, "Capital Keeps Falling on My Head"

Those Were the Days

Originally published on 2/22/2007 8:06 a.m. ET

(Sung to "

Those Were the Days")

Once upon a time, there was a sell-off

When we used to raise a glass or two

Remember how we laughed away after hours,

Thinking of great shorts like JDSU!

Those were the days, my friend

We thought they'd never end

We'd sing and short forever and a day

We'd live the life we'd choose

We'd short and never lose -- it was 2002!

For we were young and sure to have our way.

Then, the market's rise went rushing by us

We lost our shorting bravado on the way

If, by chance, I'd see you at Harry's,

We'd smile at one another and we'd say.

Those were the days, my friend

We thought they'd never end

We'd sing and short forever and a day

We'd live the life we'd choose

We'd short and never lose -- it was 2002!

Those were the days, oh yes, those were the days.

Just last night, on the cold linoleum floor

Nothing seemed the way it used to be

In the tequila glass, I saw a strange reflection

Was that lonely short seller really me?

Those were the days, my friend

We thought they'd never end

We'd sing and short forever and a day

We'd live the life we'd choose

We'd short and never lose -- it was 2002!

Those were the days, oh yes, those were the days.

Through the door there came a familiar booyah

I saw Cramer's face and heard him call my name

Oh, my friend, we're older but no wiser

For in our hearts, the dreams are still the same.

Those were the days, my friend

We thought they'd never end

We'd sing and short forever and a day

We'd live the life we'd choose

We'd short and never lose -- it was 2002!

Those were the days, oh yes, those were the days.

With apologies to

Mary Hopkin!

At time of publication, Kass and/or his funds had no positions in any of the stocks mentioned, 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. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box."

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