The Best of Kass
NEW YORK (
) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with
RealMoney Silver
readers in "The Edge," his daily trading diary.
This week, he wrote about a change in his big-screen pair trade; why long bonds were getting hurt, and why the midterm election results may not be so great for the stock market.
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Long Bonds Taking More Heat
Originally published on Nov. 5 at 12:00 p.m. EDT.
- The stronger-than-expected jobs report and the absence of the Fed buying that maturity are the catalysts.
The long end of the bond market is getting hit further from the stronger-than-expected jobs report coupled with the absence of
Fed
buying at that maturity.
At the time of publication, Kass owned call options in ProShares UltraShort 20+ Year Treasury (TBT) - Get Report
.
Where's the Beef, Ben?
Originally published on Nov. 5 at 7:28 a.m. EDT.
- Fed Chairman Ben Bernanke believes that higher stock prices should improve personal consumption expenditures.
- Unfortunately for Ben, the math fails to support his belief.
"Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." -- Fed Chairman Ben Bernanke, Washington Postop-ed
In Chairman Bernanke's
Washington Post
op-ed piece on Wednesday, he cited that easy money will promote economic growth by:
lowering mortgage rates, making housing more affordable and allowing homeowners to refinance; and
reducing corporate bond rates, which will likely encourage investment.
To begin with, it remains unclear to me whether QE2 will generate much lower mortgage and corporate bond rates from here. But for this exercise, let's dive into the Chairman's statement that higher stocks might improve personal consumption expenditures.
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Miller Tabak's Dan Greenhaus wrote yesterday that he is "sympathetic to his (Bernanke's) view ... but the math is less cooperative."
I agree.
According to the
Federal Reserve Bank of Atlanta
and
other research reports
, consumers have historically spent 3 to 4 cents out of every additional dollar of stock market wealth.
Currently, households own nearly $11 trillion in equities, ETFs and mutual funds (again, a hat tip to Dan).
Let's assume that the Fed's move has been responsible for a 10% rise in stock prices, serving to increase the aggregate value of equities by $1.1 trillion. Applying the historic stock market wealth multiplier mentioned in numerous research pieces on the subject would only translate to a modest $40 billion rise (or thereabouts) in personal consumption expenditures in a U.S. economy with a
that exceeds $14.0 trillion.
If indeed it follows that the real impact of rising stock prices on personal consumption is trivial, where's the beef, Ben?
Government Irrelevance Will Deliver Market Sorrow
Originally published on Nov. 3 at 7:29 a.m. EDT.
- Don't be too sure that the election results will have a dramatic effect on the market.
- A transformative jobs policy is no closer at hand than it was yesterday.
- We have many economic issues that need to be addressed, and gridlock is not the answer.
"I don't see anything about this president that speaks to making peace and getting along with the other side of the aisle, and I don't see the other side coming together with him either because, beginning tomorrow, we will be in presidential-election mode."
-- Jim Cramer,
Government Irrelevance Is Bliss
As
Saturday Night Live's
would say, the 2010 midterm elections are now over -- is it time to expect the president to embark on a mid-course
erection
in policy?
In 2008, the Democratic tsunami-like victory was overstated (in its consequence) by the pundits. Rather, it turned out to be a blessing for the Republican Party.
Similarly, the 2010 Republican tsunami last night is likely being overstated in its positive market consequence going forward.
Most commentators expect the administration to move to the center, and, in doing so, to extend middle-class tax relief indefinitely and, for the top taxpayers, to grant it an extension of two years. Those pundits would add, for dessert, expectations for a reduced (20%) tax on dividends (rather than going to the taxpayers' marginal tax rate as recommended by the administration).
I am dubious.
Interestingly, I view the anticipated inertia, gridlock and growing government irrelevance (Jim's great term) emphasized and supported as a positive by Jim "El Capitan" Cramer's
late yesterday as a negative -- as I do negatively view, unlike Jim, the likely efficacy and
.
Importantly, the needed fiscal response and transformative jobs policy are no closer at hand today than they were yesterday before the election results were handed down. Attention to deficits, too, is a loser, with the impractical and more radical agenda (in their suggestions of closing important departments of the U.S. government) of the Republican Party's right wing (the Tea Party) not demonstrably better than the Democrats in holding down the current account balance.
Arguably, with monetary (not fiscal) policy front and center, investors in the gold market seemed to have been handed an election win last night.
I stand by my more pessimistic investment conclusions contained in my closing remarks yesterday:
The market has continued to be boosted today by the growing probability that the Republicans will comfortably win a House majority -- though the likely outcome is that the Senate will remain controlled by the Democrats. Despite protestations from several talking heads (e.g., Strategas and Bank of America/Merrill Lynch) over the last half hour on CNBC, a Republican Senate majority would likely require wins in California, Connecticut and Washington state. Victories in these states by the Republicans are unlikely. In all likelihood we will be left with gridlock after the midterm elections are over. My view is that while gridlock is seen historically as a plus for the markets, it's different this time. The domestic economy faces numerous challenges to growth -- in the form of an overleveraged consumer, still-elevated joblessness and large fiscal imbalances (local, state and federal) -- that need to be addressed posthaste. Indeed, the current anemic trajectory of growth exposes the economy to policy mistakes, a further drop in consumer and business confidence and other unknown and exogenous factors (such as geopolitical risk). Stated simply, a government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market. I would sell the market's strength into today's election results and tomorrow's quantitative easing announcement.
Return of the Big-Screen Pair Trade
Originally published on Nov. 5 at 2:04 p.m. EDT.
- The sequel!
I have put back my
Regal Entertainment
(RGC)
long as a hedge against my
Cinemark Holdings
(CNK) - Get Report
short in that
.
At the time of publication, Kass was long shares of RGC and short shares of CNK.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.
