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
readers in "The Edge," his daily trading diary.
This week, he unveiled two more of his predictions for 2011, explained why he's bullish on GM and why margin debt is far from marginal.
click here for information about subscribing to
, where you can read Doug Kass' comments in real time -- and gain access to
five best services.
Margin Debt Surges
Originally published on Dec. 23 at 7:06 a.m. EST.
While I have written through the years that the crowds nearly always outwit the remnants, nearly everyone is bullish in a uniform optimism that has flooded the markets in recent months.
Not only are strategists (daily) trying to raise their market forecasts above others in a round of one-upmanship that is reminiscent of the uniformity of optimism and the rising price targets administered in the late 1990s -- well, it's really not
bad ... yet! -- but margin debt is now surging.
is the data from lynx-eyed
Tyler Durden. Worrisome, as Durden observes, is that the hike in margin debt has occurred "even as free cash credit accounts and credit balance in margin accounts remained relatively flat."
Driving for Upside
Originally published on Dec. 21 at 9:01 a.m. EST.
The autos can't seem to get out of their own way. I wonder what it will take for people to realize how cheap these stocks are. The government got a good price for General Motors (GM) - Get Report, but so did the people, and it only takes a couple large buyers to sweep this one.
Jim "El Capitan" Cramer (Dec. 20)
I am in agreement with Jim "El Capitan" Cramer's comments on the automobile stocks from yesterday (see above).
> > Bull or Bear? Vote in Our Poll
Fundamentally, in looking at the industry over the next few years, there is visible and unencumbered pent-up demand for automobiles in the U.S. -- unlike housing, which is plagued by a large shadow inventory.
And as a highlighted in General Motors as a "
, it's different this time for a newly designed GM.
I am a buyer on weakness.
At the time of publication, Kass was long GM
Two New Surprises for 2011
Originally published on Dec. 20 at 7:38 a.m. EST.
Over the last month, I have disclosed two new surprises for 2011 every week on
. The complete list will be published during the last week of December.
At 5:00 p.m. EST, I routinely follow up with a further discussion of my new surprises on
's "Fast Money," as I will do tonight.
Without further ado, here are this week's next two new surprises:
Surprise No. 9: The price of gold plummets by more than $250 an ounce in a four-week period in 2011 and is among the worst asset classes of the new year. The commodity experiences wild volatility in price (on five to 10 occasions, the price has a daily price change of at least $75), briefly trading under $1,050 an ounce during the year and ending the year between $1,100 and $1,200 an ounce.
By means of background, the price of gold has risen from about $250 an ounce 11 years ago to about $1,370 an ounce today -- compounding at more than a 16% rate annually. As a result, investing in gold has become
for hedge hoggers and other institutional investors -- and in due course gold has become a favored investment among individual investors.
My surprise is that next year the price of gold has the potential to become the modern-day equivalent of Hans Christian Andersen's "The Emperor's New Clothes," a short tale about two weavers who promise an emperor a new suit of clothes that are invisible to those unfit for their positions, stupid or incompetent. When the emperor parades before his subjects in his new clothes, a child cries out, "But he isn't wearing anything at all!"
With a finite supply, gold has historically been viewed as a tangible asset that increases in value during uncertain (and inflationary) times. No wonder it has become such a desirable asset class following the Great Decession and credit crisis of 2008-09. Gold bugs remind the nonbelievers that for thousands of years, gold has been a store of value and, given the current state of the world's financial system, gold is the best house in a bad neighborhood of asset classes.
But gold, which may be the most crowded trade around, is viewed now as a commodity for all seasons -- during inflation, deflation, low or high economic growth.
There is a body of thought that maintains gold holds little value, that it is only a shiny metal with limited industrial value that throws off no income or cash flow (and, as such, its value cannot be determined or analyzed with any precision based on interest rates or any other measure). Those nonbelievers compare the dizzying price of gold to the unsustainable rise in comic book prices (and other collectibles) in the early 1990s, Internet stock prices in early 2000 or home prices in 2006-07.
Here is how Oaktree Management's Howard Marks draws a colorful parallel between gold and religion, over the past weekend in his always-thoughtful commentary on the markets:
My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists ... or that God doesn't exist. The believer can't convince the atheist, and the atheist can't convince the believer. It's incredibly simple: either you believe in God or you don't. Well, that's exactly the way I think it is with gold. Either you're a believer or you're not.
What we do know is that gold is valued in an auction market based on the price where buyers ("the believers") and sellers ("the atheists") meet.
With an inability to gauge gold's intrinsic value, wide price swings remain possible. And wide price swings are what I expect in 2011.
There are numerous catalysts that can contribute to a surprising weakness in the price of gold in the upcoming year. But most likely, a large drop in the price of gold might simply be the result in a swing in sentiment that can be induced by a number of factors (or maybe even sentiment that the emperor (and gold investors/traders) aren't wearing anything at all!):
- Investors might grow increasingly comfortable in a self-sustaining, inflation-free worldwide economic recovery.
- Interest rates could ratchet higher, providing competition for non-income producing assets (like gold).
- The world stock markets could surprise to the upside, reducing investors' interest in real assets (like gold).
- The U.S. government might (astonishingly) address the deficit.
In addition, there are numerous cautionary and anecdotal signs that are reminiscent of prior unsustainable asset class cycles or bubbles:
Macro funds, like those managed by John Paulson, have outsized weightings in gold or even have established dedicated gold hedge funds
On Okeechobee Boulevard in West Palm Beach, Fla., handheld placards that used to advertise condominiums and single-family homes for sale (during the housing bubble) have been replaced by handheld signs advertising "We Buy Gold." On this well-populated street, gold exchange stores have replaced the omnipresent real estate and cell phone stores of the last speculative cycle. ("We Buy Gold," "Sell Your Unwanted Gold," "Get Cash Now For Your Gold" are names of a few of the retail outlets).
Gold is even being dispensed in an ATM machine in the Town Center Mall in Boca Raton, Fla. and at a hotel in Abu Dhabi.
The company that dispenses the gold is PMX Communities, a Boca Raton-based company listed on the pink sheets. According to a recent release, the ATM gold dispensing machines now operate in 12 locations around the world.
My spam emails normally consist of Viagra and "male enlargement" solicitations, but offers to buy gold have been on the rise over the last few months.
My guess is that among my 20 Surprises for 2011, none receives such an uproar and negative response than the surprising "death" of gold as an asset class. (As such, I have purposely made gold the 2011 Surprise No. 9 -- as a reference to the loop of "number nine" featured in the Beatles'
"Revolution" recording, which fueled rumors about Paul McCartney's death after it was reported that it sounded like "turn me on, dead man" when played backward.)
In and of itself, an adverse response to this surprise (which I expect) might provide evidence that a sharp drop in the price of gold will not be a surprise at all.
Surprise No. 10: The SEC's insider trading case expands dramatically, reaching much further into the canyons of some of the largest hedge funds and mutual funds and to several West Coast-based technology companies.
This Surprise is an extension of Surprise No. 13 from last year's
Insider trading charges expand. The SEC alleges, in a broad-ranging sting, the existence of extensive exchange of information that goes well beyond Galleon's Silicon Valley executive connections. Several well-known long-only mutual funds are implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade.
The next SEC target is directed at some of the world's largest tech companies, including one of the leading manufacturers of flash memory cards, one of the largest contract manufacturers and a big producer of integrated circuits. A high-profile very senior executive in one of these companies is implicated and is forced out of his position.
With the depth of the investigations moving toward the center of some of the largest hedge and mutual funds, many of the more active traders are temporarily in "lockdown" mode as the hedge fund community's trading activity freezes up.
New York Stock Exchange
volume and price volatility dries up. (See
Fox Business Network
closes because of lack of interest.
reduces its live broadcasting schedule and resorts to paid programming before 6 a.m. and after 8 p.m.
Particularly hard-hit is Greenwich, Conn. -- the home of many of the biggest hedge hoggers who are alleged to have committed insider trading violations. The residential real estate market in Greenwich collapses. Ken Langone personally underwrites The Robin Hood Foundation in 2011.
At the time of publication, Kass had no position in stocks mentioned
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.