NEW YORK (TheStreet) -- 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, Kass wrote about what's really happening with corporate profits; a health care sector he's shorting; and why the details count when it comes to housing data.
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Corporate Profit Margins Have Peaked
Originally published on Feb. 18 at 7:52 a.m. EST.
- The slight rise in margins incorporated in most 2011 corporate profit forecasts is mistaken.
The specter of lower corporate margins in 2011-2012 is an ursine
of mine that has been ignored by market participants (so was yesterday morning's
The strength in yesterday's Philly
reading was underscored by most talking heads. The index soared to the highest level since 2004.
Ignored was that orders over the last six months have been flat.
Ignored were additional signs of lower margins. Deeper in the data was more and growing evidence of a contraction in corporate profit margins, a mean-regressing economic series that are currently at the highest level in 57 years.
Again, most 2011 corporate profit forecasts incorporate a slight rise in margins. I think this is mistaken.
, prices paid soared from 54 to 67 (and are up by 55 since the fall). But the prices-received component of the
is not rising nearly as rapidly as the prices-paid, and the difference between the two indices is at the highest level since 1979.
Jim "El Capitan" Cramer is among the most vocal proponents of ignoring raw materials and higher input costs -- he writes/says that
companies that are leveraged to the industrial recovery.
So far, he has been dead right!
To be sure, with the absence of wage inflation, it is nearly impossible to envision a 1970s-style inflationary problem. But
, a distant cousin to stagflation, is the new problem of the 2010s.
Maybe Jim will continue to be right, but, from my perch, we are approaching the point at which (as I was reminded in an email exchange with Miller Tabak's Dan Greenhaus yesterday) there are two possible outcomes -- both of which, to varying degrees, make some of the more optimistic macro (and corporate profit) assumptions vulnerable:
businesses try to increase prices, can't, and see their margins cut; or
businesses do raise prices, people buy less, and revenue gets hit.
Better job growth will help as will the tailwind of spending by the affluent (the top 20% of earners account for 45% of all discretionary purchases), but I continue to have a minority view on the jobs outlook based on my sense of
and on the notion that there is little to replace residential real estate as a driver to growth and employment (nearly 40% of the increase in jobs in the last cycle was real-estate-related). As well, the three mega trends (globalization, advances in technology and short-term hiring as a permanent feature of our workplace) provide a challenge to meaningful improvement on the jobs picture.
Originally published on Feb. 18 at 8:52 a.m. EST.
Back in November, I
my favorite short, and I have been
for some time.
This morning, Patterson Companies
and the shares are down by 10%.
At the time of publication, Kass was short Patterson Companies, Henry Schein and Danaher
Housing Fits and Starts
Originally published on Feb. 16 at 9:48 a.m. EST.
The above-consensus housing starts print was less robust than meets the eye as the entire gain (and then some) was a surge in multifamily.
Multifamily is a volatile series, and the strength, to some degree, is a reflection of a tightening rental market. Though affordability is at a multidecade high and the benefits of ownership vs. renting is at a 10-year high, the bad taste of lower home prices continues to impact the residential real estate market.
In fact, single-family starts dropped by 4,000 in January!
January housing permits stood at only 562,000, in line with consensus but down by 100,000 from December 2010 (which was buoyed by anticipatory permiting ahead of the implementation of new building codes in 2011).
Of late, foreclosures have begun to reaccelerate, and the shadow inventory will continue to weigh on housing activity throughout the year.
Housing, from my perch, is scrapping along the bottom even though production has been well under household formation for some time.
If one is looking for a sector that will be the beneficiary of pent-up demand, look at cars, not homes.
From my perch, cars are more safe -- at any speed.
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.