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 Apple's ( AAPL) short position, how he's not a great fan of sentiment, the 40-basis-point rise in the 10-year U.S. note's yield and how the bears locate a template for a crash. Please click here for information about subscribing to Street Insight, where you can read Doug Kass' comments, as well as those from other market pros, in real time.
Disputing Apple's 'Large' Short Position
Originally published on 1/22/2007 at 10:43 a.m. EST Jim "El Capitan" Cramer wrote about Apple this morning, and I'd like to respond. One thing that I want to immediately dispute is his statement that Apple's short position is large. It is not! The float at Apple is 850 million shares -- only 24.5 million shares are short (a lowly 2.9% of the float). Moreover, with average trading volume of 70 million shares, (over the last 10 days) and 32.3 million shares of average trading volume (over the last three months), the short ratio is also a lowly 0.90. Game on, Jimmy! No positions in stocks mentioned Start of Citigroup Separation?
Originally published on 1/22/2007 at 9:30 a.m. EST There is a lot of speculation about the implications and reasons for the management change made today at Citigroup ( C). As most know, Sallie Krawcheck is leaving her CFO post to become CEO and chairman of the Global Wealth Management Group. From my perch this might not be a promotion or a demotion for Krawcheck; rather it might be a precursor to a split-up of Citigroup. This is something we wrote about in December in our Surprise List for 2007:
Originally published on 1/22/2007 at 8:50 a.m. EST Last week I spent a lot of time discussing some reservations I had with several of the features of Apple's (AAPL) iPhone and I questioned the hype which contributed to a sharp rise in Apple's equity capitalization. (See Parts I, II and III). I estimate that since Tuesday the market has given back about half the increase associatedwith the iPhone introduction ($99 in late Tuesday trading to $89 this morning), so thus far my analysis seems to have been respectable. In my three-part series I also acknowledged my limited knowledge of technology so I used a number of professional sources as a source for my analysis, which I find to be more rigorous than unsupported blanket statements of opinion. This morning I wanted to pass on a comprehensive and negative assessment of the iPhone product by Computerworld, " How Steve Jobs Blew His iPhone Keynote." This are the six main points presented by Mike Elgan, Computerworld's technology writer.
Not a Great Fan of Sentiment
Originally published on 1/23/2007 at 9:27 p.m. EST There has been a heck of a lot of complaining over the last few trading days -- I presume by invested bulls -- after a quite modest drop in equities. I continue to see the markets differently from those who believe skepticism abounds as manifested by, among other things, high short positions. I see sentiment differently than the bulls, believing that complacency is copious and disbelief has been suspended, as manifested in record low credit spreads and low volatility measures. Technically, put/call ratios are back to levels of the spring highs. As I have mentioned in the past, I am not a great fan of sentiment, preferring to see what investors are doing, not what they are saying! To be sure, the AAII survey is bearish, as is this morning's UBS Investor survey. And, fundamentally ... well you all know where I stand. Shorted Coach in Premarket
Originally published on 1/23/2007 at 9:42 a.m. EST I shorted Coach ( COH) in premarket trading at $45.50. Although earnings beat expectations, I view guidance as uninspiring and I feel the market is overeacting to the upside. Over the weekend, Michael Santoli penned an interesting column in Barron's, "Rich America, Poor America." I think Mike omitted an important point that has not only buoyed the sales for high-end retailers (like Coach) but also raises risks going forward. Many middle-income consumers have been especially emboldened in recent years by the unprecendeted extraction of capital out of their houses and have moved more upscale in their purchases of such items as apparel, jewelry, high-end appliances, etc. Companies like Coach, Tiffany ( TIF), Williams-Sonoma ( WSM) and Polo Ralph Lauren ( RL) have been particularly (and positively) affected at the margin during 2002-06 (just correlated their above-trendline ramp in comp-store sales with a schedule of real estate-refinancing cash-outs). With mortgage equity withdrawals (MEWs) slowing to a crawl, coupled with the shock of ARM resets, I see a reversal of these marginal revenues from the source of the middle-income consumer, providing a headwind to upscale retailers. Short COH, TIF, WSM, RL, RTH Explaining the Fluctuations
Originally published on 1/23/2007 at 10:23 a.m. EST Everyone seems to have a need to explain daily fluctuations of stocks/industries. Case in point: the brokerage stocks. Yesterday, another Street Insight commentator felt the market could move higher because the brokerage stocks had spiked and held their gains despite a weak tape. From my perch, tells -- like financial stocks in general, and brokerage stocks in particular -- are but part of a larger investment mosaic. Nothing more, nothing less. Perhaps the best explanation of today's weakness was that there is profit-taking from yesterday's strength! Most every twist and turn in price is noise, and should probably be analyzed as such. Again, nothing more and nothing less. Starting to Cover Coach
Originally published on 1/23/2007 at 10:42 a.m. EST Coach ( COH) has now reversed $3 lower from premarket trading. I have begun to cover a portion of the short. Position: Short COH
10-Year U.S. Note Yield Up Over 40 Basis Points
Originally published on 1/24/2007 at 12:18 p.m. EST Now above 4.81%, the yield on the 10-year U.S. note is up over 40 basis points in the past few months. We have now made up half of last year's second-half decline in yields. Thus far, this weakness has had zero impact on other asset classes -- even though it has been accompanied by the markets' no longer expecting a federal funds rate cut. One would think that any further increase in the yield will likely be accompanied by a building of rate hike expectations, a further slowdown in mortgage activity and some pressure on equities. In a normal world, that is! iPhone Searches Surpass iPod Searches
Originally published on 1/24/2007 at 8:21 a.m. EST Not surprisingly, given the introduction of the product, the volume of "iPhone" searches (for the week ended Jan. 13) have passed the weekly record iPod searches at any point last year, and in the latest week, the amount of searches for "iPhone" surpassed the searches for "iPod." It will be interesting to follow the quantity of searches during the next month or so as the excitement dies out a bit following the MacWorld announcement. Stay tuned -- I will! At the time of publication, Kass held positions in Apple. Nothing New in State of Union
Originally published on 1/24/2007 at 7:46 a.m. EST President Bush took the center stage last evening in the annual State of the Union address. According to the Washington Post, the address was two speeches in one and sent three themes to the country. The president plowed through his domestic initiatives and then moved onto his policy decisions regarding the Iraq conflict. The themes -- bipartisan cooperation, the threat of terrorism (and the need to be patient in the Mideast) and his visions for a robust domestic agenda over the balance of his presidency -- permeated his State of the Union address. The Democrats said that his tone was less confident and that his objectives more constrained than in the past. The president's allies, not surprisingly, objected to many of the Democrats' "knee-jerk" objections and initiatives (especially the health care position). Some, like Sir Larry Kudlow ("If it ain't broke, don't fix it"), seem to suggest that the economy should be the message -- and, in that regard, it's in great shape. In the main, President Bush's speech was gracious and well written, but, like the Democrats' response, highly predictable. From the standpoint of investors, neither the Republicans nor the Democrats had anything incremental to say -- nor did it contain any new actionable investment ideas.
Bears Locate a Template for a Crash
Originally published on 1/25/2007 at 10:48 a.m. In order to understand the possible future course of equity prices, it is helpful to call upon history. Today's opening missive asks two questions: Are the conditions underlying the strong market advance over the last year similar to any other time in history? If there is a historical precedent to today's market conditions and prices, what could this portend for 2007? Based on the recent (2006-07) trends in domestic equities, emerging market equities, interest rates and volatility indices, there appears to be a clear parallel to a past period. Specifically, these four factors leading to the present seem best compared to January 1994. Although equities are hitting record levels (the S&P Index has climbed in 12 of the last 13 months) and everything is coming up booyahs as disbelief has been virtually suspended, should the market relationships hold to the pattern of the first quarter of 1994 in the first quarter of this year, the investment implications should be worrisome. Strong parallels exist between today and the markets 13 years ago in 1994.
Disputing Apple's 'Large' Short Position
Originally published on 1/22/2007 at 10:43 a.m. EST Jim "El Capitan" Cramer wrote about Apple this morning, and I'd like to respond. One thing that I want to immediately dispute is his statement that Apple's short position is large. It is not! The float at Apple is 850 million shares -- only 24.5 million shares are short (a lowly 2.9% of the float). Moreover, with average trading volume of 70 million shares, (over the last 10 days) and 32.3 million shares of average trading volume (over the last three months), the short ratio is also a lowly 0.90. Game on, Jimmy! No positions in stocks mentioned Start of Citigroup Separation?
Originally published on 1/22/2007 at 9:30 a.m. EST There is a lot of speculation about the implications and reasons for the management change made today at Citigroup ( C). As most know, Sallie Krawcheck is leaving her CFO post to become CEO and chairman of the Global Wealth Management Group. From my perch this might not be a promotion or a demotion for Krawcheck; rather it might be a precursor to a split-up of Citigroup. This is something we wrote about in December in our
2. Robert E. Rubin returns to his brokerage roots and becomes the CEO and chairman of Salomon Brothers/Smith Barney after Citigroup (C) decides to break up into three separate companies: a domestic money center bank (Citibank), investment banking/retail brokerage (Salomon Brothers/Smith Barney) and international consumer finance (Citiglobal).No positions in stocks mentioned Is the iPhone Just a Phone? Part IV
Originally published on 1/22/2007 at 8:50 a.m. EST Last week I spent a lot of time discussing some reservations I had with several of the features of Apple's (AAPL) iPhone and I questioned the hype which contributed to a sharp rise in Apple's equity capitalization. (See Parts I, II and III). I estimate that since Tuesday the market has given back about half the increase associatedwith the iPhone introduction ($99 in late Tuesday trading to $89 this morning), so thus far my analysis seems to have been respectable. In my three-part series I also acknowledged my limited knowledge of technology so I used a number of professional sources as a source for my analysis, which I find to be more rigorous than unsupported blanket statements of opinion. This morning I wanted to pass on a comprehensive and negative assessment of the iPhone product by Computerworld, " How Steve Jobs Blew His iPhone Keynote." This are the six main points presented by Mike Elgan, Computerworld's technology writer.
1. Jobs raised buyer expectations too high.No positions in stock mentioned
2. Jobs raised Wall Street expectations too high.
3. Jobs gave competitors a head start.
4. Jobs undermined Apple TV hype.
5. Jobs put iPod sales at risk.
6. Jobs wrecked Cisco talks.
Not a Great Fan of Sentiment
Originally published on 1/23/2007 at 9:27 p.m. EST There has been a heck of a lot of complaining over the last few trading days -- I presume by invested bulls -- after a quite modest drop in equities. I continue to see the markets differently from those who believe skepticism abounds as manifested by, among other things, high short positions. I see sentiment differently than the bulls, believing that complacency is copious and disbelief has been suspended, as manifested in record low credit spreads and low volatility measures. Technically, put/call ratios are back to levels of the spring highs. As I have mentioned in the past, I am not a great fan of sentiment, preferring to see what investors are doing, not what they are saying! To be sure, the AAII survey is bearish, as is this morning's UBS Investor survey. And, fundamentally ... well you all know where I stand. Shorted Coach in Premarket
Originally published on 1/23/2007 at 9:42 a.m. EST I shorted Coach ( COH) in premarket trading at $45.50. Although earnings beat expectations, I view guidance as uninspiring and I feel the market is overeacting to the upside. Over the weekend, Michael Santoli penned an interesting column in Barron's, "Rich America, Poor America." I think Mike omitted an important point that has not only buoyed the sales for high-end retailers (like Coach) but also raises risks going forward. Many middle-income consumers have been especially emboldened in recent years by the unprecendeted extraction of capital out of their houses and have moved more upscale in their purchases of such items as apparel, jewelry, high-end appliances, etc. Companies like Coach, Tiffany ( TIF), Williams-Sonoma ( WSM) and Polo Ralph Lauren ( RL) have been particularly (and positively) affected at the margin during 2002-06 (just correlated their above-trendline ramp in comp-store sales with a schedule of real estate-refinancing cash-outs). With mortgage equity withdrawals (MEWs) slowing to a crawl, coupled with the shock of ARM resets, I see a reversal of these marginal revenues from the source of the middle-income consumer, providing a headwind to upscale retailers. Short COH, TIF, WSM, RL, RTH Explaining the Fluctuations
Originally published on 1/23/2007 at 10:23 a.m. EST Everyone seems to have a need to explain daily fluctuations of stocks/industries. Case in point: the brokerage stocks. Yesterday, another Street Insight commentator felt the market could move higher because the brokerage stocks had spiked and held their gains despite a weak tape. From my perch, tells -- like financial stocks in general, and brokerage stocks in particular -- are but part of a larger investment mosaic. Nothing more, nothing less. Perhaps the best explanation of today's weakness was that there is profit-taking from yesterday's strength! Most every twist and turn in price is noise, and should probably be analyzed as such. Again, nothing more and nothing less. Starting to Cover Coach
Originally published on 1/23/2007 at 10:42 a.m. EST Coach ( COH) has now reversed $3 lower from premarket trading. I have begun to cover a portion of the short. Position: Short COH
10-Year U.S. Note Yield Up Over 40 Basis Points
Originally published on 1/24/2007 at 12:18 p.m. EST Now above 4.81%, the yield on the 10-year U.S. note is up over 40 basis points in the past few months. We have now made up half of last year's second-half decline in yields. Thus far, this weakness has had zero impact on other asset classes -- even though it has been accompanied by the markets' no longer expecting a federal funds rate cut. One would think that any further increase in the yield will likely be accompanied by a building of rate hike expectations, a further slowdown in mortgage activity and some pressure on equities. In a normal world, that is! iPhone Searches Surpass iPod Searches
Originally published on 1/24/2007 at 8:21 a.m. EST Not surprisingly, given the introduction of the product, the volume of "iPhone" searches (for the week ended Jan. 13) have passed the weekly record iPod searches at any point last year, and in the latest week, the amount of searches for "iPhone" surpassed the searches for "iPod." It will be interesting to follow the quantity of searches during the next month or so as the excitement dies out a bit following the MacWorld announcement. Stay tuned -- I will! At the time of publication, Kass held positions in Apple. Nothing New in State of Union
Originally published on 1/24/2007 at 7:46 a.m. EST President Bush took the center stage last evening in the annual State of the Union address. According to the Washington Post, the address was two speeches in one and sent three themes to the country. The president plowed through his domestic initiatives and then moved onto his policy decisions regarding the Iraq conflict. The themes -- bipartisan cooperation, the threat of terrorism (and the need to be patient in the Mideast) and his visions for a robust domestic agenda over the balance of his presidency -- permeated his State of the Union address. The Democrats said that his tone was less confident and that his objectives more constrained than in the past. The president's allies, not surprisingly, objected to many of the Democrats' "knee-jerk" objections and initiatives (especially the health care position). Some, like Sir Larry Kudlow ("If it ain't broke, don't fix it"), seem to suggest that the economy should be the message -- and, in that regard, it's in great shape. In the main, President Bush's speech was gracious and well written, but, like the Democrats' response, highly predictable. From the standpoint of investors, neither the Republicans nor the Democrats had anything incremental to say -- nor did it contain any new actionable investment ideas.
Bears Locate a Template for a Crash
Originally published on 1/25/2007 at 10:48 a.m. In order to understand the possible future course of equity prices, it is helpful to call upon history. Today's opening missive asks two questions: Are the conditions underlying the strong market advance over the last year similar to any other time in history? If there is a historical precedent to today's market conditions and prices, what could this portend for 2007? Based on the recent (2006-07) trends in domestic equities, emerging market equities, interest rates and volatility indices, there appears to be a clear parallel to a past period. Specifically, these four factors leading to the present seem best compared to January 1994. Although equities are hitting record levels (the S&P Index has climbed in 12 of the last 13 months) and everything is coming up booyahs as disbelief has been virtually suspended, should the market relationships hold to the pattern of the first quarter of 1994 in the first quarter of this year, the investment implications should be worrisome. Strong parallels exist between today and the markets 13 years ago in 1994.
- U.S equities were making highs in January 1994.
- Emerging markets were rising parabolically into 1994. The Hang Seng index rose from 3,000 in 1990 to 12,500 in early 1994 while Mexico's IPC climbed from 700 to 2,900 in the same interval.
- In December 1993, complacency was copious. The VXO had declined from about 35 in 1990 to under 10 by year-end 1993.
- Bonds experienced a sharp rise in value as yields declined in 1990-1993. The 10-year U.S. note rose from about 84 and peaked at 106 in the third quarter of 1993. By January 1994, bonds were already beginning to falter.
