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.

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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:

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 associated with 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.
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.

No positions in stock mentioned


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.

A two-month drop of nearly 10% in the S&P 500 Index began at the end of January 1994. The emerging markets collapsed -- Hong Kong's market fell by a third and Mexico by an even greater amount. The bond market got schmeissed -- by year-end, the 10-year U.S. note had fallen 20 points, correcting the entire gain of the previous three years. Finally, the VIX fell back to 1990 levels, climbing from 9 to 24 in only two months.

To understand what could happen in 2007, it is also helpful to understand what conspired fundamentally back in February 1994 to take the world equity and U.S. bond markets down, and the volatility indices up. On Feb. 4, 1994, the market was spooked by a surprise hike in interest rates by the Federal Reserve. The mortgage markets went into a tailspin as bonds collapsed in price and rose in yield.

The already leveraged financial landscape was almost immediately littered with financial accidents: Orange County (California) went bankrupt and a venerable Wall Street firm (Kidder Peabody) collapsed, for example.

I can posit a number of similar developments in February 2007 that could result in history repeating itself, such as a surprise Federal Reserve rate increase, sovereign debt defaults (yesterday I mentioned Fitch's downgrade of Ecuador's debt), more aggressive moves by China to slow its economy, a financial accident in sub-prime lending or in the derivative markets, etc.

(Speaking of potential market-busting catalysts, it is interesting to note that the Chinese stock market dropped by 4% yesterday -- the largest one-day drop in seven months. Moreover, a Chinese official issued the government's first explicit warning about an overheated stock market by warning banks "to prevent personal loans from going into stocks.")

Facing the Future With the Past

Henry Ford wrote that "history is bunk" and Percy Bysshe Shelley (who was married to Mary Shelley, the author of Frankenstein) wrote "fear not the future, weep not for the past," and they both could be right. Nevertheless, I have always invested on the basis, as Karl Marx writes, "that history repeats itself" or as Pearl Buck wrote, "one faces the future with one's past."

To be sure, although there's a strong parallel between early 2007 and early 1994, it is less clear when a correction might take place in 2007. For now the burden of proof lies squarely on the ursine crowd because those who invest/trade at the "Altar of Momentum" are firmly in control.

However, the near panic to the upside in some of the more speculative fringes of the U.S. equity market suggest to this observer that the end of the market rise might be at hand -- sooner rather than later. Some of those stocks include:

Gambling stocks ( Las Vegas Sands ( LVS), Wynn Resorts ( WYNN));

Brokerage stocks ( Goldman Sachs ( GS), Merrill Lynch ( MER), Lehman Bros. ( LEH));

Publicly traded exchanges ( NYSE Group ( NYX), InterContinental Exchange ( ICE), Chicago Mercantile Exchange ( CME));

And steels ( Allegheny Technologies ( ATI), U.S. Steel ( X)).

At time of publication, Kass and/or his funds had no positions in 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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