The Best of Kass

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, he explained why housing prices still haven't hit bottom, described his increasing defensiveness and updated his favorite long and short.

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Nightmare on Main Street
Originally published on Dec. 28 at 9:59 a.m. EST.
The double-dip is almost here, as six cities set new lows for the period since the 2006 peaks. There is no good news in October's report. Home prices across the country continue to fall." says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. "The trends we have seen over the past few months have not changed. The tax incentives are over and the national economy remained lackluster in October, the month covered by these data. Existing homes sales and housing starts have been reported for both October and November, and neither is giving any sense of optimism. On a year-over-year basis, sales are down more than 25% and the months' supply of unsold homes is about 50% above where it was during the same months of last year. Housing starts are still hovering near 30-year lows. While delinquency rates might have seen some recent improvement, it is only on a relative basis. They are still well above their historic averages, in both the prime and sub-prime markets.

-- Case Shiller release today
Freddy Krueger would be pleased with today's release of weakening home prices, which was worse than expectations, exhibiting the largest drop since December 2009.

The breadth of the decline was convincing, with 18/20 cities experiencing a month over month drop in prices.

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The bulls on housing, who have looked for stability in prices for some time, have been wrong but remain optimistic. They continue to maintain that most of the home price decline is behind us and that the moribund state of the residential real estate markets will turn based on jobs growth, underproduction of homes, continued growth in population and in household formations, the benefit of ownership vs. renting and historically low mortgage rates.

These are all valid arguments in normal times and over history have typically marked a turning point in the housing cycle.

However, we are not in normal times.

I see an avalanche of foreclosures by spring 2011, mortgage rates rising, limited improvement in payroll growth and screwflation directed toward the middle class all serving as a headwind to an improving real estate market next year.

My conclusion is that housing has hit a bottom in activity -- it can't get worse -- but not a bottom in price.

My best guess would be that home prices drop by another 3% to 5% in 2011 and that industry volume will scrape along the bottom for most of the year.

A more "normal" recovery awaits in 2012-2013.


Be Afraid -- Be Very Afraid
Originally published on Dec. 28 at 7:40 a.m. EST.

Monday Monday, so good to me,
Monday Mornin', it was all I hoped it would be
Oh Monday morning,
Monday morning couldn't guarantee (Bah da bah da da da)
That Monday evenin' you would still be here with me

Every other day,(every other day) every other day,
Every other day of the week is fine, yeah
But whenever Monday comes (but whenever Monday comes), but whenever Monday comes
You can find me cryin' all of the time.

Monday Monday, so good to me,
Monday Monday, it was all I hoped it would be
Oh Monday morning, Monday morning couldn't guarantee
That Monday evening you would still be here with me.

-- The Mamas and the Papas, Monday Morning

With the animated Simon Hobbs substituting for Melissa Lee, I spent another Monday evening on CNBC with the "Fast Money" gang last night.

The producers asked me to comment on one or two possible warnings for 2011, and this is what I said: As we end 2010, there is a total absence of fear in the U.S. stock market. But what seems easy for bullish investors to imagine today might prove more difficult to deliver next year. My warning is we should be fearful that the current recovery in the U.S. economy (especially in retail spending) might be short-lived along with the rally in the stock market.

If, as I suspect, some important portion of the recovery is simply "recession fatigue," the universally optimistic and tightly grouped consensus forecasts (which have extrapolated the recent strength) will prove ephemeral.

Investors should be fearful that the foundation of growth is less robust than it appears. They should be fearful of elements that will begin to weigh on the economy and corporate profits in the second half of 2011. These include secular headwinds in fiscal imbalances, inevitability of higher marginal tax rates, a housing market plagued by inventory from past credit abuses, gridlock and the reluctance to address the ballooning deficit and a structural increase in unemployment. Also dangerous is the likely cyclical rise in interest rates and inflation in commodities such as oil.

We also should not lose sight of the fact that corporate profit margins are at highs of 55 years or more -- and quite vulnerable to a regression to the mean. I have remarked that many of those who are now expressing the most extreme levels of optimism were the most wrong-footed two years ago and experienced not-inconsequential pain in the last market cycle.

I would be getting out of retail stocks right now. I am growing increasingly defensive in today's no-fear market, and maintaining above average-cash positions is a good idea at this juncture.

On "Fast Money," Joe Terranova asked whether a shallow correction should be bought. I remarked that, while the charts are moving from the lower left to the upper right for now, as Dennis Gartman often notes, I would only be buying on marked weakness.

Following that, I said, to paraphrase Gertrude Stein, "There is less there there to this market -- as its foundation is weaker than many think." Dennis Gartman remarked, "A rose is a rose is a rose. And a bull market is a bull market -- until it is not." Ethel Merman? No -- Gertrude Stein again (according to the tongue-in-cheek Denny the G).

Anthony asked about my thoughts regarding where the market will be in 12 months. I responded that, in marked contrast to the universal optimism of most strategists, we are likely moving into a sideways market in 2011.

Let's go to the tapes!


Favorite Long and Short
Originally published on Dec. 31 at 10:11 a.m. EST.
  • Favorite long: Yahoo! (YHOO).
  • Favorite short: iShares Russell 2000 Index (IWM).

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.

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