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 acknowledged the strength of some market-leading stocks, outlined key concerns as the new year gets underway and reiterated his stance that gold could be one of the worst-performing assets this year.

Please click here for information about subscribing to RealMoney Silver, where you can read Doug Kass' comments in real time -- and gain access to RealMoney's five best services.


Big Win for the Bulls
Originally published on Jan. 7 at 2:20 p.m. EST.
"You don't have time to think up there. If you think, you are dead."
- Maverick (Tom Cruise), Top Gun

Thus far, I would call today's action a very big win for the bulls.

Financials? Just some profit-taking. No biggie.

Technology and industrials? Persistent strength and no conspicuous downdrafts.

More impressive to me is the continued strength in the new market leader, General Motors ( GM), and in the old market leaders, Apple ( AAPL), Baidu ( BIDU), Google ( GOOG) and Amazon ( AMZN) -- just very impressive, simply stated.

At least, I know my stock monitor actually has a red display button.

Time to buzz a tower!

At the time of publication, Kass was long GM.

> > Bull or Bear? Vote in Our Poll


Highway to the Danger Zone?
Originally published on Jan. 7 at 8:47 a.m. EST.
"Tower, this is Ghost Rider requesting a flyby."
-- Maverick (Tom Cruise), Top Gun

Last night was another fun segment with the "Fast Money" gang -- the group that "feels the need ... the need for speed!"

I believe that cash will be king over the next few months.

I expressed four principal concerns that represent challenges to the smooth and self-sustaining economic recovery upon which a lot of the recent market enthusiasm has been based.

Concern No. 1: Fiscal Policy and Imbalances

I called the first risk "The Wimpy Syndrome," from the comic strip Popeye in which Wimpy famously says, " I'll have a hamburger, for which I will gladly pay you on Tuesday." There are consequences to our profligate spending and to our monetary and fiscal policies. That has been the message of the rising price of gold over the past several years. As we move closer to the 2012 election, the risk is that neither the Democrats nor Republicans have the political will to move on reducing the deficit. I fully expect partisanship to replace what now appears to be a move to the center by the Obama administration and its opponents. Our fiscal imbalances at the local, state and federal levels are out of control. Aggregate federal debt is now above 90% of GDP now. In This Time Is Different, authors Carmen Reinhart and Kenneth Rogoff point out that once you get to the 85%-90% threshold of excessive debt/GDP levels, there is a secular erosion in country growth rates.

Concern No. 2: Structural Unemployment

"Fast Money" panelist Zach Karabell wrote a great column in Time Magazine yesterday, " Where the Jobs Aren't: Grappling With Structural Unemployment," which fits in precisely with this concern. While the job picture has brightened, the large roster of unemployed is structural and will remain with us in the new year, owing to a bunch of "mega trends" such as rising globalization, gains in technology and temporary employment becoming a permanent feature to the jobs market. As Zach writes, "these structural issues will not go away simply because the Fed pumps more money into the system or Washington spends more in the form of tax cuts or stimulus."

Concern No. 3: The Rapid Rise in Interest Rates

The risk that interest rates continue their rapid rate of ascent has been one of my most common ursine themes over the past several months (I have called shorting bonds " the trade of the decade.") Not only do higher rates compete with equities but they represent a serious challenge to the already weak residential real estate market. Home prices have not bottomed. Refinancings are already evaporating, and the S&P/Case-Shiller Home Prices Index has turned down in the last three months (and will likely worsen as foreclosures delayed by the robo-signing scandals come back into the marketplace for sale).

Concern No. 4: Screwflation

The struggling middle class faces wage deflation and rising costs of living -- it is being screwed. Moreover, 10 years of flat stock prices and three years of declining home prices provide a weak foundation for the U.S. consumer, an important contributor to economic growth. We don't have to look much past Target's ( TGT) weak December same-store sales to see that corporations will fall victim to screwflation. From my perch, Target's poor sales are not a one-off event. If I am correct that a relatively large component of the October-November improvement in retail sales was simply recession fatigue, personal consumption expenditures could flatten out in the months ahead. ("Fast Money's" Cortes was spot on in his halftime remarks on retail.)
"That's a negative, Ghost Rider, the pattern is full."
-- Air Boss Johnson (Duke Stroud), Top Gun

"Fast Money's" Stephen "Air Boss" Weiss argued against my view, pointing to rising productivity and wages and less political partisanship. He is willing to write off the housing problem and believes that the U.S. economic picture is improving. Stephen believes that investors are tired of negative headlines, and he dismissed my rate-rise argument on the basis that it reflected improved economic growth.

I asked Stephen whether he thought P/E multiples would expand in 2011? He said yes.

I responded that valuations could contract somewhat (a variant view) this year based on:
  1. a deceleration in the rate of earnings growth;
  2. rising inflation and interest rates;
  3. an uneven and lumpy economic setting would produce lower and more volatile than consensus corporate profits; and
  4. the continued tail risk in credit from the last cycle (e.g., the difference between the yields on Spanish and German 10-year bond yields indicates that the eurozone crisis remains intense).
Finally, Melissa asked me how much cash I had. I said over 50% and that I'm waiting to make the "big short" trade.

As sportscaster Warner Wolf used to say, let's go to the tape.


Lackluster Gold?
Originally published on Jan. 4 at 9:20 a.m. EST.
  • The price of gold could surprise investors and be among the worst asset classes this year.

Jim "El Capitan" Cramer likes gold a lot along with plenty of my hedge fund cabal.

By contrast, I believe that the price of gold could surprise investors and be among the worst asset classes this year.

For the purpose of debate with my buddy/friend/pal, Jim (and with the other contributors on RealMoolah who are bullish on gold), what follows is my gold surprise from my surprise list for 2011:

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 de rigeur 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:
  1. Macro funds, like those managed by John Paulson, have outsized weightings in gold or even have established dedicated gold hedge funds
  2. 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).
  3. 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.
  4. 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.
  5. My spam emails normally consist of Viagra and "male enlargement" solicitations, but offer to buy gold have been on the rise over the last few months.

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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