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, Kass wrote about how Yahoo! bears have it wrong, explained why the December new-home sales report was misleading and raised concerns of profit margin pressures this year.

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The Specter of Profit Margin Pressures in 2011
Originally published on Jan. 24 at 9:26 a.m. EST.
  • Corporate profit margins are among the most mean-reverting economic series extant.

I have consistently written that profit margins, at 55-year highs, remain vulnerable on several fronts.

Indeed, corporate profit margins are among the most mean-reverting economic series extant.

Both McDonald's ( MCD) and Halliburton ( HAL) are trading lower on concerns about fourth-quarter profit-margin pressure (reported this morning).

Despite the expected growth in U.S. capacity utilization this year, disappointing margins (inability to pass on higher input costs) remain a possible 2011 feature.

At the time of publication, Kass was short McDonald's.

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New-Homes Sales Built on a Weak Foundation
Originally published on Jan. 26 at 12:15 p.m. EST.
  • The artificially inflated Western region increased by an outsized 71%.

We are in a market that appears to interpret every statistic positively.

Case in point -- today's housing report, which appears to have been the proximate cause for the upside move in the indices this morning.

Sometimes, such as in this morning's December new-home sales report, the positive interpretation is nothing more than a sound bite from a bullish cabal that incorporates little analysis and overstates the case that a broader based housing recovery is in place.

December new-home sales rose to 329,000, easily beating expectations of 300,000 and compared to 280,000 in November. But the bulk of the rise was in the Western region, increasing by an outsized 71%. By contrast, sales only increased modestly in the South and Midwest. The Northeast's sales actually declined!

As I have previously reported, I suspect that during the last few months, the West Coast (California) numbers artificially inflated the national and state housing statistics, owing to the California first-time homebuyer tax credit (Assembly Bill 183), which expired on Dec. 31, 2010 (well after the national credit expired). This California home credit could be used regardless of income and was worth up to 5% of the home's price or $10,000, whichever was less.

I haven't heard a single person in the media or elsewhere focus on the notion that December's new-home sales were inflated by the expiration of the California tax credit.

No one!

This credit likely positively affected September to December new-home sales activity and prices. Since December was the last month of the state tax credit, it probably had a particularly outsized impact on today's sales report.

For example, if you go back to Case-Shiller's October report, home prices in San Francisco, San Diego and L.A. rose by about 3%, though the total country (20-city composite) reported a 0.8% drop in home prices.But the skew in new- and existing-home sales is even more pronounced (than prices) by the California tax credit.

For example, California single-family new-home sales rose by nearly 40% in November, as nationwide new-home sales increased by only 5%. (The Northeast dropped by 27% that month!) During the same period, existing-home sales in the West rose by 13%, even though the national activity was flat.



Yahoo for Yahoo!
Originally published on Jan. 27 at 11:40 a.m. EST.
  • AliPay (40% owned by Yahoo!) has grown dramatically and is likely more valuable than PayPal.

Yahoo! ( YHOO), especially after the recent weak profit report, remains unloved.

In Wall Street's analytical community, there are currently only six Strong Buys and seven Buys on Yahoo!; there are also 20 Holds and one Sell.

The average price target is only $18.23 a share.

I would like to briefly explain why the Yahoo! bears are wrong-footed and why the market is underestimating the value of the company's private assets.

Back in late November, I highlighted the value of Yahoo! on a sum-of-the-parts basis.

I was far too low as the value of AliPay, as the business has grown dramatically since that report. Indeed, given AliPay's market share of online payments, transaction volume and registered users, it is likely now more valuable than PayPal. In the fullness of time, it will be worth much more.

As of December 2010, AliPay had more than 550 million registered users with daily transaction volume of RMB 2.5 billion (U.S. $378 million). The company is processing 8.5 million transactions a day, and in fourth quarter 2010, AliPay processed more than 50% of Chinese online payments. (AliPay's transactions rose by 88% in the first half of the year!)These are almost Facebook numbers, and Facebook is now capitalized at $50 billion.

Again, I strongly suspect that AliPay (40% owned by Yahoo!) is now worth more than the estimated $20 billion that PayPal is worth -- or as much as $8 a share to Yahoo! (and moving higher based on the continued rapid growth in the Chinese online payments market).

At the time of publication, Kass was long Yahoo! common stock and call options.

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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