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 that the latest data reveal a squeezed consumer; why SunTrust and XL Group are excellent investments right now; and why the U.S. economy is bifurcated geographically.

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Dour Data
Originally published on April 29 at 12:06 p.m. EDT.

We are beginning to get economic data that incorporate the full increase in higher energy prices, and the picture, especially for the U.S. consumer, is deteriorating.

This morning's personal income data are being heralded as positive by the bulls, but they were terrible.

Here's why.

Though personal income rose by 0.5% in March, the real rate of growth in disposable income (adjusted for inflation) was 0.1% in March and just +2.5% year over year. Moreover, the nominal increase of a half of one percent was all a function of personal income that came from government transfers. A record high 18.3% of personal income is now coming from transfer payments. And because we are now entering a period in which, as I mentioned last night on "Fast Money," the outlook for 2011 government expenditures (local, state and federal) has eroded, optimistic personal consumption expenditure forecasts are in jeopardy.

Meanwhile, personal expenditures, which rose by 0.6%, vastly exceeded adjusted income growth. This means that the consumer is either dipping into credit or savings in order to maintain his spending.
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This can't and won't last, especially if the price of food and gasoline remain elevated.

Here is what Boenning and Scattergood's Rick Farr wrote on the subject this morning:
Today we learned that personal wages are still falling behind personal spending, as consumers still spend every dime they make (and then some). Personal Spending grew +0.6% M/M (4.6% Y/Y), whereas Wages grew just +0.3% (+4.4% Y/Y). Basically, there is no money left over for savings. Contrast this reality with the stated view from one of the money printers at the Fed, Charles Evans. In an interview with the Wall Street Journal on 10/5/10, Evans stated rather explicitly: "I think we're in a liquidity trap where there is excess savings." We'd like to know where this excess cash exists.

The Federal Reserve's inflationary policy makes absolutely no sense in our eyes. The best thing for the Fed to do is to allow prices to decline. That would provide consumers with a bit more disposable income and that disposable income would help to repair consumer balance sheets. The Fed, under no circumstances, should ever try to prevent consumers from increasing their savings.


Two Potential Takeover Targets
Originally published on April 29 at 11:31 a.m. EDT.
  • Reinsurer XL Group (XL) would be a tasty morsel for Swiss Re or Munich Re or even Berkshire Hathaway (BRK.A).
  • SunTrust Banks (STI - Get Report) would be a natural target for any large European or Canadian bank.
  • I have consistently added to both names.

Two potential takeover stocks for 2011 lie in my portfolio: SunTrust and XL Group.

These two positions represent the best risk/reward ratios of anything I currently own.

Reinsurer XL would be a tasty morsel for Swiss Re or Munich Re or even Berkshire Hathaway, with a private market value of about $33 a share vs. the last sale of $24.35. So with $2 of risk and $9 of upside, I have continued to expand this holding recently.

SunTrust would be a natural target for any large European or Canadian bank interested in gaining exposure to the expanding Southeast region. As well, several of the large U.S. money center banks might target the bank (despite its $14 billion capitalization), whose asset value in a transaction would be north of $35 a share. The shares also have about $2 a share of risk but upside of nearly $8 a share. I have consistently been adding to this name as well.

At the time of publication, Kass was long STI, XL and Class B shares of Berkshire Hathaway (BRK.B)


When We Played Our Charade
Originally published on April 26 at 9:14 a.m. EDT.

One of my favorite films of all time is called Charade. The movie features an all-star cast, including Cary Grant, Audrey Hepburn, Walter Matthau, James Coburn, George Kennedy and Ned Glass. If you have never seen it, may I suggest you go straight to Netflix ( NFLX) tonight and queue up a copy.

Charade is a story of deception and confusion. You never quite know what the truth is or who any character really is. There seem to be many versions of the truth. Without giving up the plot or ending, I will just say that in the end, the U.S. government comes to the rescue, so to speak.

We are in a period of economic deception and confusion. We just don't know what the real economic story is. If you listen to people (for example, those I know personally or who write to me as subscribers) with a perspective from California, Las Vegas or Southern Florida (taken together, the CaliLavaFlo states), then you will be led to believe that the economy is far worse than the economic data points are indicating. On the other hand, from my perspective, things are going quite well in the Northeast corridor from Virginia up to Massachusetts. Of course, there are pockets of weakness in the Northeast as well as pockets of strength in the CaliLavaFlo regions.

Which version of the truth do you believe?

Well, for one thing, we have to accept them all as the truth. We cannot, however, extrapolate the good to the bad nor the bad to the good. Stated simply, what we have is a bifurcated economy. This will result in long-term trends that many people cannot yet envision.

My theory of reverse population shifts, which I discussed nearly two years ago, is slowly beginning to take shape. We saw this happen in the 2010 census. This population shift will occur as people slowly realize that the CaliLavaFlo was an eruption of speculative population shifts without any substantive economic foundation. It was a modern-day gold rush of sorts. The fool's gold of these population shifts was nothing more than a Mirage (which was a sort of follow-up movie to Charade).

Simply put, we created a societal imbalance that could not be maintained. We should have seen Say's Law staring right at us. With the help of the government, we were able to fix certain industries (i.e., financial and automotive) that helped jump-start those regions. These were cyclically impaired, not secularly impaired, regions and businesses.

There was nothing that the government could do to correct the excesses in CaliLavaFlo. If the people who bought houses in those regions were saved from their own mortgages, where would they find jobs? Could everyone become a landscaper? Instead, we are left with the need to accept that a reverse migration from CaliLavaFlo will occur until such time as we revert to a mean or equilibrium in economic and population distribution. So, as those trapped by poor economic conditions in CaliLavaFlo move to areas where there are opportunities and jobs -- say, Texas or New York -- we will begin to correct our course. The perspectives will reverse, and things will no longer be the charade of the 2000s rather the foundation for economic growth for the future. Until then, you will continue to hear the clarion call of how bad it is in CaliLavaFlo. Just don't extrapolate it to the rest of the country.

At the time of publication, Kass was long shares of Netflix.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.