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 Pro readers in his daily trading diary.

Among his posts this week, Kass discussed the implications of the latest inflation data, revealed a change in his strategy on bank stocks and wrote that the bull market in gold is over, at least for a while.

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Payrolls Fall Short
Originally published on Friday, April 6 at 9:18 a.m. EDT.

  • Only 120,000 jobs were created last month.
  • The jobs weakness last month was centered in business services (law/accounting/temp firms) and education/health services.

    The report will rekindle memories of 2011 when employment faded after a strong start in the year.

    It also is supportive of the cautious views that I have expressed in my Diary for weeks:
    1. The early 2012 macroeconomic strength was a result of a pull forward because of mild weather and because of the pull forward in capital expenditures from the 100% tax credit for business spending.
    2. Structural issues in the labor market remain an important headwind (and are not likely impacted by more easing).

    As an aside, I am constantly amazed by how the pundits -- though concentrating on a narrow set of variables or companies' outlooks -- can miss so badly.

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    The miss to consensus this morning reminds me, in reverse, of the miss to consensus in Apple's ( AAPL) last earnings report when profits and sales were more than 30% above forecasts.

    There is no silver lining in the jobs report, which is supportive of the view that the economic recovery is not self-sustaining without the benefit of still massive government easing.

    Shorts in U.S. stocks will likely be rewarded on Monday.

    Even Apple and Priceline ( PCLN) might face tough going when trading resumes after the weekend.

    At the time of publication, Kass was short PowerShares QQQ Trust 1 (QQQ).

    Invest Like Barton Biggs
    Originally published on Thursday, April 5 at 11:37 a.m. EDT.
  • I am.
  • I am staying very liquid in my portfolio and limiting my gross exposure during this period of uncertainty.

    I don't give advice in my diary -- I do tell you what I am doing and why I am doing it -- but, in this case, I would strongly suggest erring on the side of conservatism in your trading and investing over the near term. Risk/reward in U.S. stocks appears to have flipped negative, and I am still looking for a correction back toward the 1350 area in the S&P 500.

    It might be too late to short and too early to buy at this point in time.

    It's a long weekend ahead, and it's probably a good time to concentrate on having fun, not putting on more risk. At least, that is what I am doing!

    I would note that Traxis Partners' Barton Biggs, for whom I have a great deal of respect, is thinking the same as I.

    At the time of publication, Kass had no positions in securities mentioned.

    The Liquidity Rally Is Over
    Originally published on Wednesday, April 4 at 7:24 a.m. EDT.
  • Absent more easing, investors are about to experience natural price discovery in stock prices.
  • "When economies stumble, public policy (fiscal and monetary) comes to the fore and defends against an acceleration of economic and corporate profit weakness and often inhibits natural price discovery."
    -- Doug Kass, "In Defense of Short Selling" (April 2, 2012)

    Over the near term -- stock, bond and gold prices are now in jeopardy of falling after the FOMC minutes were released yesterday afternoon. Those minutes emphasized that unless the economy cools, there will be no more (immediate) cowbell in the form of QE3 or Twist III.

    From my perch, the liquidity rally, which has been in place for several years now and is responsible for some of the rally off of the generational bottom, is now over.

    The U.S. monetary cliff at June's end has grown ever more pronounced with yesterday's announcement -- and ever scarier for investors in many asset classes. (The ECB's full allotment policy also ends this summer.)

    Absent more easing, investors are about to experience natural price discovery in stock prices. (While the Bernanke put is still out there, it now far more out-of-the-money than the markets believed prior to yesterday's release of the FOMC minutes.)

    I fully recognize that the market rally has been based on more than liquidity; it has been based on a slow (but steady) emergence out of the 2008-2009 recession.

    Where I have disagreed with bulls (recently) is that, though now several years of age, the U.S. recovery has been subpar in a "new normal" challenged by secular headwinds (of structural unemployment and fiscal imbalances). And what makes me even more concerned over the next few months, is that there are growing signs of ambiguity with regard to the trajectory of future domestic economic growth:
    • Warm weather has pulled forward retail sales.
    • The 100% tax credit (which was reduced to 50% on Dec. 31, 2011) has likely pulled forward business spending.
    • Though labor growth is healthier, weak (relative to expectations) industrial production, durables, personal income, high manufacturing, burgeoning automobile inventories and so on all point to moderating domestic growth.
    • Current political gridlock and likely continued gridlock following the November elections could result in undesirable, growth-deflating and higher interest rates, as bond vigilantes rebel against deficit inaction. Rising interest rates will continue to hurt the refinancing market (already refi applications are down seven weeks in a row), which serves as a source of consumer comfort (and spending) and could hamper the nascent recovery in housing.

    Worse yet is that a potential growth slowdown could be occurring at a time when U.S. corporate profits are trending at all-time highs and in which profit margins are vulnerable at 57-year highs.

    And over there in Europe, the so-called recovery is much more fragile and more vulnerable than in the U.S., serving to adversely impact those U.S. multinationals that serve that market.

    Finally, yesterday's announcement has occurred following a persistent and record-breaking rally in world equity prices that has worn out just about every short-seller and has led to expanding long exposure out of the hedge fund community (but has not yet brought in the retail investor).

    In summary, the forward looking outlook is not pretty for the U.S. stock market, as the liquidity rally is now over.

    Get defensive as investors face the newfound reality of natural price discovery.

    At the time of publication, Kass had no positions in securities mentioned.

    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.