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 what the latest jobless claims and ISM reports mean for the economy, why Ocwen Financial is now his favorite stock for 2012 and why Barnes & Noble is a perfect example of when not to short a stock.

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Parsing the Data
Originally published on Thursday, May 3 at 11:07 a.m. EDT.
  • Let's review this morning's economic data.
  • Initial jobless claims came in at 365,000 vs. expectations of 375,000 and 392,000 a week earlier. This is the lowest claims number since the end of March, which suggests that the recent upward move in claims was, to some degree, a function of the Easter holiday. Today's report is consistent with at least 175,000-a-month payroll growth. (Tomorrow I expect about 150,000 and then upward-trending payroll gains.)

    First-quarter labor productivity dropped by 0.5%, in line with expectations. This reflects increases in hiring and expanding employee hours combined with a moderation in economic growth and output.

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    First-quarter unit labor costs rose by 2%, less than expectations of 2.7%.

    April ISM nonmanufacturing, at 53.5, missed expectations for 55.3. Business activity declined to the lowest level since October 2011. New orders and employment fell while backlogs rose. Export orders were solid, rising to the best reading in 14 months. Prices paid eased for the second month in a row, and 15 out of 18 industries surveyed reported positive growth.

    It is important to remember that the services report, prior to today's release, was indicative of real GDP growth of more than 3.25%, so this morning's release must be put into perspective.

    If we combine both this morning's ISM nonmanufacting with the report earlier this week of ISM manufacturing, April averaged 53.7 compared to 55.7 in the prior month. This should translate into at least 2.5% real GDP growth, which is slightly better than my muddle-through expectation.

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


    Ocwen Has Huge Potential
    Originally published on Thursday, May 3 at 12:05 p.m. EDT.
  • Ocwen becomes my favorite stock for 2012 now.
  • The key takeaway from the Ocwen ( OCN) conference call is that the company faces a huge runway, with $450 billion of potential servicing deals in the pipeline.

    This coupled with a likely spin-out of two new businesses in late 2012-early 2013 makes Ocwen eerily reminiscent to its sister (which was spun out in 2009), Altisource Portfolio Solutions ( ASPS).

    Ocwen becomes my favorite stock for 2012 now.

    More to come after I complete my analysis of the first-quarter 2012 report.

    At the time of publication, Kass was long OCN, ASPS and HLSS.


    Big Bond Short
    Originally published on Monday, April 30 at 1:17 p.m. EDT.
  • My near-20% weighting in this trade is the largest individual asset class bet I have ever made.
  • "Chains of habit are too light to be felt until they are too heavy to be broken."
    -- Warren Buffett

    I currently have a near-20% weighting in my bond short. It is the largest individual asset class bet I have ever made and underscores my conviction -- or insanity.

    I will be speaking at Whitney Tilson's seventh annual spring Value Investing Congress in Omaha, Nebraska, a week from today (Monday, May 7).

    The subject of my talk is "The End of the Bond Bull Market (From an Equity Investor's Perspective)."

    Wish me luck -- I will need it!

    And if any subscribers are in Omaha next weekend to attend Berkshire Hathaway's ( BRK.A) annual meeting, please look me up.

    I'll be the guy wearing the sweater that says, "Warning: Bonds may be hazardous to your health!"

    At the time of publication, Kass was long BRK.B, TBT and TBF. He was short TLT.


    When Not to Short (Part Deux)
    Originally published on Monday, April 30 at 9:29 a.m. EDT.
  • Shorting heavily shorted stocks can be harmful to your investment and financial well-being.
  • In early March, I wrote some basic rules I abide by in shorting.

    Back then, I used Sears Holdings ( SHLD) as an illustration.

    Among my tenets was never short an equity whose short interest exceeds 7% of the outstanding float or three days of volume.

    Today, Microsoft ( MSFT) has announced that it is making a $300 million strategic investment in Barnes & Noble ( BKS), a heavily shorted stock.

    In the case of Barnes & Noble, there are 58 million shares outstanding, but the float (noninsider shares owned by the public) is only 18 million shares.

    There are 19 million shares short, representing more than 100% of the float!

    Another principle I have with regard to shorting is that I never short a stock whose short interest is more than three days of volume.

    In the case of Barnes & Noble, the average daily trading volume (over the past three months) is 1.3 million shares. The 19 million shares short represent about 15x (and days) average daily trading volume.

    These conditions are nonstarters to me and why I have never shorted Barnes & Noble, which has always had a questionable business model.

    This morning, Barnes & Noble's shares have more than doubled in premarket trading.

    If you must short a stock with a high short interest relative to the company's float, elect to buy puts and define your risk.

    Otherwise, shorting heavily shorted stocks can be harmful to your investment and financial well-being.

    I know; I have the investment scars to go with that experience!

    At the time of publication, Kass was long Microsoft shares and short Microsoft calls.

    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.