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 past week, Kass explained why AIG's earnings were so disappointing, detailed a short-term Apple trade and interpreted Friday's economic data.

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AIG Disappoints
Originally published on Friday, Nov. 2 at 8:32 a.m. EDT.
  • I have sold most of my long position.
  • There was less than meets the eye in AIG's ( AIG) third-quarter 2012 earnings report issued after the close on Thursday.

    While the headline earnings of $1.00 a share beat consensus EPS of 86 cents, all of the beat and then some was notably a function of a greater-than-expected contribution from noncore items in global capital markets ($200 million better than estimated), direct investment book ($400 million higher than estimates), the fair value mark of AIA ($200 million above analysts' forecasts) and ML III ($150 million higher than consensus).

    In total, other noncore operations (at $1.47 billion) produced nearly $1 billion pretax more than consensus contribution. These noncore items contributed close to a 40 cents-a-share swing relative to expectations, placing core earnings at a disappointing level against consensus and the headline number.

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    Property and casualty investment income beat. So did SunAmerica Financial as did domestic life profits. Aircraft leasing was hurt by an impairment charge.

    The lower core earnings power (property and casualty missed by nearly $300 million as the combined ratio rose to 105% vs. 100.5% estimated) demonstrated in this report explains in large measure why AIG sells at a massive discount to book value ($68.80). A company that can only demonstrate a 6% sustainable return on capital deserves a meaningful discount to book value.

    This disappointing profit shortfall combined with a likely Treasury sale of its remaining shares by year-end -- the lockup ends on Nov. 10 -- suggests to me that AIG's shares will remain under pressure. As well, the price of the secondary will likely come at a lower level than I previously thought.

    I have sold most of my AIG long position.

    And if the Street waxes optimistically this morning -- I have yet seen the reviews -- I will sell the balance of my AIG (no rush!) and wait (depending on price) for the secondary to reenter the name.

    I continue to expect that the AIG secondary will come in November/early December, but previously I thought it would come between $34-$35 and then the shares would not look back. Now I think it might come $32-$33 and the sale and near-term outlook will be more of a struggle.

    The conference call is currently under way.

    At the time of publication, Kass was long AIG.

    Taking a Bite Out of Apple
    Originally published on Wednesday, Oct. 31 at 10:41 a.m. EDT.
  • As I often like to write, in this market backdrop it is important to stay flexible and opportunistic!
  • To that end, I have taken a small trading long rental in Apple ( AAPL) at under $590.

    My trading rationale is as follows.
    • Many of my recent concerns have been discounted in the $110-per-share schmeissing in Apple shares.
    • Month-end is probably exaggerating the price fall, as some investors/traders want the stock off of their books.
    • Controversy surrounding the recently announced management changes have likely hastened and accelerated the share price decline. These concerns are probably overblown.
    • Product concerns are also likely overblown -- though the competitive landscape is changing.
    • The technicals! As I have previously written, I believe in charts, especially at important support and resistance lines. Apple's 200-day moving average is $588.70, and I suspect it will hold for now.

    In other words, traders and investors are shooting first and asking questions later.

    I am putting my pen to my opportunistic writings -- and staying flexible in my trading.

    At the time of publication, Kass was long AAPL.

    Parsing the Data
    Originally published on Friday, Nov. 2 at 12:12 p.m. EDT.
  • Let's review this morning's economic data.
  • The jobs report was good, though it had some blemishes -- workweek and average hourly earnings were weaker than expected, which could serve to moderate the recent strength in retail activity. Nonfarm payrolls rose by 171,000 (consensus was 125,000). Importantly, September and October jobs were revised upwardly by nearly 85,000. Private sector was quite strong (184,000 vs. estimates of 123,000 and 128,000 in September, the best reading in nine months).

    The underlying trend in jobs growth is running 155,000 a month -- sufficient to underpin real GDP growth of 2%. Given the labor participation rate, this is still not enough to reduce the unemployment rate -- we need 175,000 or more. The particular strength in retail (month-over-month gain of 36,000) implies good growth in retail sales last month. Temporary employment rose smartly in October, possibly a sign of stabilization in manufacturing.

    Factory orders were up 4.8% -- no surprise since most of this report was included in last week's durable goods release. Core durable good orders and shipments (excluding defense and aircraft) were revised to +0.2% and +0.1%, respectively. It also means that the recently reported third-quarter 2012 real GDP might be raised from +2% to +2.2%.

    I don't think that any of today's reports will change voters' opinions on the economy.

    In terms of incoming economic data in the next few weeks, November sales, industrial production and employment will be weak, but the markets will look beyond them as they have been heavily influenced by the effects of Hurricane Sandy.

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

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