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 shares some negative Apple ( AAPL) headlines, talks about the earnings cliff and explains why the short Treasury ETF looks interesting.

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It's the Earnings Cliff
Originally published on Friday, Dec. 14 at 8:58 a.m. EST.
  • No rush to buy now
  • .
The basic thrust of my missives in my Diary since the election is that the economic, fiscal, political and geopolitical cliff fears are overblown .

What is not overblown is the earnings cliff.

And the action of Apple's ( AAPL) shares over the last 2-1/2 months is symptomatic of my 2013 fear that consensus top down ($107) and bottom up ($113) profits for the S&P next year are simply pie in the sky.

A sub-$100 2013 S&P forecast is where I live.

And 14x seems a reasonable valuation under the umbrella cyclical and secular challenges.

It is hard to see, with profits and margins near cyclical peaks, valuations expand in a subpar-profit backdrop .

This is true even if a half-assed fiscal cliff compromise is reached in the next week.

There is no rush to go out and buy at this point.

Position: None

Friday's Apple Negative Headlines
Originally published on Friday, Dec. 14 at 11:34 a.m. EST.
  • What's doing the rounds.
  1. Several more negative sell-side calls on weak supply chain checks (Apple, Jabil ( JBL), etc). See comments from DB Asia/Japan.

  2. AAPL iPhone 5 launch in China uneventful with lines small: WSJ.

  3. Hon-Hai -5% (Largan limit down & LPL hit Thursday) on AAPL iPhone 5 demand concerns.

  4. Several more articles out overnight about NAND/DRAM pricing continuing to rip higher.

  5. Apple's Decision To Make The New iMacs Super Thin Was A Mistake .

Position: None

The Short Treasury ETF Gets Interesting
Originally published on Thursday, Dec. 13 at 12:50 p.m. EST.
  • The TBT has fallen to a level that should be near support.

The ProShares UltraShort 20 Year-Plus Treasury ETF ( TBT) has fallen by nearly $1 a share from the morning's highs.

I expect that important technical level -- 1.67% yield on the 10-year U.S. note -- should provide support.

I would be a buyer of the TBT between $61.50 and $61.75.

Position: Long TBT common and calls

Chasing the Dragon
Originally published on Monday, Dec. 10 at 10:20 a.m. EST.
  • The economic data out of China has clearly improved.

It seems as if it was only a few weeks ago that there was rising confidence in a Chinese hard landing.

Continued worries about the legitimacy of the economic data from that region, weakening PMIs and poor prospects for the country's export markets contributed to a technical breakdown in the iShares:FTSE China 25 ( FXI), which many thought was a continuation of the deep bear market of 2010-12 .

But back in September I embraced the Chinese market and I now hold on to a 5% long weighting in the FXI , with an average cost of about $36/share.

Since then, the economic data out of China has clearly improved .

Little Second-Level Thinking About China Two Months Ago

At that time, I wrote that too many were worrying and embracing the technical breakdown. But there was no second-level thinking regarding how poorly Chinese stocks were being valued (in absolute terms and relative to other emerging and developed markets (like U.S. stocks).Three months ago, the current valuation metrics for Chinese companies were growing cheaper by the day, with forward P/E multiples of only 7.8x, an average dividend yield 3.9% and with a lowly price-to-book of 1.3x.

The Chinese stock market has risen by only about 5% since then, so the stocks still appear dirt cheap in both absolute and relative terms. By contrast, the S&P 500 trades today at a bit over 14x earnings, has an average dividend yield of 1.9% and price-to-book value is 2.1x.As I wrote previously, there remains a lot of distance/daylight between the valuation of Chinese stocks and U.S. stocks.

My question is if China is indeed the growth driver of the world's economic community, doesn't this highlight how cheap stocks can get when growth is in question? But now that the growth prospects are mending in China, I suspect the sharp undercut to value months ago for Chinese stocks will be followed by the potential for a surprising rally over the next few quarters.

The fundamental improvement in Chinese stocks has now been accompanied by a sharp reversal in improving technical backdrop for equities over there. (This is something Sir Denny Gartman recently highlighted in his daily newsletter).

Several highly-regarded technicians have joined the FXI train in recent days and I expect the rally in Chinese stocks in 2013 will be one of next year's biggest surprises.

Position: Long FXI

Chasing the Dragon (Part Deux)
Originally published on Monday, Dec. 10 at 1:40 p.m. EST.
  • Goldman Sachs weighs in.

Apropos to my China post this morning, this from Goldman Sachs just now:

"Our Equity Trading Strategies group is recommending a tactical long position in the MSCI Emerging Market equity index (MXEF), (with) a target of 1125 and a stop of 985, following some incrementally supportive China data over the weekend and ahead of the earliest bits of the December data set."

One thing I didn't mention earlier is not only are we seeing a quickening pace of economic activity in China but the share prices are still at a 20% discount to the emerging markets benchmark.

Position: Long FXI

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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