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 discussed the recent drop in the price of gold and why he sees corporate profits under threat.

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Fool's Gold
Originally published on Friday, April 12 at 2:23 p.m. EDT.
  • Today we witnessed a dramatic decline ($60-plus/oz.) in the price of gold.
  • More than a year ago, I wrote about the price of gold. My conclusion was that gold doesn't produce profits and, as such, fails to provide a stream of income, so it's hard for me to estimate its intrinsic value (and next to impossible for me to invest in or trade it).

    In light of this week's sharp drop, which began with Goldman Sachs' downgrade on the asset class and has ended with the possible sale of Cyprus' stash, here are my previous observations in "Fool's Gold":
    The second major category of investments involves assets that will never produce anything but that are purchased in the buyer's hope that someone else, who also knows that the assets will be forever unproductive, will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century ...

    This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future....

    The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative.

    -- Warren Buffett, 2012 Berkshire Hathaway (BRK.B) letter

    In theory, gold is a great asset class in a world of too much cowbell, where fear is a constant and the integrity of most currencies is waning (as an outgrowth of addressing fiscal imbalances with monetary solutions).

    As I once wrote about gold, however, there is no way to calculate intrinsic value. When it drops by $100 or $200 per ounce, an investor has little bearing as to whether the precious metal is cheap and at what price level it provides intrinsic value.

    As Oaktree Capital Management's Howard Marks has written, gold is a lot like religion. In religion, you either believe in God or you don't. In the gold market, you either believe in gold or you don't.

    In essence, the gold market is a state of mind. It neither represents a corporate franchise that increases over time as profits are earned and retained -- such as, say, Procter & Gamble ( PG), with a protected moat -- nor is it a productive asset.

    On the latter point, gold doesn't produce profits and, as such, fails to provide a stream of income.

    Its future price is simple dependent upon someone willing to pay more for the asset class compared to its price today.

    As I said back then, the bull market in gold has stalled, and it might not return for a while.

    At the time of publication, Kass was long OAK and PG, and short BRK.B.


    Where I Stand
    Originally published on Friday, April 12 at 2:23 p.m. EDT.
  • Here is a brief recap of my investment outlook.
  • To date in 2013, the world's central bankers have seemed to repeal the laws of investment gravity.

    The stock market this year has risen based on the growing confidence that global easing will trickle down and improve regional economies around the world.

    Unfortunately, just the opposite is occurring, as (particularly in the U.S.) more cowbell is beginning to have a negative impact (by robbing income from the savings class). European economies' recoveries have also failed to meet expectations.

    Nevertheless, the gap or schism between the rising stock market and the visible deceleration in the rate of global economic growth has been widening in a more dramatic and conspicuous fashion over the past several weeks.

    Indeed, despite the rising challenge to S&P 500 profits, the U.S. stock market this week has had its best four-day performance in 2013.

    P/E multiples have surprisingly expanded this year, while the outlook for profits has deteriorated.

    Whether it is the weakness in the most recent U.S. ISM release, a fall in consumer and small-business confidence, disappointing retail sales, a sharp drop in the Citigroup U.S. Surprise Index (now down 21-plus points in April), worsening EU economies or any of a number of other factors, global growth is slowing to a rate that will jeopardize ambitious U.S. corporate profit forecasts projected by the consensus.

    And the recent broad drop in commodities, which has intensified today, seems to be endorsing the notion of much slower economic growth around the world.

    In most areas of corporate America, there is little in the way of pricing power.

    A chill in first-quarter earnings reports is increasingly visible -- Oracle ( ORCL), J.B. Hunt ( JBHT), Harris Corp. ( HRS) and so on -- even during a first quarter in the U.S. that will likely exhibit +3% real GDP.

    What will happen to earnings when the rate of growth in domestic economy halves?

    At the time of publication, Kass was short SPY.

    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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