GDP Nonevent; For Pete's Sake: Best of Kass

http://www.thestreet.com/story/12461560/1/jc-penny-is-changing-course.html?kval=dontmissNEW 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 the posts this past week were items about GDP data and investors vs. traders.

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Parsing the GDP Data

Originally published on Friday, Feb. 28, at 9:17 a.m. EDT.

Fourth-quarter 2013 GDP was revised down from 3.2% to 2.4%, under consensus 2.5%.

The driver of the downward revision was predominantly PCE-related. Personal consumption was revised down from 3.3% to 2.6% (expectations of 2.9%), while the GDP price index was revised up from 1.3% to 1.6%, and the ex-food and energy price index rose by 1.8% vs. 1.5% in third-quarter 2013.

Bottom line: Nothing all that new in this report, and it shouldn't have any meaningful impact on the S&P 500. Looking ahead to first-quarter 2014 GDP, yesterday we starting seeing the beginning of what will likely be a cascade of downward estimate revisions to first-quarter 2014 GDP, due to weather and inventory effects. The current expectation is that the first quarter will come in at 2.1% (Goldman Sachs is at 1.8%) and second quarter will come in at 2.8%. Those estimates are likely to diverge as the first quarter is revised down and the second quarter is revised up. The average, which will be the important thing to look at, is likely to remain constant around the general area of 2.5%, which implies neither an acceleration nor deceleration from recent activity.


Where Have All the Investors Gone?

Originally published on Thursday, Feb. 27, at 7:48 a.m. EDT.

Where have all the investors gone, long time passing?
Where have all the investors gone, long time ago?
Where have all the investors gone?
High-frequency strategies have picked them everyone.
Oh, when will they ever learn?
Oh, when will they ever learn?

Where have all the fundamentalists gone, long time passing?
Where have all the Warren Buffetts gone, long time ago?
Where have all the Lee Coopermans gone?
Gone to quant strategies every one.
Oh, when will they ever learn?
Oh, when will they ever learn?

Where have all the fundamentalists gone, long time passing?
Where have all the Seth Klarmans gone, long time ago?
Where have all the Mario Gabellis gone?
Gone to quant strategies every one
Oh, when will they ever learn?
Oh, when will they ever learn?

Where have all the investors gone, long time passing?
Where have all the investors gone, long time ago?
Where have all the investors gone?
Gone to investment graveyards, every one.
Oh, when will they ever learn?
Oh, when will they ever learn?

Where have all the Warren Buffetts gone, long time passing?
Where have all the Lee Coopermans gone, long time ago?
Where have all the Mario Gabellis gone?
Gone to trading, every one.
Oh, when will they ever learn?
Oh, when will they ever learn?

Where have all the Graham and Dodd followers gone, long time passing?
Where have all the Howard Marks followers gone, long time ago?
Where have all the Marty Whitman followers gone?
Quant strategies have picked them, every one.
Oh, when will they ever learn?
Oh, when will they ever learn?

With apologies to the late, great Pete Seeger, who wrote the beautiful "Where Have All the Flowers Gone?"

  • Traders have replaced investors in an ADHD investment world.
  • Holding periods have dwindled from eight years (in 1970) to less than five days today.
  • Investment history demonstrates that this almost always ends badly.

While I believe that some trading can play a role in generating good investment returns, the markets have become a roulette wheel in which fundamentals and investors have taken a backseat to sentiment mood changes, technicals, price-based algorithms, and (most important) traders and high-frequency trading and other quant strategies.

What is even more surprising is that dramatically dwindling stock holding periods have not only been popularized, but this phenomenon has been generally accepted by many investors.

When I graduated from Wharton in the early 1970s, the average holding period of a stock was nearly eight years. By the turn of this decade, the average holding period dropped to only five days. No doubt the average holding periods have dropped further since 2010.

In large measure, the proliferation of high-frequency trading strategies (now representing 70% of overall trading volume) has been the proximate cause for investors' ADHD (attention deficit hyperactivity disorder). In addition, with the popularity of short-term instruments (e.g., weekly options) and generally shortening investment time frames, investors have nearly disappeared and have been replaced by traders.

Many or most of these traders look only at a stock symbol and its chart and have zero knowledge of the underlying worth of an equity.

This may not be a healthy state of investment affairs.

This observation also helps to understand the popularity and binary nature of exchange-traded funds, which have become the trading community's delight -- and investment crutch -- and have become (for many) a substitute for individual stock security analysis.

It can also help to understand the increased frequency (arguably) of the disconnect between fundamentals and stock prices and the extreme differentiated moves both up (the five horsemen of the NasdaqNetflix  (NFLX), Google  (GOOG), Amazon  (AMZN), Tesla (TSLA) and Priceline  (PCLN)) and down (in disfavored stocks and unpopular market sectors).

As a vivid example, yesterday, Tesla (a large company whose market capitalization exceeds $30 billion) traded 24 million shares vs. only an 84 million share float (and 122 million shares outstanding). On average, 16.5 million shares have traded in each of the last 10 trading days. This means that (on average) every five days, the float of Tesla has traded.

Where have all the investors gone, long time passing?

It is no wonder that Mr. Market has no memory from day to day.

Investment history -- think of the period leading up to and into the October 1987 market crash -- demonstrates that this almost always ends badly.

At the time of original publication, Kass was short TSLA and 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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