NEW YORK (Real Money) -- 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.

This past week, Kass wrote about how nobody -- not even the great Carl Icahn -- seems to be looking in the right direction in this market; the choreographed earnings beats we are seeing again this season; and the frustration traders face when dealing with such a volatile market.

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Everyone's Looking Up, but Should Be Looking Down

Originally published on Thursday, Oct 16, at 8:54 a.m. EDT

It's the Carl Icahn lesson.

"Also-Ran Surprise No. 5: Carl Icahn's fund loses 15% to 20%." -- Kass Diary, 15 Surprises for 2014.

By my calculation (below) Carl Icahn's portfolio (of individual stock holdings) has lost more than $6 billion from the recent market highs.

The message (and lesson) of today's opening missive is not to single out the vulnerability of Carl Icahn's investment portfolio. Nor is it about schadenfreude.

Like Warren Buffett, I worship at the altar of Carl Icahn's investment prowess. He is brilliant. focused and aggressive. He possesses the ability to reduce an investment thesis to a couple of logically constructed bullet points. 

My intention this morning is not to be critical of Icahn but rather  to deliver the lesson and message that if one of the world's most successful investors might be having a tough time of it -- all investors should pay heed to a market that could (and has) lost its innocence.

At the beginning of this year, I delivered a cautious view of the stock market.

In my 15 Surprises for 2014 I suggested that the headwinds for equities would produce a negative year for the major indices and could be so strong as to take some of the greatest hedgehoggers (including Carl Icahn) through the meat grinder.

This appears to be the case, based on Guru Focus. Carl Icahn's major holdings, with the exception of Apple (AAPL - Get Report) , are sinking like the submarine in the 1958 movie starring Clark Gable and Burt Lancaster Run Silent Run Deep.

Here is a list of some of Icahn's largest holdings (including his 90%-owned holding company Icahn Enterprises (IEP - Get Report) (with the six-month price charts in parentheses followed by the approximate share price decline from the recent peak).

  1. Icahn Enterprises 105.8 million shares -$20
  2. Hologic (HOLX - Get Report) 34.2 million shares -$3
  3. Apple 52.0 million shares -$5
  4. Talisman Energy (TLM) 76.0 million shares -$5
  5. Chesapeake Energy (CHK - Get Report) 66.5 million shares -$12
  6. eBay (EBAY - Get Report) 30.8 million shares -$7
  7. Nuance Communications (NUAN - Get Report) 60.8 million shares -$6
  8. Herbalife (HLF - Get Report) 17.0 million shares -$25
  9. Transocean (RIG - Get Report) 21.9 million share -$16
  10. Hertz (HTZ - Get Report) 38.8 million shares -$12
  11. Netflix (NFLX - Get Report) 1.7 million shares -$150

As most of you know by now, after the close Wednesday Netflix reported a rare and surprising miss to expectations on domestic and international subscriber additions. Further, the company substantially guided profit forecasts lower.

Netflix's shares, in response, plummetted by nearly 25% or $110 a share in after-market trading Wednesday night.

Carl Icahn's son Brett and his partner David Schecter (who make up Sargon) were featured last week on "Fast Money Halftime" and discussed their support and conviction in their Netflix investment.

"We started buying Netflix at $68 -- we faced criticism as it doubled and doubled again... (Netflix is) one of greatest consumer bargains of all time. It has great growth domestically and internationally and great operating leverage ... Netflix is a 30% of our portfolio at Sargon." -- Sargon's Brett Icahn, David Schecter


Let me start by saying that Brett Icahn's purchase of Netflix at around $68 was brilliant and I admire the aggressive move he made. He is much like his dad as it relates to conviction and boldness.

But there are several important messages following Netflix's decline last evening.

  • As Jim "El Capitan" Cramer advocates, STAY DIVERSIFIED. It is inappropriate for the individual investor to be as concentrated as Sargon. It is typically a recipe for investment/financial disaster.
  • Self-confidence and hubris rarely pays (even if you are an icon -- or Icahn), particularly in a period of uncertainty, lack of predictability, market volatility and slowing global economic growth.
  • Never allow an investment to be a disproportionate portion of your portfolio. Take profits and sell appreciated stocks down to reasonable weightings (as they rise). As legendary trader Joe Gruss once told me,"When reaching Station Success, get off!"

The Icahn Lesson

During the recent market schemissing, everybody seems to still be looking up when they should be looking down.

If one of the world's greatest investors, Carl Icahn, is struggling with an estimated loss of more than $6 billion (I am not taking into account his short hedges as I know not what they may be nor do I know the size of the hedges), it might be time for us to be more concerned with return of capital than return on capital.

I will end by repeating a frequently-written point.

Err on the side of conservatism and maintain above-average reserves during this volatile and uncertain investment backdrop.


Once More, the Jump of a Lifetime!

Originally published on Friday, Oct 17, at 7:13 a.m. EDT

But remember, consensus EPS [earnings-per-share] expectations are essentially manipulated and based on the guidance from investor relations departments and managements. They are framed to be beaten. As such, it's like Monty Python's Upper Class Twit of the Year Competition where one of the events is for the contestants to jump over matchboxes. . . . So, when the business media is all aflutter with this week's 'important' earnings releases, pay them no mind as beating EPS consensus (which typically occurs about 65% to 70% of the time) is the 'Upper Class Twit of the Year.'

--Kass Diary, 2012 

Pardon my skepticism -- but, from cycle to cycle, some things never change. 

As earnings season continues, General Electric (GE - Get Report) jumps over analyst-consensus match covers as EPS beats estimates by a "choreographed" penny per share. 

As I have written in the past, GE -- and other corporations -- beating consensus expectations is much like Monty Python's Upper Class Twit of the Year, in which contestants jump over the matchbook covers

Next contestant is Nigel Incubator-Jones. His best friend is a tree, and in his spare time he is a stockbroker. 


Not for the Faint of Heart

Originally published on Thursday, Oct 16, at 2:31 p.m. EDT

Again, for emphasis.

This level of volatillity precludes many retail investors from trading or investing. There will come a time when it is safe to be in the waters, but not yet.

Only the most facile, quick and aggressive traders need apply in this difficult and challenging market backdrop.

It is almost impossible for me to post my trades, as they are happening so quickly in a market without memory from hour to hour.

Is it the weekend yet?

At the time of publication, Kass held no positions in any of the 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.