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 he's positioned to weather currency and economic risks of sinking oil prices by shorting some financials and buying closed-end muni bond funds.
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Brief Conclusions on Crude
Originally published on Friday Nov. 28, 2014 at 8:02 a.m. EST.
Here are some brief and tentative investment conclusions I have relating to the recent large drop in the price of crude.
Zero-percent interest rates and free money are the fathers of malinvestment. (We learned this 2007-08 and will again learn that yield reach often has negative outcomes in the real economy). As proof, take a look at the prices of high-yield oil paper today or that of leveraged, high-yielding master limited oil partnerships. (This could be the beginning signposts of the adverse consequences of policy and rising systemic risks).
Offsets to Lower Oil Prices Could Run Deeper Than Many Expect
The decline in the price of gasoline and heating oil (a tax cut to the consumer) will be importantly offset by the lower level of oil-related production/capital spending/profitability and the reduction in that sector's employment profile and condition.
Add selected currencies to the list of markets with a dirty float that could upset the perceived calm investment/trade waters as well.
Low Rates/Inflation For Longer
Inflation remains non-existent and low interest rates will continue to characterize the investment backdrop.
Risks to the Financial Sector
Selected financial stocks will be hobbled by low rates. Net interest margins will suffer (for longer than is generally expected) and reinvestment rates will roil the insurance industry. (I remain net short banks and life insurance stocks).
Sectors That Benefit
The asset classes that will benefit from lower oil prices will be fixed income and bond-equivalent equity groups. (My favorite asset class remains closed-end municipal bond funds).
At the time of publication, Kass owned muni funds, LNC, FCX and MET.