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.
Unequivocally Poor Data
Originally published on Wednesday, Nov. 26, 2014 at 9:33 a.m. EST.
The exclusive prosperity of the U.S. recovery will be felt in the months ahead.
This morning's economic data support the contentions reflected in my opening missive Wednesday. The figure for core durable-goods orders was disappointing: it came in at a drop of 1.3% for October, whereas expectations were for a gain of 1%.
September's number had also reflected a 1.3% slide, that time against estimates for a 0.7% rise.
Weakness in the October report was broad-based. Core shipments were also weak relative to expectations. Inventories grew -- by 0.6% -- and note that October's inventories-to-shipments ratio is now at 1.65, up from 1.59 a year earlier. Meanwhile, personal-income growth and spending were uninspiring. That is surprising to many. Finally, jobless claims rose above 300,000.
The bottom line is that this morning's data are unequivocally poor. A global economic slowdown will be exerting downward pressure on domestic activity and foreign-export demand.
On that point, Hewlett-Packard (HPQ) CEO Meg Whitman's remarked on the pressures of a rising U.S. dollar in an interview with CNBC's David Faber this morning. Furthermore, the weakness in spending and income is disappointing in light of lower energy prices and improving job growth. As I've written, the exclusive prosperity of the U.S. recovery will be felt in the months ahead.
At the time of publication, Kass held no positions in H-P shares.
Going Back to a Net Short in Banks
Originally published on Tuesday, Nov. 25, 2014 at 8:29 a.m. EST
I am planning to return to a net-short position on banks over the next few days on the recent sector strength.
My rationale is threefold: net interest margin pressure continues, loan demand remains slow, and we're seeing weak capital-markets activity. I would not be surprised if earnings missed slightly to expectations, nor if 2015 consensus estimates were taken down as well. I have no plan to disturb my long-term investments in Northwest Bancorp and Citi.
At the time of publication, Kass was long Northwest Bancorp and Citigroup and short JPMorgan.
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