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 said he expects Europe's weak QE to backfire, sending stocks lower. He's shorting the SPY and buying a gold ETF. Kass expects home prices to fall in the second half of the year, which may help stabilize home sales.
Originally published on Dec. 30, 2014 at 9:27 a.m. EST
- Surprise No. 12
Home prices fall in the second half of 2015.
"I told my mother-in-law that my house was her house and she said, 'Get the hell off my property.'" -- Joan Rivers
"Under the weight of reduced home affordability, still-low household formation gains and continued pressure on real incomes, home prices fall in 2015. Builders lose pricing power." -- Kass Diary, 15 Surprises for 2015
According to the S&P/Case-Shiller Home Prices Index, home prices in October rose 0.76% month-over-month and rose 4.5% year-over-year, both a touch above expectations, but September was revised slightly lower. Prices on a year-over-year basis has now slowed for 11 straight months, and the gain of 4.5% is the slowest since September 2012, as not one of the 20 cities surveyed saw a double-digit gain.
San Francisco and Miami had the strongest price increases, with Cleveland the least. Bottom line, the housing industry in 2014 has had a year of fits and starts as the homeownership rate continues to fall. Investors are buying fewer homes, credit standards remain tight, and income growth remains sluggish (albeit less so), but job growth has improved and mortgage rates are historically low.
This all said, lower home price growth is a necessary component in an eventual sustainable improvement in home sales, as too many first-time buyers have been priced out of the market. Hopefully, we can soon once again align home price growth with income growth.
Originally published on Dec. 30, 2015 at 2:42 p.m. EST
Surprise No. 1
- A recap of the first surprise for 2015: faith in central bankers is tested (stocks sink and gold soars).
European QE Backfires. The ECB initiates a sovereign QE in January 2015, but it is modest in scale (relative to expectations), as Germany won't permit a more aggressive strategy. Markets are disappointed with the small size of the ECB's initiative and European banks choose to hold their bonds instead of selling. ECB balance sheet still can't get to 3 trillion euros and the euro actually rallies sharply. Bottom line, QE fails to work (economic growth doesn't accelerate and inflationary expectations don't lift).
Draghi Is Exposed. Mario Draghi is exposed for what he really is: the big kid of which everyone is scared. For some time, no one wanted to fight him (or fade sovereign debt bonds, which would be contra to his policy). But, after the meek January QE, the response changes. He is now seen as the bully who never throws a punch and who always has gotten his way. But at the time of the January QE a medium-sized kid (and a market participant) teases him and Draghi warns him again to stop it. The kid keeps teasing. Draghi the bully takes a swing, it turns out he can't fight and the medium-sized kid whips his butt. From then on, the big kid is feared no more. For some time Draghi has said he will do "whatever it takes," but he never really had to do anything. When he finally gets going and has to act rather than talk, he will expose himself as only a bully and as a weak big kid. Mario Draghi gets fed up with the Germans and returns to Italy (where he was governor of the Bank of Italy between 2006-2011) and becomes the country's president.
-- Doug Kass Diary, 15 surprises for 2015
ECB Economist Peter Praet is warning in an interview with Boersen-Zeitung that the decline in oil prices is "de anchoring" expectations for European inflation to drop below zero "for a longer period in 2015," and has suggested that ECB QE is growing more likely.
So let me get this straight.
Draghi has jawboned interest rates in the EU to well below where anyone had expected in 2014, and that is still not enough, as the European economies are flatlining at best.
Italy's 10-year yield is less than 1.90% (compared to 2.18% in the U.S.) and German Bunds are yielding 0.60%.
What possibly will ever-lower rates do to help the European economies, given their ridiculously and artifically low interest rates today?
I remain a market bear, particularly in light of the magnitude of the recovery since the mid October lows. At best, we have "borrowed" from 2015 returns. At worst, well, look at my 15 Surprises for 2015.
Originally published on Jan. 2 2015 at 9:34 a.m. EST
- Taking a starter position.
Reflecting my view in Surprise No. 1 in my 15 Surprises for 2015, I am taking a starter position in gold.
I am buying SPDR Gold (GLD) with a $112.50 limit Friday morning. And reflecting my previous view that the price of precious metals is so difficult to predict (and is based more, like religion, in the belief in the commodity) that starter position is quite small.
Originally published on Jan. 2 2015 at 7:12 a.m. EST
- By the numbers.
- The gross return of the S&P in 2014 was 11.4%. Including a dividend return of 2.3%, the total return of S&P was 13.7%. This ranks in the 54th percentile since 1962.
- Realized volatility was 11.4%.
- Since 1928, the average annual (price) return is 5.6% on volatility of 16.2% -- said another way, compared with the history book, the market delivered twice the average return on 70% of the average volume.
- Just like in 2013, 59% of days were up days (96th percentile). The median return on those days was +42 basis points, which was 5 basis points worse than 2013. Down days made a bigger difference. The median return on down days was -45 basis points, compared with -36 basis points in 2013.
- U.S. Treasuries returned a superb double-digit return on volatility of 5.4%, so the S&P Sharpe Ratio of 0.3 was in the 48th percentile.
- The best S&P sector returns: utilities (+29%), health care (+25%) and tech (+20%).
- The worst S&P sector returns: energy (-8%), telecom (+3%) and materials (+7%).
- The best global markets: China (+58%), India (+33%), Turkey (+27%), Philippines (+26%), Indonesia (+25%).
- The worst global markets: Greece (-29%), Portugal (-21%), Austria (-13%), South Korea (-5%), Brazil (-3%).
- S&P experienced strong relative returns, even when dollar strength is excluded: