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 U.S. markets may not be the oasis many think they are amid global market turmoil, given their potential exposure to trillions in currency, commodity and derivatives risk. Meanwhile, Kass said investors should buy Apple alone as the company's analyst earnings estimates rise -- not the entire electronic technology group in the S&P 500 index -- which is just benefiting from Apple's gains thanks to its heavy weighting in the index.

Originally published on Jan. 15, 2015 at 1:53 p.m. EST

Midnight at the Oasis 

"Midnight at the oasis
Send your camel to bed
Shadows painting our faces
Traces of romance in our heads
Heaven's holding a half-moon
Shining just for us"

-- Maria Muldaur, Midnight at the Oasis

Many strategists, money managers and others believe strongly today that the U.S. will continue to be an "oasis of prosperity."

We hear this term and view repeatedly these days. This notion of our country's singular and relative strength has produced the correct investment strategy for more than five years since the Generational Bottom. There had been two exceptions (2000-2002 and 2007-2009), but it has been the proper course of action for almost 28 years.

For some time, as Jim "El Capitan" Cramer has correctly observed, adverse non-U.S. macroeconomic events have been ignored by the equity markets. Jim has called this "The Bristol-Myers Theorem," which has brilliantly kept him in the markets all the way back to the 1987 Stock Market Crash to the present.

Those adverse non U.S. macro events, as Jim has properly and consistently ascertained, have merely been opportunities to "buy the dip."

However, with the S&P 500 at 2,000, and given the swift and deep changes and volatility in commodities, currencies and interest rates, I am not entirely convinced that macro will continue to be ignored in the markets, especially given sub-par global economic growth.

Last night at the South Florida CFA Society event, at which I had made a presentation, a smart panelist from Jason Trennert's Strategas argued that the U.S. is the cleanest shirt in a dirty laundry.

We debated this "oasis" view, which I respectfully disagreed with and took the other side.

Not only do I think that the market has fully discounted that consensus view (after the market has tripled in the last five years), but I would argue that we are in a networked, interconnected and flat world (in economic and market terms). Contagion risks are greater today than at any other time in history.

This is one of the reasons we are seeing Black Swans with greater frequency in recent years.

We all may have our baseline expectations for global economic growth, but never in history have we faced such a broad list of outcomes (some of which are adverse). And I would argue that current valuations don't reflect this uncertainty and variety of possible outcomes.

For one, I have argued that a strong U.S. dollar is likely to have a direct (and negative) impact on domestic growth, as the proportion of export business delivered by S&P 500 companies has greatly expanded in recent years (coincident, in part, with the emergence of middle classes in the developing world).

But there are other concerns in an interconnected economic and capital market world.

Consider, for example, the rising volatility seen recently in different asset classes:

* The conspicuous (and unexpected) drop in the price of crude oil over the last two months, and the near-$5 drop from early morning peak to current price today!

* The Dow Jones Industrial Average fell by over 550 points from top to bottom two days ago.

* Copper gapped down (on the opening) by over 10% earlier in the week to a twelve year low.

* Treasury yields are moving rapidly lower to unprecedented levels.

* Today's excessive move in currencies.

Do we really know the size of commodities and currency-linked notes, or the systemically important financial institutions in which they reside?

After all, almost everyone underestimated the impact of those "financial weapons of mass destruction" (sliced and diced mortgage-backed bonds) that nearly killed the world's economies and markets back in the mid 2000s.

Benjamin Disraeli, a former British equivalent of Treasury Secretary, once said: "what we have learned from history is that we haven't learned from history." Mark Twain said: "history night not repeat, but it certainly rhymes."

In my 15 Surprises for 2015, I reflected some related concerns (regarding the growth, again, of derivative books):

Surprise No. 15 -- A derivative blowup precipitates an abrupt market drop.

"I view derivatives as time bombs, both for the parties that deal in them and the economic system." -- Warren Buffett

The $300 trillion holdings of derivatives by the U.S. banking industry has been all but forgotten.

The four-largest U.S. banks account for $240 trillion of that total, dwarfing their combined $750 billion in statutory capital! This sort of exposure in which notional derivatives are more than 300x the banks' net worth, as my friend The Credit Strategist's Mike Lewitt has written, "would be laughable if the consequences of a financial accident were not so potentially catastrophic."

To make matters worse, the passage of the $1.1 trillion spending bill passed this month (written by lobbyists and voted on by bought-and-paid-for legislators who probably neither read nor understood the complex spending bill) has kept taxpayers on the hook --through the FDIC -- for those derivatives (what Warren Buffett previously called "financial weapons of mass destruction.")

On any measure, the sheer size of these derivative portfolios pose potential risk to the world's financial stability. What we have learned from the past cycle is how opaque the exposure really is and how stupid and avaricious our bankers really are when allowed to venture into territories of leverage.

Whether it is energy derivatives or some other asset class, a derivative blowup in 2015 will serve to preserve the wise words of Benjamin Disraeli (who served twice as Great Britain's Prime Minister) that "what we have learned from history is that we haven't learned from history."

It will also harm our markets, once again.

The view of the U.S. as an "oasis of prosperity" and independent from the travails around the world will be debated, and possibly tested throughout this year.

"I know your Daddy's a sultan
A nomad known to all
With fifty girls to attend him, they all send him
Jump at his beck and call"

Originally published on Jan. 16, 2015 at 2:03 p.m. EST

Dissecting the Earnings

  • I ran my numbers on all of the S&P 500 constituents.

This morning we looked at the trend in the consensus operating earnings estimate for the S&P 500 and now I want to revisit that subject.

The summary is always important, but drilling down and examining the constituent components can also be illuminating. We need to answer important questions: Are the estimate cuts meaningful in their magnitude? Are a few bad apples, perhaps in the oil patch, creating all the turmoil? What group needs to turn to cause the trend for the full index to turn?

To answer these and other portfolio-threatening questions, I ran my numbers on all of the S&P 500 constituents and then sliced and diced the list to see what popped up. I focused on the 2015 EPS estimate for each name and how it has changed over the past three months. (The three-month window is somewhat arbitrary, but is a good starting point for the research.)

Conclusion One: The downward pull on the 2015 consensus is being driven by the oil patch, as one would expect, especially oilfield services (which Factset classifies in Industrial Services). Interestingly, consumer durables are also lousy. This group includes autos and the like. Tech hardware is solid, for reasons we will see in a moment. So, ex-oil, would the market earnings trend look so bad?

Before you get too excited, consider that the index is once again under the influence of an Apple (AAPL - Get Report) effect. Earnings estimates for Apple are ramping and its weighting in the index means that upward pressure exerts an outsized influence. This table shows the estimate trend of the largest weighted names.

If we pull Apple out of the calculation, the trend for the index suddenly looks far worse and tech hardware goes from a top-performing group to a fairly lousy one. So, if you want to play tech, what you really want to do is play Apple and ignore the rest.

Looking at the worst estimate changes, they skew toward energy. But most of the worst have such small weightings that they do not matter.

Similarly, the best estimate changes are generally not in names weighted largely enough to matter, with the exception of Apple and Amazon (AMZN - Get Report) . Removing the influence of Amazon does not change the S&P 500 trend too much, but retail trade suddenly is twice as bad.

My conclusions are two-fold. First, the estimate trend for the S&P 500 is worse than it appears, due to the positive influence of one stock, so the index could behave differently than the estimate trend might imply. Conversely, the index is being highly influenced by one group, energy, so positive trends in the other groups could influence performance more than you would typically consider.

At the time of publication, Kass and/or his funds were long T, JPM, DE, F, TSO, AA, although holdings can change at any time.

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.