Kass's Tactical Investing Blueprint for 2015; Yellen the (Teddy) Bear: Best of Kass

NEW YORK (RealMoneyPro) -- 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 laid out his 2015 tactical investing plans and his views of Federal Reserve Chair Janet Yellen's cautious talk about stock valuations.

My Tactical Investing Blueprint for 2015

Originally published on May 4 at 7:25 a.m. EDT

I am negative on both stocks and bonds for numerous reasons, the most important of which is the likelihood that (for the fourth consecutive year) global economic growth and U.S. corporate profit growth will disappoint relative to expectations.

Secondly, the chasm between rising financial asset prices and the real economy is ever widening. Thirdly, with fiscal policy inert and uninvolved, the burden of engineering a more buoyant trajectory of growth has been placed on monetary authorities.

Unfortunately, zero interest rates and quantitative easing are now doing more bad than good, disadvantaging the savings class (which has caused consumers to hoard cash and reduce spending), encouraging malinvestment and retarding investment (capital expenditures) in plant and equipment.

I expect a negative return in stocks this year.

When the correction comes, it will probably be broad based. Especially vulnerable are social media stocks that incorporate unreasonable expectations for profit growth. In addition, numerous stocks are vulnerable to secular changes in the business landscape (typically caused by advances in technology).

On the bullish side, I remain positive on selected equities (especially banks) and with certain sectors (e.g. closed-end municipal bond funds). The latter group (funds) has cheapened coincident with the recent rate rise and I have expanded the size of my long exposure as prices have retreated. The size of the rate rise that I am projecting is not expected to be a hurdle to more fund capital gains (on top of hefty non-taxable yields) over the balance of 2015. On the other hand, the rate rise will be large enough to positively impact banking industry fundamentals.

Bonds -- in the U.S. and outside of the country -- are overpriced.

The core reason for my pessimistic view of the asset class is that the 10-year U.S. note yield is discounting an unrealistically low growth rate for real GDP domestic growth. In addition, signposts of a climbing inflation rate are growing more conspicuous and wage growth is beginning to accelerate, while energy prices, rents and other costs (of the necessities of life) are rising.

Outside of the U.S., bonds are particularly expensive.

But with the yield on the 10- year U.S. note having risen by almost 50 basis points in the last few months (to 2.12%), I would not be surprised if rates dropped back a bit over the summer.

We all recognize the importance of timing in our investment decisions.

It has so far not paid to be anticipatory of the adverse trends impacting both the stock and bond markets and I am holding on to the notion of being more reactive in strategy of expanding my short book.

My short exposure in stocks is still relatively low, particularly relative to my conviction of the negative outlook.

Though I believe that rates will back down in the near term, my short exposure in bonds is more sizable based on my current perception of reward vs. risk.

Position: Long BTT, ETX, BKN, NQS, NPM, NAD, NMO, NMA, VPV, VCV, NQU, NPI, VGM, NRK, TBF, short SPY, QQQ, TLT, German Bund futures

Yellen the (Teddy) Bear

Originally published on May 7 at 12:32 p.m. EDT

"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

-- Alan Greenspan, "The Challenge of Central Banking in a Democratic Society," Dec. 5, 1996

On May 6, numerous market commentators expressed the view that the Fed Chair Yellen's comments that the U.S. stock market and bond market are overvalued were wrong-footed or inappropriate.

Many went back to former Fed head Alan Greenspan's 1996 "irrational exuberance" statement given in a speech to the American Enterprise Institute. Over time, Greenspan's phrase made its way into colloquial speech as a catchphrase. Though few heeded Greenspan's warnings (as the market headed steadily higher after his speech), his phrase has been well remembered.

Some critically recalled Yellen's comments that biotech stocks were overvalued -- right before a sharp climb in the sector's share prices.

Both have now provoked a strong reaction in financial circles. Most of the responses have been critical.

I have a different reaction.

"I would highlight that equity market valuations at this point generally are quite high ... there are potential dangers there ... when the Fed decides it's time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates. So we're trying to ... communicate as clearly about our monetary policy so we don't take markets by surprise."

-- Janet Yellen, Finance and Society Conference (May 6)

Yellen didn't slam stocks as materially overvalued. She couched and qualified her comments (as did Warren Buffett last weekend) with the notion that stocks were highly priced but were not as expensive as bonds. In addition, Yellen said bond rates could be moving higher in response to future monetary policy moves.

In essence, she has prepared markets for more risk in the future.

To this observer, she had a right to say what she did and spoke her mind in a balanced and thoughtful manner.

Over history, multiple Federal Reserve chairs have expressed similar views on the capital markets -- as one of the Fed's stated mandates and missions (right on its Web site!) is to defend our economy against the emergence of systemic risk, to monitor systemic risk and to promote financial stability.

Finally and importantly, I find it hypocritical of the many "free market" ideologues who condemn Yellen's (and Greenspan's) cautionary comments while accepting the notion of the Fed's frequent positive comments (at capital market price lows or after significant market corrections) and those of other central bankers (Draghi comes to mind).

Stated simply, investors and traders can't have it both ways.

Position: None

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.

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