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 had a lot to say about the ongoing Greek debt debacle, why Airbnb's valuation is full of hot air, and what the Federal Open Market Committee's inaction really meant.
Originally published June 16 at 9:12 a.m. EDT
"Manic moves and drowsy dreams
Or living in the middle
between the two extremes."
-- Hall and Oates, Out of Touch
According to my research, the first Greek default occurred in fourth-century B.C. when the 13 city states of the Delian League borrowed money from the Temple of Delos and defaulted on most of their loan. (There were only 14 inhabitants remaining on the island of Delos as of a 2001 census. Sic transit gloria!)
Greece's financial history is one of repeated defaults on sovereign-debt obligations. Most led to market dislocations, but limited or no long term systemic damage.
In modern times, the country has been in default for nearly 90 years -- or about half of its history as an independent nation.
There have been at least five separate defaults in the modern era. The first occurred in 1826 during the early days of Greece's fight for independence. Defaults then recurred in 1843, 1860, 1894 and 1932 during the Great Depression.
That said, Greece isn't the worst country in terms of repaying its bills. For example, Venezuela and Ecuador have each defaulted on their debts on 10 different occasions.
Still, I hear many in the media incorrectly suggest that Greece is a "one-off," and that a default would have a limited impact on markets.
Perhaps that was true in 400 B.C. -- or even in the 19th or 20th centuries -- but in today's flat, networked and interconnected world, no country is an island of Delos any more. History over the last four decades has demonstrated that increasingly, "contagion" is the natural consequence of country defaults.
As Greece begins to slip into the abyss of capital controls and default, we've already seen signposts of contagion as the bond-yield spread between Germany and other Eurozone states is widening.
The France/Germany 10-year spread has almost doubled in the last three trading days. European and U.S. equities have also begun to roll over, and Chinese stocks are also taking a spill.
Here is the sea of red in Greece's bond markets this morning. The lofty yields below (and the inverted yield curve they point to) underscore that the country has basically already defaulted:
MATURITY PRICE CHANGE YIELD
2 YEAR $62.978 -0.73 30.00%
5 YEAR $62.40 -1.79 19.57%
10 YEAR $49.75 -2.57 12.73%
As Peter Boockvar noted this morning, the Athens stock market is lower by more than 3% and down by 13% over the past three trading days.
Take it from me: Greece will eventually default, and Greece banks will fail.
Here's the sequence I expect:
- European central banks and the ECB will take meaningful hits and will implement a nonsensical scheme to deal with the writeoffs.
- Other banks (which are all leveraged) will also take writeoffs on inter-bank lending and repos.
- Berlin will blame Athens.
- Athens will blame Berlin.
Upon default, the euro could experience a beatdown and the U.S. dollar might rip higher. That will serve as a "tightening" move in America, placing pressure on commodities and emerging markets worldwide and exports and corporate profits here at home.
Treasuries will likely rise in price and drop in yield, while a decline in global stocks seems probable.
"There is a growing consensus that Greece needs the eurozone more than the eurozone needs Greece, and that a Greece exit would not have an adverse impact on the markets. I have a different view. I am of the belief that a Greece exit would be negative for the capital markets for a number of reasons, including (but not only) these:
- A redenomination of Greece's currency would have something of a domino effect on the sovereign debt of Italy, Spain and other weak countries in the Eurozone. Why would traders and investors want to trade or own Italian or Spanish debt if these countries too might ultimately exit the EU and devalue their currencies?
- An exit of Greece would raise the spectre that more extreme political parties in the weaker peripheral countries might gain momentum."
-- Doug's Daily Diary (May 27), Going Against the Grain on Greece
Most importantly (at least to me) is the possible contagious impact on Spain, Portugal and Italy -- where yield spreads will widen and yields will continue to gap higher, as I've addressed in the past. In the extreme, even the EU's existence could be in peril.
Sell-side brokerages interpret a Greece default -- their ideas are bountiful and their concerns are limited, as they see the problems as contained. But no good will come from Greece's financial problems in a flat, networked and interconnected (and, over there, a leveraged) world.
And in a world that already has liquidity issues, there likely will be other unintended consequences that we know not of yet today, as well as deep-rooted secular headwinds. Think, for example, about possible dislocations in the derivatives market.
My advice? Don't take Wall Street's brown acid, and err on the side of conservatism.
Tactically, as I've recently written before, I would favor the cash and bond-equivalent market sectors (REITs, utilities, closed-end municipal-bond funds, etc.) over cyclicals and industrials this summer.
In the broadest sense, my view remains that we're currently building a broad and important market top, and my baseline expectation is that we're now making a transition from bull market to a range-bound market.
To me, the next stage on both fundamental and technical grounds is a move towards a bear market/correction, which is coming into clearer focus.
"Gird for battle." (Hat tip to Sir Mark Grant)
Or as Hall and Oates put it:
"Broken ice still melts in the sun
And ties that are broken
can often be one again.
We're soul alone
And soul really matters to me
Take a look around.
You're out of touch
I'm out of time
But I'm out of my head
when you're not around."
How Outrageous Is Airbnb's Soaring Valuation?
Originally published June 18 at 9:25 a.m. EDT
And the malinvestment beat goes on.
According to The Wall Street Journal, Airbnb is raising $1 billion in a funding round that values the short-term-rental company at $24 billion.
That's higher than the $21 billion valuation of Marriott International (MAR), and only Uber has a higher valuation among startups.
Takeaways and Observations From the Fed Report
Originally published June 18 at 8:12 a.m. EDT
Here are my takeaways and observations on yesterday's Federal Reserve news:
- There was little new in the Fed's release.
- As expected, the Fed downgraded domestic 2015-16 growth prospects, delaying the inevitable rate rise to September or December. (Goldman Sachs and others have moved their predictions for the rate hike to the last month of the year).
- The Fed remains "data dependent," with an eye toward the doings at Greece and the nature of the economic recovery in the Eurozone.
- The central bank's last rate rise was way back June 2006. I don't expect the Fed to rush towards the next one, particularly in light of the global economic weakness. As a result, a rate rise should be contained.
- As Fred Hickey mentioned in his tweet (posted previously) the only time we seem to learn about a downgrade of domestic economic growth is when the Fed fails to raise interest rates and posts a new economic forecast. Ergo, the chasm between the real economy and asset prices continues to widen.
- For now, it's clear that the market continues to favor subpar economic growth vs. acceleration of growth, even though corporate-profit expectations have been revised dramatically lower over the last 12 months and consensus is still imperiled. In other words, bad economic news is still good news.
- I thought the main story yesterday was the retreat in the 10-year U.S. Treasury's yield, something I've been expecting this summer. I'm still of the outlier view that we've already seen 10-year Treasury yields' 2015 high, and that a move back towards 2.10% to 2.15% is likely.
- A lower-rate environment augurs well for better performance in bond-equivalent sectors like REITs, utilities and closed-end municipal-bond funds -- a variant view, I know.
- On the other hand, a lower-rate backdrop will put short-term pressure on bank stocks, which are asset sensitive (something I cautioned about this week).
- In light of steady stock futures this morning, the Fed release seems to have trumped continued corporate-profit disappointments announced after the close yesterday, such as those from Oracle (ORCL) and Jabil Circuits (JBL).
- There's more and more evidence of a Chinese stock-market bubble. As I wrote recently, I missed shorting the iShares China Large-Cap ETF (FXI). Shame on me!
For all of the reasons above (as well as for some other reasons), I continue to subscribe to the notion that we're in the process of forming a top on global equities.
Position: Long ETX, BKN, NQS, NPM, NAD, NMO, NMA, VPV, VCV, NQU, NPI, VGM, NRK; Short SPY