Technicals Vs Fundamentals; Banking on the Future: Best of Kass

 

NEW YORK (RealMoney) -- 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 put his money where his fundamental-trading mouth is, selling some Twitter calls when the technical charts say to buy them, and explained why banks are still on his Best Ideas list -- but with some caveats.

 


 

Technicals vs. Fundamentals (Twitter Edition)

Originally published Oct. 21 at 8:32 a.m. EDT

"Technicals vs. fundamentals" is an age old argument.

 While I use technical analysis sparsely (and facetiously call it "voodoo"), I appreciate that others use it as a predominant form of trading and investing.

I'm respectful of this and admire it when they succeed -- but "it's not for me," as Grandma Koufax used to say.

A good case in point is my take on Twitter (TWTR) . Morgan Stanley downgraded TWTR to Underweight this morning, and the shares are likely to take a small hit as a result.

But Bob Lang, one of RealMoneyPro's technically oriented contributors, wrote earlier this week that he liked Twitter's chart and was buying the December $30 calls for about $3.25.

As Bob noted: "For the better part of 2015, Twitter has been a name to avoid, showing massive amounts of negative flow indicative of institutional distribution." That's very correct, in my view.

But Bob also said: "With positive earnings and seasonal strength, we could see Twitter finally get back to the mid $40s by year-end." While I wish that were true, I feel it's unlikely.

So, as I've previously noted, I've been reducing some of my Twitter exposure.

Basically, I saw Twitter as getting a strong, temporary bounce and becoming overbought on the news of Jack Dorsey as new CEO and ex-CEO Steve Ballmer of Microsoft (MSFT) becoming a major investor.

But after those swift rallies, Twitter now faces some heavy lifting to turn around monthly average users, sales, profits and cash flow. This will take several quarters.

So, Bob got me to thinking: "Why not take the other side of his trade and write the same calls against my holdings?" Which I did at $3.20 to $3.30.

Bob saw an opportunity based on the charts to buy Twitter calls, and I saw an opportunity based on my views to sell Twitter calls. This respectful difference of opinion highlights how a technical analyst and fundamental analyst see things differently.

Stay tuned for the results of this "Technicals vs. Fundamentals" debate. We'll only need two months to see which view was correct in this case.

Note: I've maintained TWTR on my Best Ideas list because I believe that in the fullness of time, the company will execute its strategy properly and take advantage of the extraordinary opportunities that the Twitter platform provides.

 

Position: Long TWTR (small), Short TWTR calls

 

 


 

Bank on Banks for the Long Term (But Not Necessarily for Today)

Originally published Oct. 19 at 10:28 a.m. EDT

Citigroup (C) clearly lit a fire in the banking sector over the past week, but I prefer to take deep dives into profit results and quality rather than let the market's enthusiasm sway me. (Click here to see my more-cautious comments from late last week on the quality of earnings at Bank of America (BAC) for a contrast.)

While I'm keeping banks on my Best Ideas list, I think investors have gotten a bit of ahead on the group. Citigroup's strong share price has come in response to more company-specific factors than many realize, and Citi's improvement was really more about Citi Holdings than the bank's core earnings drivers.

In fact, I'm modestly reducing some of my bank exposure (including Citigroup) this morning given the sector's sharp move higher over the last two weeks.

I expect money-center banks to see some near-term profit taking in the face of faltering global economic growth, lower-than-expected interest rates and poor prospects for capital markets. All of those factors should mean the industry sees slightly slower earnings momentum than generally expected.

Other things to keep in mind:

  • Goldman Sachs (GS) and Morgan Stanley (MS) have underscored capital markets' weakness with their recent earnings releases. I expect this will continue for several quarters. That's why I recently sold my GS and MS positions and took both stocks off of my Best Ideas list.
  • The Federal Reserve's "Lower for Longer" interest-rate policy means investors will have to adjust the trajectory for banks' net interest income and margin growth a bit to the downside.
  • If the growth rate for both the U.S. and global economies continues to deteriorate, credit demand will be weaker.

As for Citigroup, its solid results stemmed in a large part from lower legal costs, improved credit experience and strong expense control -- $200 million below forecast, a core part of my bank thesis. On the negative side, FICC and Asia were weaker than consensus expectations.

Overall, Citi's operating results fell two cents shy of consensus after adjusting for asset sales, DVA and the reversal of some credit adjustments. Top-line results missed by a small $200 million (blame Asia).

But Citigroup's key improvement -- and what moved the stock -- was continued profits ($31 million) at Citi Holdings, which C is slowly winding down. As I've written in the past, profits from this division "unlock" the value of Citigroup's large deferred-tax asset. Importantly, Citigroup said it plans to sell $30 billion of Citi Holdings' assets by year's end.

These assets (6% of Citigroup's total assets) are now down to $110 billion -- 20% below the year-ago level. About $38 billion of Citi Holding's assets were under contract for sale at quarter's end, with 85% of that expected to close by Dec. 31. This should augur well for the bank's CCAR submission next year.

Citigroup trades at an 11% discount to net tangible book value and remains the most attractive of the money-center banks. But it's the improvement at Citi Holdings -- not the bank's core earnings drivers -- that captures my upbeat short-term enthusiasm for the stock. I expect the bank to only see modest earnings-per-share improvement (about 5% for 2015 vs. 2014), and I don't expect much in the way of gains for C's shares over the balance of this year.

Still, Citigroup's rate of growth should double over the next year. So, my 12-month price target for the stock is about $60 a share vs. about $53 today. But I can see a much greater percentage gain using a longer timeframe.

The bottom line: While banks' short-term outlook is mixed, the sector remains full of exquisite multiyear investment plays. Citigroup is on my Best Ideas List and represents my largest individual bank holding.

Position: Long C, BAC

At the time of publication, Kass and/or his funds were long C, BAC and TWTR (small), and short TWTR calls, 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.

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