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 discussed buying Potash and used a Grateful Dead song to illustrate why the market mechanism is broken.
Reasons to Buy Potash -- or Not
Originally published Feb. 25 at 2:56 p.m. EST
I have quoted subscriber Kim G in the past.
If I weren't so friggin' bearish on the overall market, I'd be *VERY* tempted to buy POT here. Reasons:
1) Dividend - 6.1% - is secure unless prices utterly collapse; unlikely IMHO. So you're paid to wait.
2) It's hard to imagine crop prices getting much worse; any weather event could drive them higher in a hurry which would benefit entire ag complex.
3) Stopped underperforming SPY in mid-Jan. This means that big money is no longer reducing weight relative to benchmark. (This is a fancy way of saying that it appears they are now only motivated to sell due to redemptions.)
4) Technically it finally (FINALLY!) appears to be bottoming. Appears to be in a sideways consolidation for the last month or so. Caveat: It's VERY early in this process, if that's indeed what's happening.
5) Nine-month downtrend line has finally been broken to the upside.
6) 30 DMA has flattened and is now rising ever so slightly. If this continues, 30 DMA will cross over 50 DMA shortly. Last time 30 DMA > 50 DMA was last March.
7) Earnings estimate trend appears to have flattened out, though it's early to feel confident about that.
8) On balance volume has improved somewhat.
1) Still trading at 1.5x book. While cheap, not SUPER cheap.
2) Stock had a similar sideways pause last spring, albeit 2x higher than today.
3) I still believe we are in an equity bear market, and given that view, I have trouble believing that POT has seen its ultimate bottom.
I'm tempted to do one of the following:
- Sell $15 puts in SMALL quantities
- Put in a BUY GTC order at $15.50 at SMALL quantities
Position: Long POT
The Market Mechanism Is Broken (Part Deux)
Originally published Feb. 25 at 8:37 a.m. EST
"Stephen prospered in his time,
Well he may and he may decline.
Did it matter? Does it now?
Stephen would answer
If he only knew how.
Wishing well with a golden bell,
Bucket hanging clear to hell.
Twixt now and then,
Stephen fill it up and lower down
And lower down again."
-- The Grateful Dead, St. Stephen
Like many kids of the late 1960s, The Grateful Dead was one of my lights to discovery when I searched for the meaning of life.
St. Stephen was one of those songs that I played over and over again back then. Robert Hunter and Jerry Garcia wrote the song, which appeared in 1969 on the Dead's third album, Aoxomoxoa.
The real St. Stephen was a Christian martyr who served as a deacon of the early church in Israel. An inspiring preacher, he converted many to Christianity. He was falsely accused of blasphemy, but during his trial gave a stirring defense of the idea of Jesus as lord and savior. His enemies closed their ears and stoned him to death.
The Grateful Dead song is partly about St. Stephen and partly about "soul searching" in general (excuse the pun). The song asked many questions ("Did it matter. Does it now?"), but not even a great martyr like St. Stephen could answer them.
Later on when I began to formulate my career choices, I moved from The Grateful Dead to the Wharton School. During that early 1970s transition, I learned finance and began to formulate my investment methodology -- no longer by interpreting Grateful Dead songs, but by questioning whether the market was efficient or simply a "random walk."
I concluded that fundamental analysis suited me well, and I rejoined the working world (and society, my parents would say). After graduating from Wharton two years later, I became a Kidder, Peabody housing analyst.
Markets acted differently in the 1970s. The guiding beam was fundamentals, which seemed to determine stock prices' future trend. Things were more predictable for decades, from 1972 to 2012. But let's fast-forward to 2016, where we have a market that's without memory from day to day.
A Distorted Market
Quants have filled the vacuum created by quiescent retail- and institutional-investor communities, while levered ETFs (another Wall Street "invention") have grown like, well, mushrooms. Both have taken a much more dominant role in our markets.
Unfortunately, the U.S. Securities and Exchange Commission has become effete. Regulators twiddle their thumbs as the New York Stock Exchange and Nasdaq sell customer orders to high-frequency traders, and ETFs exaggerate price moves. The markets grow ever more volatile and break down further.
A Distorted Monetary Policy
Monetary policy has become America's dominant tool for engineering economic growth. U.S. politicians grow increasingly partisan and unable to compromise on legislation, leaving fiscal policy inert. The Federal Reserve keeps short-term rates near zero, while other central banks travel into negative territory.
But as I wrote recently:
- Negative interest rates and wealth-tax talk aren't pro-growth to me. Instead, they're deflationary -- and if anything, talking about them only adds to the doom and gloom that's already floating around us.
- We need true tax reform that simplifies the system and encourages growth while paying down public debt.
Of course, no one likes being told these difficult truths. We're like St. Stephen of the Grateful Dead's song: "Wherever he goes, the people all complain."
Just as St. Stephen got killed for speaking out, many investors and traders have gotten beaten up by the volatility that's associated with distorted markets and monetary policy.
Confidence Ebbs and a Crisis Begins to Develop
"Lady finer, dipped in moonlight,
Writing 'What for?' across the morning sky.
Sunlight splatters dawn with an answer.
Darkness shrugs and bids the day goodbye."
-- The Grateful Dead, St. Stephen
Today's market is fragile at best. It's influenced by strong deflationary forces that have conspired to reduce prospects for global economic growth and worsened the corporate-profit outlook.
And at worst, the market has been completely broken by the dominance of quants -- who worship at the altar of price and are agnostic to balance sheets, income statements and private-market values.
Either way, fiscal inertia, a dependence on monetary policy and the quants' dominance and influence have materially expanded the market's volatility and unpredictability. This eats away at confidence in a cumulative way that I can't overstate.
"Did he doubt or did he try?
Answers aplenty in the by and by.
Talk about your plenty, talk about your ills,
One man gathers what another man spills."
-- The Grateful Dead, St. Stephen
Navigating the market with a modicum of confidence (an essential ingredient to successful investing) has been abandoned. Or, as Jerry Garcia put it in St. Stephen:
"Fortune comes a crawlin', calliope woman
Spinning that curious sense of your own.
Can you answer? Yes I can,
But what would be the answer
To the answer man?"
The lyrics in St. Stephen seem to reach some sort of conclusion about the questions they pose, but then they undercut it. The determined declaration that "St. Stephen will remain, all he's lost he shall regain" is followed by a verse that ends with an answer to a question that's then questioned itself: "But what would be the answer to the answer man?"
For Wall Street, there seems to be no answer or near-term solution to the structural issues that have poisoned our markets these days. Meanwhile, the odds of a global recession grow, as Citigroup (C) wrote in a research note:
"We are currently in a highly precarious environment for global growth and asset markets after two to three years of relative calm. ...
The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies, a large increase in the uncertainty about the advanced economies' outlook (notably for the U.S.) and a tightening in financial conditions everywhere."
Fundamentals remain poor, while concerns about a Chinese structural and cyclical slowdown and Beijing's unsustainable currency regime are rising. Meanwhile excessive leverage and increasing regional risks (such as the risk that Britain might exit the European Union) are additional and growing concerns.
The Bottom Line
Global recession risk and the market's dependence on quants and easy monetary policy could be a toxic cocktail for stocks.
Our market without memory will remain a difficult place to navigate in 2016. And the structural problems above are likely to stay with us for some time, until a deeper bear market shocks authorities into action.
For now, as I expressed in Wednesday's opening missive, I'm bearish on the S&P 500's prospects for both the short and intermediate term.