He does have more old school individual picks from traditional sectors and he has a lot more of a short bias than I do (I believe his hedge fund is short focused), but at least from an economic point of view we seem to treading in the very same direction. Today he has an article on 'Buying the Financials' with a very in depth reasoning - I will put the Cliff Notes versions below and you can click on the link to read the whole story. His viewpoint is if he (and I) are wrong and this is just a shallow slowdown this is the time to get into these names. Myself, while I will be warming up to the investment banks later (ex-Bear Stearns whose whole business growth the past few years was based on mortgages), I can't really see this being a great bottom for an investing point of view. But as I wrote this weekend, for a trade...
For example, we are seeing some bottoming action in financials. I've scaled back my Ultrashort Financial (SKF) to almost nil due to this. In fact, for those with very short time frame (say 1-3 weeks), the exact opposite - Ultra Financial (UYG) might be a good trade - it closed Friday @ $36.51 - it would not surprise me to see something like this bounce 20% as we get an oversold bounce in this area. Same with some retail, homebuilder, and restaurant stocks.
For example, Citibank (C) is swirling with rumors of a 20K headcount reduction (as predicted; once management bonuses were secured, time to cut the people), $15B more of foreign capital infusion (as predicted), and a larger than even I expected writedown of "up to $24B". And the stock is up. Hence, my point that much of the bad is 'priced in'. (for now) As an aside I wrote in December that investors apparently were immune to these (yawn) $4B, $5B type of writedowns - I mean what is a few billion among friends. But $20B+? Now that's impressive!
Anyhow, the marketplace is adjusting and while I think the consumer slowdown shoe to fall (which won't be as drastic as the mortgage mess), is still to come - that will affect the traditional banks and lending organizations more than the investment banks. Hence, why I still find the traditional banks to be more of a trade if one is so inclined. Here are Kass' rationalizations:
- On Thursday and Friday, I covered all of my longstanding shorts in the financial sector. That includes positions in brokerages, banks, mortgage originators and mortgage insurers. Last week, I described the most difficult issue that investors face today: To what degree have market prices discounted the emerging fundamental weakness?
- We seem to be moving in the right direction. For the first time (coincident with the recent drop in share prices), a discounted cash-flow model today, based on my consistently below-consensus 2008 S&P 500 profit forecast of $80 and other reasonable assumptions, produces an undervalued market reading.
- Anecdotally, even the formerly "Liebnetzian" mood from Larry Kudlow's band of merry men, to judge by when I appeared on Friday night's "Kudlow & Company," is growing more cautious. And so too is the formidable Ben Stein backing off of his previous and unadulterated optimism.
- Permanent capital is being replenished.
- Government policy will not be standing still.
- The seized-up credit markets will not be a permanent condition.
- Credit writedowns will likely peak in fourth quarter 2007.
- Many managements have been turned over -- and more will be in the near term.
- Business franchises are intact.
- Financials are statistically cheap against sustainable earnings.
- Financials have dramatically underperformed relative to the S&P 500.
I do agree with the above positives although I am not sure these financials are as 'cheap' as they look. Very importantly, the LIBOR rates which were a major problem we discussed in the late fall and early winter have started to act more normally once the Fed starting doing their special TAF auctions (originally there were going to be 4; now its been changed to 'unlimited') and the HALF a TRILLION European Injection [LIBOR Rates Plummet on Half Trillion Infusion by ECB]. So these are net 'positives' for the worldwide (namely US and UK) financial system, all at the small cost of massive devaluation of US dollar, and tremendous inflation. So we save the bacon of the banks at the cost of all our purchasing power being decimated. Sounds like a win win! Ok, well not so much.
No position
