November 14th, 2012

The Contra-Kass Trade

I’m concerned.  Ever since having made his “generational low” call in 2009, I seem to have always be winding up on the opposite side of a trade by Doug Kass, the head of Seabreeze Partners and prominently featured “talking head” on Jim Cramer’s website and show.  For example, in April 2011, when the S&P 500 was 1312.62, I wrote in a post entitled “Kass Today’s Broken Clock?“,

““A week ago, I [Kass] wrote a column, “Apocalypse Soon,” which outlined, in a comprehensive way, the ingredients for a market fall.” ……. he wrote that a market correction loomed ever closer.  His reasons are a perma-bear’s litany of all the bad things wrong in the world, in financial markets and in government….

 

The market will eventually correct but it could be from a level 10-15% higher than when the pundits first made their calls. You can be ultra-conservative and allow to fear drive you to the sidelines now or you can try to benefit of a move higher ahead of the reversal, whenever that might come.  I’ll stick to my discipline and move to the sidelines only when the market tells me its time, not when the pundits do.”

In August, 16, 2012, Kass stuck to and reiterated his bearish call by adding a political dimension by suggesting than “Ryan’s selection will lead to Obama’s reelection and driving the the market down to 1300 (interestingly, he started his pitch by using an invalid and inaccurate technical view  of the market) because of Ryan’s conservative history and his known hostility towards Bernanke.  Kass believes that the highs for the market have already been made. (see my Scaling the Wall of Worry) .

To his credit, the market did drop to 1074.77 during the Euro Debt Crisis by the following October but subsequently recovered and went into bull mode pushing the market to 1474.51 on Sept 14,2012.

What worries me is that for some reason Kass has turned bullish.  In a recent long, multi-page blurb offered as a “preview” post on Cramer’s membership site, Kass reversed his previous bearish view and claimed “Current Fears are Overblown“.  His argument is that

“…recent signposts suggest a somewhat more reduced concern over the other cliffs and over the market risks served up by a rising tax rate on dividends and capital gains.  These signals, when combined with central bank easing around the world and the recent stock market slide, suggest that the current fears are overblown, that the rationale behind a meaningful market downside has been removed and that the market’s risk/reward has improved.  I am more upbeat than I have been for quite some time, and, while not “over my skis” long, I have increased my net long exposure as a manifestation of that increased optimism….there is likely to be an upside to my fair market value calculation in the months ahead.”

He spends the next four pages supporting for his change of heart on the various risks the market’s been facing over the past year including: China weakness, Euro debt crisis, “Fiscal Cliff”, earnings disappointments, etc.  The S&P 500 closed that day at 1374.53 (it closed today at 1355.49).

What sent shivers down my back is that his turn to optimism comes just as I have become more bearish.  As I wrote to my Members this past weekend,  we’ve been anticipating, watching and reacting to the correction since the end of September:

9/23: “For the S&P 500 to be able to make new highs, there needs to be a convergence, sort of a reversion to the mean, a narrowing of the performance difference between the best and worst performers. I hate to say this but it sort of reminds me of the top of the Tech Bubble when everyone was piling into tech stocks and all other stocks were left languishing and looking for investors’ money flow.”

 

10/7: “I’m noticing two indicators pointing to the idea that the “herd” may be ahead of itself and in need of additional time to gather strength for the next push to higher levels – the market tends to correct whenever it has surged too far ahead of where it’s been over the prior 300 trading days. That’s not to say that it will crash; but it will be pulled back to the moving average level…..The OBV has trended lower as the market has hit recent new highs. Without volume support, it’s hard to see the market continuing to advance.”

 

10/14: “rather then betting one way or another when the odds of winning are no better than 50/50, it doesn’t seem to make sense to either sell or buy in the face of the uncertainty. Any single pundit’s prognostication is dismissed as just one more biased, slanted sell-serving position. Lumping all investors together finds that they are evenly split …. hence market stagnation. There’s going to be plenty of action coming soon and time to react. This is when patience pays off.”

 

10/21: “Even though all the moving averages are still trending higher and are in perfect alignment, a continued rapid erosion in the average to under the 200 day moving average at around 1380 (the “Death Cross”) would send an extremely bearish alarm.”

 

10/28: “we could be in trouble if the market crosses below the 200-dma, currently just 21 points below Friday’s close, when the Market Momentum Meter immediately flashes bearish Red and I’ll be then forced to consider reducing the Portfolio’s exposure to risk by 25-40%.”

 

11/4: “1) changes will need to be made in what we’re invested in and how much to have at risk and 2) our decisions will have to be made and acted on much quicker.”

My proprietary Market Momentum Meter has been signalling bearish Red and I have moved my Model Portfolio from 83% invested down to less than 60% invested.

Kass may have turned more bullish, but my indicators point to a risk of substantially lower prices if certain conditions materialize.  I hate to be on the opposite side of a trade by someone so well-respected as Doug Kass.  I hope he’s right but, based on his track record over the past year and half, I have to ask, how can someone’s market timing be so bad?

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