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DAILY DIARY

Doug Kass

Market on Close

  • How much to sell?

My mavens on the floor see a large net sale of $1.7 billion on the close today.

The largest sector sales are in financials ($300 million), energy ($285 million) and consumer staples ($240 million).

There are no net sector buys!

In terms of individual buys: 3M (MMM, $20 million), Marriott International (MAR, $10 million) and Avalonbay Communities (AVB, $10 million).

In terms of individual sales: Exxon Mobil (XOM, $70 million), Citigroup (C, $43 million) and Procter & Gamble (PG, $43 million).

Position: Long XOM and PG

Tell Me Something I Don't Know

  • Heard on the Vine. 

À la "The Chris Matthews Show" segment, Dougie, tell me something I don't know: Here is the biggest new thing!

Position: None

Recommendced Reading

  • Run, don't walk, to read Ed Ponsi's latest column.

Ed Ponsi "Scheme" has a very enjoyable column entitled "Kirk, Spock and Apple." 

Position: None

How Now, Herbalife

  • We have opposing stories on it price and availability to borrow.

On CNBC my friend/buddy/pal Brian Sullivan said he spoke to a hedge fund acquaintance and Herbalife (HLF) is easy and cheap to borrow.

I spoke to my prime broker and got a slightly different explanation. According to my prime, Herbalife is next to impossible to borrow and the yearly cost approximates 6%.

Position: None

All Out of TBT

  • The near-term outlook for bond yields and bond prices is unclear to me.

The 10-year U.S. note now yields 1.95% and ProShares UltraShort 20+ Year Treasury (TBT) is up by over $2 a share.

I have liquidated my short bond position based on my view that the near-term outlook for bond yields and bond prices is unclear to me.

Position: None

Play Apple for a Bounce?

  • The trade is not for me.

Four of my hedge fund pals instant messaged me over the last 60 minutes, all telling me they are buying Apple (AAPL) "for a bounce."

I don't see price as a catalyst, but the stock is certainly deflated.

That said, the trade is not for me.

Position: None

Backing Out of TBT

  • Over the near term, 1.94% resistance could be formidable.

I have just taken off the ProShares UltraShort 20+ Year Treasury (TBT) puts that I sold short yesterday and the TBT shares that I bought earlier in the week, as the 10-year yield approaches the previous high of 1.94%.

Over the near term, 1.94% resistance could be formidable.

Position: Short TBT puts

Compelling Viewing

  • CNBC offers some show-stopping programming.

I am told that stock market volume cralwed to zero during CNBC's version of "Jerry Springer with Limos" (Hat tip to Sir Arthur!). But I don't think Snooki and "The Situation" are being threatened yet!

Position: None

Defending the Dark Side

  • Short selling is a useful tool that can provide profits in almost any market setting.

Pershing Square's Bill Ackman is defending the role of short selling on CNBC's "Fast Money Halftime Report" now.

I spent some time in defense of short selling last October in "Cynics Are Simply Thwarted Romantics:"

Inigo Montoya (Mandy Patinkin): Who are you?

Westley (Cary Elwes): No one of consequence.

Inigo Montoya: I must know.

Westley: Get used to disappointment.

-- The Princess Bride

With what seems to be under the guise of sound twenty-first century central banking, the Fed's policy of providing ever more cowbell through the manipulation of interest rates and even possibly aiming at raising asset prices (such as equities), I continue to hear the following objections from many investors and traders:

  • Why bother selling short?
  • Isn't short selling a mug's game?

Over the years, in search of a variant view, my analysis has often led me to reject general expectations and orthodoxy. At times, this has put me at odds with consensus, as I am sometimes bullish when others are bearish and bearish when others are bullish.

Princess Buttercup (Robin Wright): You mock my pain.

Westley: Life is pain, Highness. Anyone who says differently is selling something.

-- The Princess Bride

Sometimes I'm right, but I can be wrong.

Markets are invariably moved by the unexpected or what the crowd is not anticipating, particularly at inflection points. Part of my job (as I see it) is to game whether the crowd is correct of view or wrong (and should be faded). Legendary hedge fund manager Michael Steinhardt once said that developing a variant view is what puts distance between ordinary and superior investment performance.

As we all know, the objective of establishing a profitable, non-consensus view is easy to talk about but hard to isolate in analysis and put into practice. Since the crowd is more typically optimistic, over the course of time, this pursuit has led me to specialize in selling short -- and, at times, I have maintained sizeable short positions (even as stock markets advanced).

It appears the basic objections to short selling are that:

  • when economies stumble, public policy (fiscal and monetary) comes to the fore and defends against an acceleration of economic and corporate profit weakness and often inhibits natural price discovery;
  • risk and reward are asymmetric in short selling;
  • the historic average annual positive return for equities is an insurmountable headwind; and
  • the exercise of selling short is analytically time-consuming -- long ideas are dished out on a silver platter by Wall Street's research departments and are usually confirmed by management, which is not true of shorts.

"I'll tell you the truth, and it's up to you to live with it."

-- William Goldman, The Princess Bride (the novel)

I couldn't disagree more. Financial concepts have their seasons, and the market's numerous dives over the past decade combined with the uniqueness of today's structural worldwide economic challenges and the increased frequency of black swan events suggest that, when timed properly, a great deal of money can be made on the short side.

Sometimes a market gets terribly overvalued -- as it did in the late 1990s, when investors adopted the notion that the DJIA was destined to reach 36,000 (i.e., that there shouldn't be a risk premium on stocks) or embraced the notion of a new paradigm (i.e., an uninterrupted economic boom), which created unique opportunities on the short side.

Other times (more often than the above condition), individual securities or sectors are embraced by market participants and levitated to unimaginable valuations, which also creates an opportunity on the short side.

Mainly, it seems to me that opportunities to challenge biases are much more pronounced and more easily identifiable on the short side, no matter what the market conditions are, mainly because those searching for such weaknesses are substantially in the minority. And few are comfortable with the short side, which makes for an inefficient market.

Count Rugen (Christopher Guest): Could this be a trap?

Prince Humperdinck (Chris Sarandon): I always think everything could be a trap, which is why I'm still alive.

-- The Princess Bride

Investors want to look on the bright side. Individual and institutional investors and corporate managements are invariably biased and bullish. How else to explain that nearly every money manager interviewed in the media is constructive? As well, consider whether you have ever witnessed a media interview with a corporate executive who was bearish on the future of his company. In my numerous appearances on CNBC, I have rarely (if ever) encountered such an animal. When is the last time you saw a downbeat CEO on Jim "El Capitan" Cramer's "Mad Money?"

Warren Buffett put this more eloquently in his description of corporate truth telling in a letter to Berkshire Hathaway (BRK.A/BRK.B) shareholders in the late 1980s. In explaining his absence of an interface with management, he wrote that "corporate managers lie like ministers of finance on the eve of devaluation."

As always, Buffett was ahead of the times.

That said, poor management, frauds and eroding company or industry trends always will be in fashion, regardless of market conditions. This occurs despite the appearance of short selling as a mug's game or as a losing proposition based on the headwind of longer-term positive historic trends in equity returns.

Finally, more than any time in history, it can be argued that the secular headwinds (e.g., fiscal imbalances, structural unemployment, debt-laden private and public sector balance sheets, etc.) to worldwide economic growth represent powerful gusts that challenge a smooth and self-sustaining trajectory of global economic growth.

These factors (and others) are likely to lead to a more tentative and inconsistent growth backdrop in which corporate managers will likely find it more difficult (than in the past) to navigate the currents.

In summary, short selling and hedging seem to me to be a necessity in an increasingly uncertain world. After all, farmers do it, oil exploration companies do it, miners do it, even property owners do it by selling forward with long-term leases.

Moreover, short selling creates portfolio stability and a hedge against the inherently positive bias of analysts, managements and even human nature. Rather than being a mug's game, I have concluded that short selling is a useful tool that can provide profits in almost any market setting.

From my perch, the construction of a short is almost as important as the short itself, especially given the asymmetric risk/reward, which provides investors with an opportunity to capitalize on short-selling opportunities with some degree of comfort. This can be accomplished by buying puts or, as I like to do, through purchasing out-of-the-money calls as protection against the short (and allowing us to define risk). This strategy also serves to buy time for the short catalysts to develop.

One should never be obsessed with short selling or any specific investment strategy, but given that there is little permanent truth in the markets and given the aforementioned factors that will likely weigh on global economic growth, I have concluded that short selling is a necessary part of an investor's repertoire -- or at least mine.

(Note: Twenty-five years old? Inconceivable! Happy twenty-fifth birthday to The Princess Bride, one of my favorite films.)

Position: None

Off DeMark on Apple

  • I continue to avoid Apple from the long side, and I continue to short Mr. Market. 

Tom DeMark, who's market timing work I respect immensely, got it very wrong on Apple (AAPL) recently (just as I have gotten the market call wrong over the past few weeks!).

Here is what Tom said back on Jan. 13 on CNBC's "Fast Money" regarding Apple's share price prospects.

That said, I hope his overall market call is better!

With Apple down by nearly $10 today, the company cedes its place as most valuable company in the world to Exxon Mobil (XOM).

High above the Alps, my gnome is hearing that Apple's shares are lower because of margin calls. (It's been a while for this catalyst, especially with regard to Apple.)

I continue to avoid Apple from the long side, and I continue to be short Mr. Market.

Position: Long XOM

Technically Streaking

  • BTIG casts a technical eye on streaks.

Here is some great technical market data from my friends at BTIG!

If the tape closes green today it will be the SPX's 58th streak of 8 or more up days since 1928 and the first such streak since November 2004.

  • 31 of the 58 have seen day 9 continue the streak
  • In general the tape is lower a week after the streak ends and this is the only time frame that produces negative average return.
  • While the further reaching data is bullish, it's important to note until you get out 3 months, the tape underperforms historical averages based on any random date.
  • 3 months out is the real sweet spot



Sources: Bloomberg and BTIG

Position: None

Breadth Check

  • Here's a whiff.

Below is the breadth at 11:00 a.m. EST:

  • S&P 500 -- 255 advancers to 238 decliners
  • NYSE -- 846 advancers to 962 decliners
  • Nasdaq -- 985 advancers to 1,021 decliners
  • Russell 2000 -- 801 advancers to 1,057 decliners

Volume on S&P is 1% higher than past 10-day volume, 8% higher than past 30-day average and 7% lower than yesterday for this time of morning.

Position: Short SPY and IWM

Wells Cuts Estimates for Caterpillar

  • It was only a matter of time.

Wells Fargo is cutting numbers on Caterpillar (CAT) now.

Position: Short cAT

A Few Words on Yahoo!

  • The time to buy it was months ago at $16 or less.

Over on Columnist Conversation, Bob Lang is buyingYahoo! (YHOO).

From my perch, the time to buy it was months ago at $16 or less.

I don't know how it will trade on the earnings report, but I do feel strongly that on a risk/reward basis it provides little fundamental value.

Position: None

Bad Breadth, Russell

  • Russell breadth turns negative.
Position: Short IWM

Netflix Brings Pain to Shorts

  • It's pure hell if you're short this name.

Netflix (NFLX) is another $20 a share higher, raining pure hell on the short-selling community.

See my comments this morning on  heavily shorted stocks.

Position: None

Positive on Procter

  • I will update my position later.

Jim "El Capitan" Cramer comments positively on Procter & Gamble (PG) in Action Alerts PLUS this morning.

I will update my position later.

Position: Long PG

New-Home Sales

  • New-home sales miss relative to expectations.

New-Home Sales

Source: Bloomberg

View Chart »View in New Window »

Position: None

Weak Data From Caterpillar

  • Expect the shares of Caterpillar to be lower today.

Caterpillar (CAT) reports weak December dealer statistics, with retail sales of machines down 1% and power systems retail down 2%.

Despite higher S&P futures, I would expect the shares of Caterpillar to be lower today (in front of Monday's earnings).

Retail sales of machines:

  • Asia/Pacific, down 7%
  • Europe/Africa/Middle East, up 4%
  • Latin America, up 14%
  • rest of world, up 2%
  • North America, down 6%
  • overall, 1%

Power systems retail:

  • electric power, up 4%
  • industrial, down 20%
  • transportation, down 11%
  • petroleum, up 3%
  • overall, down 2%
Position: Short CAT

From the Street of Dreams

  • Goldman Sachs gets downgraded by two firms.

Deutsche Bank and Citigroup downgrade Goldman Sachs (GS) Neutral.

Ford (F) was also downgraded to Neutral at Barclays.

JPMorgan Chase (JPM) was upgraded to Buy at Deutsche Bank.

Position: Long F; short GS

Judgment Day (Part Deux)

  • At 1.92%, the U.S. 10-year note is back up to the Jan. 3, 2013 high and the high of May 2012.

A better-than-expected German IFO (confidence) print (from 102.4 to 104.2) has pushed the 10-year bund yield 7 basis points higher, to 1.65%. This is the highest yield in four months.

The U.S. 10-year note is up a like amount (to 1.92%), back to the Jan. 3, 2013 high after the fiscal deal was announced and following the FOMC minutes from the December meeting that speculated about an end to quantitative easing. (The 10-year yield is also back to the high of May 2012.)

This is an important short-term yield level.

Position: Long TBT common; short TBT puts

Don't Chase

  • All the various risk-appetite indices are in extended territory.

Based on the futures, the S&P 500 will open at yesterday's intraday high.

The S&P's relative strength index is now at the second highest reading since early 2001.

The transportation index is up eight days in a row and its RSI is 94, the highest level since 1989.

All the various risk-appetite indices are in extended territory.

I have written this before over the last two weeks, but I will write it again: I wouldn't be chasing stocks here.

Price is what you pay, value is what you get.

Position: None

Economic Calendar

  • Here it is.

We have a light economic calendar today.

Position: None

Judgment Day?

  • The yield on the 10-year U.S. note is now 1.91%.
Position: Long TBT common; short TBT puts

Netflix Provides an Important Short-Selling Lesson

  • Shorting heavily shorted stocks can be harmful to your investment and financial well-being.

On a return to modest profitability, Netflix's (NFLX) shares soared by about 40% yesterday, providing an important short-selling lesson to investors and traders -- a lesson I have repeatedly delivered over the years in my diary.

Among my rules is that I will never short an equity whose short interest exceeds about 7% of the outstanding float.

In the case of Netflix, there are 55.5 million shares outstanding, but the float (non-insider shares owned by the public) is 48.7 million shares.

There are 13.15 million shares short, representing an unusually high 27% of the float.

This is a nonstarter to me and why I have never shorted Netflix -- despite, at times, having fundamental reservations regarding the company.

Another principle I have with regard to shorting is that I never short a stock whose short interest is over two or three days of average daily volume.

In the case of Netflix, the average daily trading volume (over the past three months) is 4.5 million shares. The 13.15 million shares short represent about 3x average daily trading volume. Again, this is a nonstarter.

If you must short a stock with a high short interest relative to the company's float, elect to buy puts and define your risk.

Otherwise, shorting heavily shorted stocks can be harmful to your investment and financial well-being.

I know. I have the scars to go with that experience!

Position: None

Dear Mr. Fantasy

  • The line of demarcation between economic progress and fantasy grows increasingly blurred.

Dear Mister Fantasy play us a tune

Something to make us all happy


Do anything take us out of this gloom

Sing a song, play guitar

Make it snappy

You are the one who can make us all laugh

But doing that you break out in tears

Please don't be sad

If it was a straight mind you had

We wouldn't have known you all these years

 -- Traffic, "Dear Mr. Fantasy"

Despite Apple (AAPL) and mixed fundamentals, there were more gains overnight, reversing early-evening futures weakness:

  • S&P futures up 3;
  • European markets up;
  • euro up;
  • crude flat;
  • gold down 4; and
  • 10-year yield up to 1.89%.

From my perch, the line of demarcation between economic progress and fantasy grows increasingly blurred as stocks have ascended for 10 out of the last 11 days.

Position: Long TBT common; short SPY common; short TBT puts
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-32.96%
Doug KassOXY12/6/23-16.60%
Doug KassCVX12/6/23+9.52%
Doug KassXOM12/6/23+13.70%
Doug KassMSOS11/1/23-22.80%
Doug KassJOE9/19/23-15.13%
Doug KassOXY9/19/23-27.76%
Doug KassELAN3/22/23+32.98%
Doug KassVTV10/20/20+65.61%
Doug KassVBR10/20/20+77.63%