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Kass calls a top, checklist



August 27, 2009 – Comments (10)

Recently on Doug Kass, who made an eternal name for himself by calling a bottom in march in a post titled "bottoms up, mr. market", and who made a call, back in march with the S&P in the 700s, that the market would ramp to the 800's quickly and eventually reach 1050.  I guess if he plays it right he could look pretty smart here...  pretty smart indeed!  However since the S&P hit 950 in late July he's turned very bearish and been wrong quite a bit.  By nature, I think, after reading his stuff for a few months, Kass feels a need to go against the prevailing sentiment.  That works often, and is probably quite a bit better than going with the prevailing sentiment, but ...  Fair value and not opposite-the-current-sentiment is probably the best thing to do. 

As for me I've sat down and taken a long hard look at each of my major holdings, and done some hedging ranging from none to significant.  For example, I hold casino stocks BYD, MGM, WYNN, and LVS with practically all of the holding bought at prices far, far below today mostly in late february/early march.  Alot of my casino holdings are in the form of calls.  I've executed all of my WYNN calls and then hedged them significantly.  Basically, I can make about 20% from todays prices on WYNN and lose little.  (I use options to hedge).  I've hedged all of my LVS by selling covered calls to raise about 20% in premium of todays pps.   This leaves me with considerable upside in LVS, and reduced downside.  Its a semi-bullish hedge.  Same for BYD.  MGM is unhedged for the most part as i think MGM is one of the most intriguing buys on the markettoday and may ultimately wind up worth $20.

I've hedged my bank shares as well.  BAC, USB, WFC, and GRNB are my bank shares.  GRNB isn't hedgeable to any significant extent, USB and WFC I've collared (google options collar to see) and I've sold covered calls on all my BAC.  At prices well above today, mind, but also at prices that I think represent roughly the upper range of fair value for BAC.  

I've hedged my ASH by selling covered calls that've raised about 15% on current prices for roughly 50% upside.  My DOW is largely unhedged, but I think, frankly, that DOW is worth quite a bit more than curretn PPS and has migrated back to its former fairly stable, blue-chip status.  So i'm ok with letting DOW ride.  

My largest holdings are insurance companies.  My HIG is very hedged, my XL is semi-hedged, my GNW is semi-hedged, and my CNO is not hedged at this time.  

BDCs (business development companies) are one of my largest stakes.  And essentially completely unhedged.  This isn't because I think they will run forever, but rather because they are in essence unhedgeable.   If my best friend walkedinto the room right now and said "name one stock to put all my money in" I'd say ARCC.  Sameif my parents asked, probably same if someone held a gun to my head and made me pick just one.  That doesn't mean I think its the stock that willgive the best return in the next 2 years...

I think that stock is RJET.  RJET is one of my top 5 holdings and i'm only up 25% or so on it, and i'm completely unhedged.  RJET, in my view, and I can often be very wrong in life, is going to 20+

BZ is one of my top 10 holdings, and it isn't hedgeable, and I can't unload my shares (which are alot I fear) in 2 days w/o driving the price down, but oh well.  I think BZ has good management, is well levered to an improving economy or an inventory re-stocking bump, and will benefit from its rleatively rapid paydown of debt.   RCL is hedged.

USG is basically unhedged.  I think USG will go far higher in the course of time.  I'm willing to sit and wait.  And see it go to 10 again, in which case I will again be a buyer.  Best company in an eternal industry.

Etc, etc, etc, .  I now have considerable protection should the market move down.  I am still definitely net long, but the pain of a move lower is considerably mitigated, and I will win in a flat market from time decay on short calls.  

I am comfortable with that.  If the market is flat for the next year time decay will bring me above my goal of 2-3x my money in this crash/rebound, if the market goes up my hedges stand to limit me to 4-5x my money (i'll take it, trust me), and if the market dips I stand to suffer a whole lot less than I would otherwise.

Only time will tell if these moves are intelligent or folly,...  but I'm comfortable with them as I type here tonight.

My next blog will be about a potential benefit of debt held by a company that you are considering buying stock in.  Yes, I said it, and I expect some flack, debt can be good.  :)

10 Comments – Post Your Own

#1) On August 27, 2009 at 11:59 PM, checklist34 (98.66) wrote:

To sum, I think that caution and prudence are in order now.  There is no doubt that stocks are no longer blindingly cheap.  I think fair value on the S&P lies between 1100 and 1200, quite a way from here, but ...  but stocks are undeniably no longer extremely cheap.  One must be selective to find stocks you could call very cheap, very selective in fact. 

I do think some stocks are good buys here.  RJET is my personal favorite, followed by stable high yielders including NLY (I don't own NLY, btw), ARCC, AINV, PNNT, PSEC, HTGC, FSC (I own alot of all of those).  MGM is intriguing...  There are no doubt 100's more stocks that will appreciate alot from here, but I certainly don't know about every stock or even most of them.  

But this is not the time to go all in recklessly, that time was late February and early MArhc.  :)

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#2) On August 28, 2009 at 12:03 AM, checklist34 (98.66) wrote:

I mis-typed in my first post.  Kass called a top at 1038.  I don't know if I agree... I think the market drifts towards 1100 this year (as i've posted before). :)

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#3) On August 28, 2009 at 1:22 AM, awallejr (28.38) wrote:

Well I wish you luck on RJET.  Personally I would never touch an airline.  I do think the "easy" money is over and we are moving into the next leg of the bull market (yes bull MARKET, not merely a bull RALLY).

Next 2 months will be telling.  Almost everyone is expecting some kind of selloff come September (myself included).  The only question is how far and how deep.  If you have dry powder on the side, I  submit the time to deploy it is fast approaching.

Of your BDCs I do like PSEC the most and even own that in real life.  I like ALD as a long term spec play too.  Would be a buyer under $3.

I still urge oil holdings simply because they play into multiple scenarios (high inflation play, decent world wide recovery play, weak dollar play, declining supply play).  There are still alot of undervalued companies in this field.

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#4) On August 28, 2009 at 1:30 PM, sentinelbrit (57.73) wrote:

Great blog! Just as the market over-reacted to the downside, it can do so to the up-side. I am surprised the market has risen so much - but I don't think we are at a stage of euphoria in terms of sentiment. I read Kass as well and have found him to be a good reader of market sentiment. Re Kass - he has been bearish since about 930 on the S&P. His main premise is that the chickens are going to come home to roost given the consumer excesses of the last decade and the growing indebtedness of the country's finances. It's hard to argue with him but in my experience economic ratios and conditions can remain extended for years without the market taking the slightest bit of notice. I don't buy all the scare mongering regarding China and the dollar. It has seldom made sense to base investment decisions on such matters.


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#5) On August 28, 2009 at 6:33 PM, checklist34 (98.66) wrote:

Awall, ALD will be a "going concern", and I agree about buying below $3 and certainly $2.50 if it gets there.  I'm holding a modest position bought at the march lows.  At the march bottom I made my biggest holdings BDCs with ALD, MCGC, ARCC, AINV, and... ACAS the focus.  ACAS was the largest position.  ACAS has not done as well as the others since and remains in a precarious position.  I still think ARCC is a great buy today and AINV as well (though less than ARCC).  MCGC is also worth buying under $3, very similar overall situation to ALD.  I like PSEC alot and hold quite a bit of it.

Whats your favorite oil play?  I have several times looked into it... only to get confused.  I've come to understand the situation at BDCs and insurance companies far, far better than I understand the oil world.  Chemicals are a big stake just because of a huge stake of ASH bought in jan/feb/early march.  

I wouldn't touch any airline, including LUV, with a 10 foot pole...  except RJET.  :)  They recently beat out LUV in an auction for Frontier despite having a 25x lower market cap at auction time.  They got frontier and midwest for practically nothing.  

The resulting entity now has a price/sales of about 0.1, a price/earnings based on RJETs 4 year averaged earnings BEFORE the aquisitions of about 5 (thats good), no apparent risk of bankruptcy or large financial problems...

And frontier itself has made $28M in the last 2 months.  The total market cap of RJET is about 300M.  So combining Frontier (now profitable for 9 straight months in bankruptcy) and RJET and the estimated 20-50 million in cost savings ... in a good case its possible to envision a p/e of 2 or less at todays prices for RJET, in a bad case its difficult to come up with a way that the p/e is higher than 5.  

We'll see, and everybody will get one really wrong sometime in their life, but... RJET traded itself above 20 18 months ago, Frontier + RJET has the potential to be at minimum twice as profitable.  Management seems talented, transparent, and competent. RJET did not previously have exposure tooil prices, they do now.  RJET was not previously in competition with its customers, it is now.  Those are some potential headwinds.  LUV could get all bent and try to run RJETs new aquisitions out of the market... 

We'll see.   But by and large the upside seems considerable and the downside seems fairly limited at todays prices. 

Everybody can blow one sometimes, but I don't think this one is my time.  

I blew it on ACAS...  dammit.  I picked it as my #1 BDC buy at the bottom and its turned out to be the one in the worst shape.  Oh how I wish those ACAS shares could convert to MCGC, ARCC, ALD shares w/o me having to pay the tax man half a kidney.  I have some thinking to do on that one.


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#6) On August 28, 2009 at 6:35 PM, checklist34 (98.66) wrote:

btwawall, I really hope you are right about a bull market.  My bullish hedges...  would work out really well in a non-violently up market.  As in in a market where we crawl and bounce and creep slowly up instead of these epic breathtaking thrusts. 

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#7) On August 28, 2009 at 7:16 PM, checklist34 (98.66) wrote:

brit, good comments.  I think Kass tends towards perma-bearishness, I'm not calling him a permabear, but if we rated investors and their general sentiment (say their mean or median sentiment) on a scale of 1-100 with 100 being always every day super bullish and 1 being always every day super bearish he's probably a 30 or something.  I'm probably a 60 or 70, but I try to keep a grip on my natural bullishness and optimism. 

The fears about china and them crushing the dollar are silly in my view.  They have as much or more to lose than we do.  And they can't beat us in a fight, and they need us economically, etc.  

China and sentiment towards it is currently in a bubble in my view.  

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#8) On August 28, 2009 at 7:21 PM, awallejr (28.38) wrote:

Well everyone is simply expecting that come September the market is going to crash like it did last year.  But this time last year was a hell of alot different than now.  The one impetus of volatility I can see is in churning out of the weak stocks that had dramatic run ups into better quality.  But as for an outright crash, we aren't staring at 3-month Libor over $4 (is around .36 now).  We aren't facing potential GDP declines of 6% back to back future quarters.  We have seen the FED pump a ton of liquidity in the market.  Hedging might be prudent next 2 months tho.

As for ACAS I dumped it once I got my dividend and rolled it over into C and ALD.  That company is just bleeding too much.  And if it should happen to one day recover, ALD will be ahead of it anyway.

As for oil I hold BP for yield and ATPG for capital appreciation.  Any of the big integrateds will work in the long run. Blogged about ATPG.  I was pushing it when it was under $8 and is now over $11.  Might want to wait for a pullback, but if under $10 accumulate the sucker. 

I would be a bit careful on chemicals and airlines if you do see oil continuing to rise, since those sectors are sensitive to such price increases.

Another interesting spec stock I have been buying is LGDI.  This is a multi year hold tho. It is an Australian mining company that mines (well will starting end this year) phosphate rock for fertilizer.  Soros owns 10% of the company so it isn't a pump and dump stock.  Here's their website link:

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#9) On August 28, 2009 at 10:58 PM, sentinelbrit (57.73) wrote:

I sold my holding in FXI a few weeks ago. I think the China market is prone to extremes and its best to invest after a steep market decline and then sell after it has risen 30-40%. 


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#10) On August 28, 2009 at 11:07 PM, checklist34 (98.66) wrote:

hey awall, the very nature of hedging is being careful.  :)  I agree there is practically no chance we re-visit the march lows...  But I also think that the odds of moving up 10% and down 10% are equal if not favoring down...  We'll see, I suck at predicting the market.

Brit, I guess i haven't had or held alot of chinese stocks simply because I don't know anything about most of them, and frankly I just can't buy into something "everybody" knows is the right thing to do.  And I think "everybody" has been into china this year.  

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