KASS: 15 SURPRISES FOR 2012
This is always a fun annual read from hedge funder Doug Kass (via The Street.com):
“1. The U.S. stock market approaches its all-time high in 2012.
2. The growth in the U.S. economy accelerates as the year progresses.
3. Former Presidents Bill Clinton and George Bush form a bipartisan coalition that persuades both parties to unite in addressing our fiscal imbalances.
4. Despite the grand compromise, the Republican presidential ticket gains steam as year progresses, and Romney is elected as the forty-fifth President of the United States.
5. A sloppy start in arresting the European debt crisis leads to far more forceful and successful policy.
6. The Fed ties monetary policy to the labor market.
7. Sears Holdings declares bankruptcy.
8. Cyberwarfare intensifies.
9. Financial stocks are a leading market sector.
10. Despite the advance in the U.S. stock market, high-beta stocks underperform.
11. Mutual fund inflows return in force.
12. We’ll see merger mania.
13. The ETF bubble explodes.
14. China has a soft landing (despite indigestion in the property market), and India has a hard landing.
15. Israel Attacks Iran.”
What ETF bubble?
Exactly, what is that supposed to mean!?
“What ETF bubble?”
Easy to understand why Mr. Kass and his category hates ETFs: passive investment built mainly on a basket of ETFs have vastly outperformed “investments managed by smart people” in hedge funds so because sooner or later people will understand that people like Mr. Kass deserves to earn no more money than my barber…
He might be talking about the ultra and triple ETFs, which use derivatives as opposed to baskets of stocks. Some have been highly problematic and cause severe price erosion for long term holders and require necessary adjustments to make up for the erosion.
E.g., if an ETF is of the triple variety, it moves 3% to each 1% move in the market. If the market moves down 1% and then up 1%, it’s virtually back to where it started. The 3x ETF, however, will have regained less ground than the market, creating price erosion.
But the triple leveraged ETF aren’t even supposed to be held long-time for that exact reason, these are really only good for day/swing traders.
I guess I wasn’t clear. The issue is with the adjustments the providers have to make to the underlying derivatives due to price erosion. I’m a little fuzzy on the details, which is why I’m not being clear. I read something about it a while back. If I can dig it up tomorrow I’ll post it here.
Yeah I think it has to do with how the ETF shares come into being, which is very different from say mutual funds because if you buy from the fund directly there’ll be new money coming into the fund and new shares created for you, whereas with an ETF you can just buy shares others have provided – or as a large player and authorized participant just provide them yourself and pocket (arbitrage) profits.
On the other hand I know some guys who consistently take out profits out of TZA / TNA (triple leveraged Russel 2000, mostly based on an index swap as underlying instrument), but these are day traders. They would probably be wiped out if they held as much capital in a leveraged instrument through the year. Of course you can’t trade swaps as a retail trader and most Wall St. people would like nothing more than restricting retail to long stocks.
On the other hand, if you held TNA short from January 3 at 76.21 and covered it yesterday at 45.57 you would have made a nice profit (30.64). Then you could have gone and hedged it with TZA which moves in the opposite direction, sold short on January 3 at 46.83 and bought back yesterday at 26.10 (+27.73), with no directional risk. I believe these can even be borrowed? What am I missing?
“If the market moves down 1% and then up 1%, it’s virtually back to where it started. The 3x ETF, however, will have regained less ground than the market, creating price erosion.”
yes, but in an up market, the 3x does better. eyes wide open and buyer beware.
Read the full article. iMO, it is pretty good. Lots of detail backing up his rationale.
I like his number 1 (market may rally hard. Buy out of the menu calls to profit in case this happens) , number 9, financials may do better than expected (buy JPM XLF) . I also like 15 (buy XOM and /or XLE – says schlumberger). On 14, even though I vote for a china hardlanding, if they engineer a soft landing once again, there may be a huge short covering rally (buy XLI calls)
Kass has a screw loose in thinking Bush 43 can lead a bipartisian coalition. Bush 43 destroyed his reputation with many conservatives after his half-truths in selling the Iraq war, the bailouts of big banks, medicare expansion, etc.
Bush 41. George senior.
Europe is real, yet Kass seems to brush over it. There is an eerily contrived faith that leaders will just get together and fix it, like it’s just a matter of a final final final meeting. If China soft lands, then we need to convert to communism because that will be proof that a centrally controlled economy trumps free market capitalism. Our market predictors do not carry a batting average, like MLB. We need the equivalent of baseball cards for these guys. My favorite statistic… slugging percentage.
@ mercator
agreed. kass seems a bit too bullish, as if he needs to keep his contrarian stripes that way.
All-time high? I think Mr. Kass is in for a surprise himself.
Kass said the dip in early October was a good buying opportunity. He was right about that. Haven’t followed him long enough to know his overall track record though.
I keep trying to figure out if this end of the year bounce is a repeat of 2010. We’ve got ECRI and Hussman who are predicting a 2012 slowdown and a growing number of analysts predicting acceleration. The growing number of analysts predicted acceleration in 2011. That didn’t work out so well. They could be right this time.
I’m with Cullen that it will be “muddle through”, but I think we have a good chance of recession in 2012. Europe, China, Federal/State budget cuts, continued deleveraging, and high energy prices are headwinds. The federal deficit is about the only tailwind I see.
Maybe I’m too pessimistic, but I don’t see many potential drivers of sustained economic growth.
He claims a 50% hit rate for 2011 – but appears to give himself a passing grade when his prediction was only half right – gold was to go down but with high volatility. Due to the volatility he was “right”. He also predicted a flat S&P – kudos so he was right, but predicted low volatility – but still right despite some wild, wild swings.
Meanwhile last year and 2012 have opposing predictions – so by being so generous in his self grading, and predicting opposite outcomes, how can you not get 50% right? For example, I don’t see how the economy and stock market improve so dramatically and Obama does not get elected. So if he is right about the economy he is likely wrong about Obama, and visa versa, so a 50% hit rate.
He is also not an MMTer given his 2011 bond vigilante prediction. And in general it seemed when he was right it was for the wrong reasons. To his defense, he does call these “surprises” which one would assume a lower hit rate. But he didn’t really get 50% right in 2011 so I doubt his track records claims for prior years too.
Cullen,
Would love to hear your thoughts on SocGen’s recommendations for the next year:
http://www.scribd.com/doc/74069786/Socgen-Patience-Bad-News-Will-Become-Good-News
Do you think a post on this will be useful for your readers?
Lots of good info in the SocGen piece – agreed with almost all of it. Thanks for sharing exertia.
Quite a bullish, yet realistic, list. Good read.