Bear Case for Retail; Beware the Cult of Momentum: Best of Kass

Doug Kass
August 18, 2013

NEW YORK ( TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

Among the posts this past week were entries about the retail situation and the cult of momentum.

Please click here for information about subscribing to RealMoney Pro.


The Bear Case for Retail
Originally published on Friday, Aug. 16 at 7:58 a.m. EDT.

In "Retail Faces Defining Week," Jim "El Capitan" Cramer outlines his concerns about the retail sector.

I am in complete agreement.

On July 15, I initiated a short in the Market Vectors Retail ETF -- I also shorted Home Depot and Lowe's on July 25, both of which I foolishly covered on Aug. 1.

I feel confident in this negative sector view based on the following observations:

The recent weak retail sales and profit guidance from Macy's , Wal-Mart , Polo Ralph Lauren and Nordstrom are clear signals that we should expect less-than-consensus personal consumption expenditures in the second half and that retail stocks will likely suffer. And the mix change -- that is, strength in durables (hard goods) and weakness in non durables (soft goods) -- augurs poorly for future retail sector profitability.

At the time of publication, Kass was short RTH.


Beware the Momentum Cult
Originally published on Thursday, Aug. 15 at 1:32 p.m. EDT.

Beware of those who worship at the altar of price momentum.

Because, in the main, they are a fickle bunch of lemmings.

I am sorry to be so blunt.

Simply watch CNBC/Bloomberg or read Tweets and daily newsletters today, and you will find even the most glib and self-assured bulls turn on a dime when stock prices move south. It's almost as if they had no memory of what they said or wrote in the day or weeks before!

Indeed, last night I received an email from a prominent "talking head" and good pal (I will not name him out of the respect I have for him over the years) who basically ridiculed the logic and conclusions in my "Top 10 Reasons Why the Market May Have Peaked for the Year " post from Tuesday. He actually implored me to change my mind.

Well, today, he, too, turned bearish.

I recently wrote about the growing self-confident bullish investment community.

Unfortunately, most of the lot are technically oriented day-traders who never even looked at the companies' balance sheets or income statements before exclaiming their enthusiasm for the issues/stocks. They are mostly trend-followers who worship at the altar of price momentum.

Following prices and gazing at charts makes for an easy, simplistic and necessary strategy for a business commentator, strategist or investor who spends much of his time preparing for media engagement

This is why it is important to do your own homework -- as Jim "El Capitan" Cramer (who is a clear exception to my characterizations above!) implores you to -- and come to your own independent investment conclusions.

And the theme of this column also applies to my musings as well as the others!

  • Most important, the U.S. savings rate is at a more-than-five-year low. In other words, the 2012 and early-2013 strength in retail sales has borrowed from future retail sales.
  • Over the past few months durable purchases (autos and homes) have been relatively robust while apparel has been weakening. The former purchases are typically financed while the latter are not. This suggests to me that personal tax rate hikes, stagnating real incomes, insecurity over the economy and the jobs market are beginning to take a toll on the average Joe, especially when he needs to pay cash and can't finance a purchase. I have been trying to short VF Corporation , as a high-priced proxy for the apparel sector all week and will continue today).
  • The retail sector has outperformed the market over the past several months and is vulnerable.
  • Higher interest rates have caused a collapse in refinancings, which has historically served to buoy household income and spending. This is occurring at a time when incomes are stagnating while the costs of the necessities of life are increasing (what I have described in Barron's as the screwflation of the middle class). With interest rates rising, I expect this contribution to household incomes to deteriorate further.
  • The most important headwind to the consumer is rising gasoline prices, which will press the consumer's real income more.
  • Listen to Citigroup's second-quarter conference call in which the bank expects weakening North America consumer business.
  • Finally, retail optimists continue to point to aggregate jobs growth. My response is that the job growth is occurring in low-paying and temporary jobs (i.e., this growth is of low quality). Just look at the average hourly earnings in the last BLS report; they were down.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.