Among the posts this past week were entries about a potential near-term rally, a potential positive for Altisource Residential and Janet Yellen's nomination to head the Federal Reserve.
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The Near-Term Game Plan
Originally published on Thursday, Oct. 10 at 9:46 a.m. EDT.
I am expecting the market to rally irregularly over the next few days, with the SPDR S&P 500 ETF Trust trading back into the $168-$170 area (close to the early-August high).
I plan to be a scale seller of my longs into this -- in fact, I halved my SPY long rental at $167.30 earlier this morning, and I just sold the balance of the position (because we can't predict the future with precision!).
I expect the market to peak a day or so before an inevitable budget and debt-ceiling compromise and then to sell off on the announcement as it becomes obvious that the agreement will likely be brief and incomplete, with many more fiscal deadlines between now and year-end.
As we move full swing into the earnings season, I anticipate that the market will have a downward bias (principally a function of an ambiguous profit picture and economic outlook), though it will be a fertile time for stock-picking opportunities (both long and short).
My guess is that November and December will bring on a range for the S&P 500 of between 1630 and 1700.
At the time of original publication, Kass had no positions in the investments mentioned.
More Good News for Altisource Residential
Originally published on Wednesday, Oct. 9 at 9:03 a.m. EDT.
I uncovered another potential positive for Altisource Residential this morning in a National Mortgage News article.
Apparently, the Federal Housing Administration plans to shortly dispose of nearly 30,000 nonperforming loans (worth a total of $5 billion).
I have previously chronicled Altisource Residential's aggresssive acquisition history over the last six months and its interesting business model by which the company outsources modifications/servicing of loans to Ocwen and remediation/renovation/lease of foreclosed properities to Altisource Portfolio Solutions /Altisource Asset Management .
While I haven't yet spoken to Altisource Residential's management, I think we should presume they will be a bidder for this book of business.
If partially/wholly successful, this would be an important win for the company, and profit estimates (and dividend paying capability) would be measurably increased.
At the time of original publication, Kass was long RESI.
Originally published on Tuesday, Oct. 8 at 9:57 a.m. EDT.
The Janet Yellen nomination as Fed head has been largely discounted and was the base case consensus expectation.
All else equal, Yellen should bring knee jerk of weaker $, weaker bonds, better stocks. It could also bring a bid to yen.
In response, Goldman Sachs just put out a piece on why they expect a late Fed exit, which is equity market friendly:
Yellen's appointment, above any other candidate for the position, should be viewed as providing continuity to current policy.
Yellen has been a principal designer of the current Bernanke monetary policy and without question is against any tightening, even if the unemployment rate drops somewhat. This is consistent with Bernanke's latest speech, which indicated that other labor market measures might need to be utilized in setting policy.
So far, the market reaction has been modest. There is likely to be a modest reduction in uncertainty and volatility. The yield curve should steepen a bit as there may be more reliance on dovish forward guidance vs. purchases of longer-term securities. But the curve is already quite steep, so this effect may be small.
The 10-year note's yield is down by about one basis point and S&P futures are +4.
I want it to be abundantly clear that while I believe that we could see a near-term rally in the markets (coincident with a last-minute budget compromise), I am sticking with the notion that the U.S. stock market hit a high in August 2013.
Remember, after the expected rally, investors (and traders) face the uncertainty of corporate profits and sales, a profit margin for leading U.S. companies that is more than 70% above the five-decade average and still-elevated P/E multiples (particularly vis-a-vis the beginning of the year). We face a structural disequilibrium in the labor market, our middle class has gotten screwed by policy, geopolitical risks (forgotten over the last two weeks) are mounting, and getting back to my August top column, several other significant market and economic headwinds are clearly visible.
For most, a few-percent rally is not really worth the effort, unless you are swift of trading hand.
These sort of short-term moves are not for everyone.
For the average investor, I continue to endorse the notion of above-average cash reserves and smaller-than-average positions.
-- Doug Kass, "Just to Clarify" (Oct. 9, 2013)
"We continue to expect a late Fed exit with the first federal funds rate hike in early 2016. One reason for this view, which we recently discussed in some detail, is "optimal control" considerations.
In a series of speeches in 2012 Fed Vice Chair Yellen presented simulations that pointed to an even longer period of zero short-term interest rates than the FOMC's current threshold guidance imply. Our update of her optimal control path points to the first funds rate hike in 2016Q1.
The key characteristic of the optimal control approach is that unemployment and inflation are allowed to overshoot their goals. In these simulations, the unemployment rate has fallen below its structural rate and inflation has somewhat overshot its goal at the time of the first funds rate hike."