Slowing Growth; Radian; GDP: Best of Kass

TheStreet.com

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 slowing growth, good news for Radian and the revised GDP.

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Slowing Growth
Originally published on Friday, Aug. 30 at 10:49 a.m. EDT.

For several months I have maintained that expectations for domestic economic growth and corporate profits were too optimistic and that the landscape was growing more challenging.

This view contrasted with the consensus that U.S. economic growth would accelerate markedly in the second half of the year, laying the framework for self-sustaining economic growth and profit prosperity into 2014 and beyond.

The expectation of an acceleration in domestic growth is now fading and is likely the primary reason why stocks have corrected. Further complicating the situation is that most of the Fed members want to taper into what appears, increasingly, as slowing growth. So a policy mistake might be made in the weeks ahead.

This morning the income/spending Milwaukee Manufacturing Index came in weaker than expected. The Chicago Index was in line with consensus (signaling slightly-below-trend activity in the Midwest). Confidence declined in August from a six-year high in July.

Sub-par 2% second-half real GDP remains my expectation.

Many brokerages have lowered their 3Q 2013 real GDP forecasts this morning (Goldman Sachs to +1.8% from +1.8%, Morgan Stanley to +1.9% from +2.2%, Nancy Lazar (one of the biggest supporters of accelerating growth) cut her forecast, as did ISI's Ed Hyman, and Macroeconomic Advisors went to +1.6% from +2.2%.)

More lower economic forecasts lie ahead and with it will be lower forecasts for corporate profits, providing a backdrop for limited upside to markets at best.

At worst (my baseline expectation), the S&P Index still has an appointment with 1550-1600.


More Good News for Radian
Originally published on Friday, Aug. 30 at 10:03 a.m. EDT.

After the close on Thursday, Radian announced that it is effectively capping its liability on nearly 26,000 defaulted Freddie Mac-backed loans. (Radian can still benefit from recissions/denials on this book of well-collaterolized business.)

Radian and Freddie Mac have been discussing their mutual desire to place the legacy exposure behind them for almost two and a half years. In all likelihood, Radian is having similar conversations with other government sponsored agencies, so more good news may lie ahead.

This agreement serves to cure a large portion of the company's current default inventory (most of which was previously expected to go to claim). It gives the company greater clarity of going-forward profits and reduces its risk in its existing portfolio covered by the agreement.

The announced loan-loss reserving and cap will likely shield almost $200 million or $1 per share of EPS and book-value erosion over the next several years.

As I mentioned this week, Radian's future earnings will be catalyzed by unprofitable legacy business rolling off the books and by very large margins (and high profitability) on new mortgage insurance activity.

Now we can add to the bullish investment thesis that the legacy drag will be further addressed and cured through negotiations, like the agreement announced last evening.

These two factors (profitable new business and settlements of past legacy problems) will likely fuel signifcantly lower future credit costs and will raise expectations for future profit growth (to well above current consensus).

Radian remains my favorite stock. (I am a buyer at $13.50 or lower.)

At the time of publication, Kass was long RDN.


Good News, Bad News
Originally published on Thursday, Aug. 29 at 10:01 a.m. EDT.

The good news was that the second-quarter 2013 real gross domestic product figure was revised higher.

The bad news is that the revision will not likely be beneficial to the stock market. Indeed, it could have a negative influence.

Here is why.

Reflecting the narrowing trade deficit (which was reported after the preliminary second-quarter GDP was released), the second-quarter 2013 revised real GDP was in line with expectations.

The core consumption deflator was +1.2% year over year (steadily dropping from +2% at the beginning of the year). The Fed's inflation target is 2%, so the below-target rate suggests that a September tapering ("lite") will occur, but it might be toward the lower end of reducing purchases by only $10 billion per month. And it might only involve the buying of Treasuries, not mortgage-backed securities.

Also in the report, GDP-based profits were +4% -- in line with the rise in S&P 500 profits -- but taking out financials, the gain was negligible and poor in quality. Most important, second-quarter inventory accumulation was higher than expected.

Moreover, to make the start of tapering even "lighter," I expect it will initially be centered on Treasury securities, not MBS.

Second, GDP-based profits were up 4% to 5% in Q2, in line with S&P 500 profits. Like S&P 500 profits, the gain was centered in financials, and quality of earnings is poor.

Third, there was more inventory-building in Q2 than originally reported, suggesting less of a boost to third-quarter GDP from inventory accumulation; this will take away from third-quarter GDP growth.

Today's report suggests little acceleration in second-half domestic economic growth, a continuing concern of mine. It also does not bode well for corporate profits.

I expect consensus second-half economic growth expectations to be lowered coming weeks.

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