Friday, April 03, 2009

Dougie Kass's Recap

Here's my dear old bear-turned-bull pal Dougie Kass's recap of last night's market panel debate on CNBC's The Kudlow Report.

With My Fav'rite Host

The relevance of the Group of 20 meeting, the questioning the importance of mark-to-market accounting and the future for U.S. stock market were the principal subjects on CNBC's "The Kudlow Report" last night.

It was another spirited show!

Group of 20 Meeting

Sir Larry Kudlow, Andy Busch, and Jim Lacamp were all upset about signs (over there) of the heavy hand of regulation, the lack of discussion on tax cuts and the bold IMF financing policies (and greater regulatory role) that they perceived to be President Obama's (and others') message this week in London. I thought that the London meeting was "not a dark day in American history" -- it was a sideshow -- and that, in reality, an international anti-capital page was not being turned. Regulation (and "smackdown") geared toward hedge funds and the greater role of the IMF will not likely occur speedily, so, for now, the G-20 proceedings will have little bearing on the U.S. stock market.

I reminded the show's participants that free market capitalism failed in the last cycle and that, since the Obama inauguration, stocks have begun to act well; to some degree, this is an endorsement of the new administration's overall economic policies. (I viewed a need for more regulation following the laissez faire attitude of the prior administration. Free market capitalism failed miserably in its task of regulating our financial institutions.)

What is more relevant to me, and other investors, is that the delayed impact of fiscal and monetary stimulation is leading to a growing evidence of a bottom in production declines. Our stock market is responding to better factory orders, improving housing sales activity and better retail sales, not to the rhetoric at the G-20 meeting.

Mark-to-Market Accounting Changes

I viewed Thursday's announcement as a type of regulatory forbearance that forestalls the banking industry's capital bleed, serving to provide a grace period for the banks to "earn out" of their asset quality problems. Net interest margins are wide now and deposit bases are growing, so the financial sector will arrive at profitability sooner than many believe possible.

As proof of widening spreads, consider that Bank of America (BAC) sold three-year government guaranteed notes this week at only about 102 basis points above Treasuries. By contrast, Warren Buffett's Berkshire Hathaway (BRK.A) sold three-year notes at 282 basis points above Treasuries.

I added that it is important to recognize that, in anticipation of modifications of accounting, the banking stocks are up 50% in a month and, for the time being, have likely discounted yesterday's mark-to-market announcement.

The U.S. Stock Market

I disagreed with my friend/buddy/pal, Jim Lacamp, who expressed the bear market rally view. Rather, I view the current rally as having more "pith" (and vinegar!) to it than previous advances. The market internals, in particular, are unusually strong and indicative of a broadening market that likely hit a generational low a month ago and would likely sustain itself into the summer months. I repeated my notion that despite the continued weakness in many lagging economic indicators (e.g., employment), housing remains the leading indicator to watch; it was the epicenter of our economic and credit problems, and recent evidence suggests that it's showing signs of life in the current spring selling season.

Here is the tape of last night's show.