market folly

Continuing our coverage, today we're posting up more notes from the Value Investing Congress.  Below are notes and the slideshow presentation from Doug Kass of Seabreeze Partners.  His talk was entitled, "The end of the bond bull market from an equity investor's perspective."

The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.  Kass quoted Warren Buffett: "Chains of habit are too light to be felt until they are too heavy to be broken."

Doug Kass argues that shorting bonds has been a great hedge against profits.  He says that shorting bonds might be the trade of the decade - to go against the grain and short bonds.  This is currently the largest position Kass has ever taken in his partnership.  Will Rodgers says that "You have to go out on the limb because that's where the fruit is."


The End of the Bond Bull Market

Example of risk of extrapolation:  Siegel stocks for the long run - labeled stocks safe for the long-term right about the top.  Howard Marks: "extrapolators fail to understand that things mean regress. And crown wrong at extremes."

BusinessWeek - "Death of Equities" was right at the end of the lost decade of equities and then the market gains 18% per year after the article was published and then did 19% annually for the next 20 years with only 2 down years.

Key Factors to the Short

- Flight to safety premium erodes
- Muddle through economy gains steam
- Fed policy on hold - leads to natural price discovery
- Inflation on ascent
- Housing recovering (thinks housing could add 1% to US GDP next year)
- Stocks vs bonds approaching reallocation trade
- US fiscal imbalances are not being addressed

Simple observations on the 10 year:  stock market 2% return is 50x earnings. Pay 40% to Uncle Sam - after tax yield is 1.2% and with inflation at 3% it's a negative real yield.

Real GDP 2.5 and inflation of 2% = 4.5% with current yield of 1.9% - "tons of daylight in the middle."

He also discussed Ocwen Financial (OCN) - subprime mortgage servicing.  Banks are getting out of servicing and outsourced portfolio solution $12 at spin in 2009 to $60.  Trades at 15 and will earn $2 per share in 2013.


Embedded below is Doug Kass' slideshow presentation on the end of the bond bull market:




Be sure to click here for other presentations from the Value Investing Congress.