Doug Kass: 7 Important Bubbles In Our Current Market
Aptly-named financial bubbles can disappear just as quickly as they form.
Seabreeze Partners Management Inc. President Doug Kass was a special guest on Benzinga's #PreMarket Prep, and he talked about where he thinks the biggest bubbles are right now. Depending on your point of view, Kass said, there's about eight or nine. Here are the seven he outlined for us:
Kass called the IPO market the most obvious bubble, because more than 75 percent of the IPOs brought to market haven't been profitable.
Social media stocks are being valued on the notion of addressable markets. Kass said this is similar to 1999, when Internet stocks were priced "relative to eyeballs." He used Tesla (NASDAQ: TSLA) as an example.
"One of my favorite shorts, (Tesla) was able to sell $2 billion in converts about two to three months ago, after a four-fold increase the share price," he said. "They paid only 50 basis points for ten-year money, and the convert demanded a 40 percent conversion premium. These terms are nuts."
"There's obviously a bubble in the amount of debt as a percentage of global GDP that is held by the major central banks,” Kass said.
Another bubble is the belief that the Federal quantitative easing policy is sufficient, by itself, to generate a self-sustaining recovery in the domestic economy.
“If you think about it, the shoulders of responsibility of catalyzing domestic growth have been on the federal reserve, because our political leaders in Washington D.C. are incompetent, inert and partisan,” Kass said.
There's a strange situation when Spanish and Italian yields converge with U.S. ones, Kass said, and there's a problem when Greece is able to sell bonds at the rate they recently did about three weeks ago.
“We're even seeing covenant-lite loans now at a rate, which is about two times the rate in 2007 before we had problems with those financial weapons of mass destruction derivatives,” he said.
Chinese and Shadow Banking
“There's certainly excesses of bubbles in the Chinese banking and shadow banking industries, as well as how many hundreds of trillions of dollars of derivatives notional outstanding exist,” he said.
The last bubble that Kass mentioned was buybacks. Goldman Sachs (NYSE: GS) reported that this past March was its busiest on record with nearly 75 billion dollars in buyback authorizations.
The first quarter saw almost 300 authorizations that totaled nearly $200 billion, which sets a pace for over 700 billion in authorizations for this year.
“That's the second most ever behind 2007, which was the market top. And we all know that corporations typically buy high and sell low,” Kass said. “The last time we saw this rush to buy was 2007 -- the year the market peaked.”
When Will the Bubbles Burst?
Kass believes they already have begun to pop. What he calls the "high-beta earthquake" began in the first week of March, when the league-leading biotech stocks began to break down. Then it continued in the following weeks, as companies like Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG) (NASDAQ: GOOGL), Priceline (NASDAQ: PCLN), Tesla, Netflix (NASDAQ: NFLX), and Yelp (NYSE: YELP) all got “schmeissed” in the market, Kass said.
“I think this is the first shot across the bow,” he said.
Although share prices are benefiting from a combination of massive liquidity and zero interest rate policy, Kass thinks investors are increasingly realizing that each progressive quantitative easing is having a more measured impact on domestic growth.
“We have rates at zero. They have been for some time. QE has obviously become a blunt tool,” he said. “Think about it. We've had it easy for five years, and we have one-tenth of one percent real GDP in the first quarter announced yesterday.”
Kass thinks the Federal Reserve has built the bridge to growth, but isn't able to deliver the destination on its own.
“Even though a Fed run by ‘Helicopter' Ben (Bernake) and, who I call ‘Whirlybird' Janet Yellen can change how things look, they can't change how things are,” he said.
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