“I just think in the latter advances in the market rally – which I think we’re in – a lot of the concerns are camouflaged and put on the back burner - and the line of demarcation and progress is sometimes blurred. And I think that’s where we are,” says Kass.
“Valuations are very high. Everyone quotes a 17 multiple on the S&P – actually the median multiple is over 20 times and the medium multiple on the Russell 2000 is actually 55% higher than the top in mid-2000. These are not ingredients for the continuation of the bull market in my view.”
If we’re bubbled – what sector should be sold – and bought?
“One sector that really concerns me.. is the financial area,” replies Kass. “If you look at the major brokerage stocks, the average debt to capital ratio is somewhere between 13 and 20 times. If you look at the major money center banks the average debt to capital ratio is somewhere between 25 to 30 times. When you get a 2 sigma event like you’ve seen in ‘sub-slime’ this creates problems.”
He adds “Also the whole derivative business is opaque… No one can really follow the brokerage stocks.. these are basically buying blind pools of assets.”
But they’re making a vast sum of money?
“I think the brokerage companies.. particularly the principal traders like Goldman Sachs (GS)… and certainly the hedge fund community are the 21st century equivalent of the 'The Wizard Of Oz' - sometimes deceitful, barely magical and always immersed in leverage and I think they’re going to face their come-uppance in this cycle because we’ve never had such an aggravated use of leverage. Leverage is always the monster that kills,” says Kass.
What’s your best trade?
“I’m a dedicated short seller,” replies Kass. “What’s done well for me is a basic theme of companies that are challenged from a technological standpoint. If you look at American Greetings (AM) or Valassis (VCI) which sells coupon inserts to Sunday papers.. and Warner Music (WMG) with the death of the CD.. those sort of companies have done quite poorly in this market advance.”