Kass, founder and president of Seabreeze Partners Management, continues to bet shares of Fannie, Freddie and consumer companies will fall because of his overwhelming concern that housing prices will tumble further into early 2009 and credit availability will tighten further.
“We’ve had this asset- and debt-dependency over the last decade,” Kass told Reuters in a series of interviews this week and last. “It is a thing of the past and we are now left to pick up the pieces. It is going to be a painful adjustment process, which will take years -- not months.”
Painful, for sure, but profitable for Kass.
His flagship Seabreeze Partners Short fund is up 24.08 percent, excluding fees, in the year to date -- versus the Standard & Poor's 500 index's .SPX loss of over 13.50 percent for the same period. Since its inception in January 2005, the fund is up 46.68 percent.
One of his successful shorts this year has been Fannie and Freddie. After covering his positions earlier this year, Kass in March opportunistically re-shorted the government-sponsored enterprises after the Treasury announced that the companies would be allowed to increase their mortgage lending limits.
“If you look at the charts, you can see the stocks ran by nearly 20 percent that week,” he said. Kass then believed that if he was right on home prices, that they could drop even further -- which they did -- Fannie’s and Freddie’s capital cushions would come under pressure.
“There will be some de facto government rescue of the companies, probably in the form of a series of terribly dilutive financings,” Kass said. On Monday, weekly financial newspaper Barron’s asserted that a government bailout is likely and could wipe out the value of common shares in Fannie and Freddie.
That article led investors to dump Fannie and Freddie shares, as Fannie was down 22 percent and Freddie 25 percent.
Kass’ last short sale on Fannie was made at $31.50 per share while Freddie was sold at $30.48. Fannie is now trading at $5.85 and Freddie at $4.10. Kass said he believes the shares will go to zero.
CONSUMERS ARE ‘COOKED’
As home prices tallied double-digit percentage gains in most of the country over the last five years, consumers used their homes as virtual ATM machines, borrowing against the rising value and spending the proceeds on an array of products.
“They all point to a cooked consumer who is burdened by job layoffs, inflationary pressures, eroding real disposable income, lower stock prices and a moribund housing market,” he said.
Retail represents Kass's largest short exposure. He has gone the untraditional route, however, betting against dental companies Henry Schein Inc HSIC.O and Patterson Companies PDCO.O. "Consumers are moving away from discretionary items like cosmetic elective surgery toward necessities as they downsize," Kass said.
All told, Kass concedes he didn't call Wal-Mart WMT.N accurately. Earlier this year, he told Reuters he was shorting the Big Kahuna of discount retailers because its major customers have been engulfed in the subprime mortgage crisis.
“Wal-Mart benefited from all the problems that I discussed, so they were the beneficiary because they are one of the most important purveyors of inexpensive wares,” he added.
Even still, he took off his short position on Wal-Mart and “profitably a while back,” he added.
Reporting by Jennifer Ablan; Editing by Jonathan Oatis
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