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Ardent Listener
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Posted - 02/20/2011 :  19:28:22  Show Profile Send Ardent Listener a Private Message
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Doug Kass: Investors Ignoring Enormity of Brewing Crisis
Published: Friday, 18 Feb 2011 | 6:15 PM ET Text Size

By: Lee Brodie
Producer



With Wisconsin in the throws of a budget crisis and more pros predicting multi-billion bond defaults, is a serious crisis coming?

Strategic investor and CNBC contributor Doug Kass sure thinks so. And the founder and president of Seabreeze Partners says you’re probably underestimating the enormity of the problem.

As a topic, we know municipal bonds is enough to make you glaze over – but Kass isn’t talking about yields or hard to understand finance.

He simply believes the financial health of local and state governments is extremely precarious and the ripples generated by the fallout will be much worse than you realize.

Kass is most focused on shortfalls in pension funds (estimated to be anywhere between $1 and $3 trillion depending how the numbers are crunched.)



The way in which governments service that kind of debt is at the heart of this issue. Governments will potentially cut jobs, freeze wages, raise taxes and make deep spending cuts.

All that generates “a toxic roostertail of elevated unemployment and higher marginal tax rates,” Kass says. And pretty soon we're looking at problems that “jeopardize the economic recovery.”

Kass isn’t alone in his prediction. Widely followed analyst Meredith Whitney says much the same.

“There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” she said in a “60 Minutes” interview. “You could see 50 sizable defaults, 50 to 100 sizable defaults, more. This will amount to hundreds of billions of dollars worth of defaults.”

As an investor what’s the takeaway? Kass says it’s really quite simple. Expect the consumer to remain the Achilles heel of the economy.”

That goes along with what he told us about a week ago; that the rally would soon come to a screeching halt.

As you might expect he suggests playing it short - but what you might not expect is that he likes shorting dental stocks such as Patterson [PDCO 33.85 -0.51 (-1.48%) ] or Henry Schein [HSIC 69.85 0.56 (+0.81%) ]. Why dental? “40% of dental procedures are elective and can be postponed,” he explains.

We know what you're thinking? Doug Kass is a bear. He's been predicting the demise of this rally for months.

It's true that he leans on the pessimistic side but he's also widely followed for his market timing - he correctly called a bottom last summer and also predicted the crisis lows in March 2009.

Maybe, just maybe he's onto something. What do you think? We want to know!



Will the poor financial health of state and local governments drag down the stock market?
Yes, the ripple will be very serious.
68%68%No, the feds won't let it get bad.
32%32%
Total Votes: 7694
Not a Scientific Survey
Results may not total 100% due to rounding

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Think positive.
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