- Doug Kass's surprises for 2023 highlight a slate of wide-ranging possibilities.
- Stocks could defy the masses, rallying in the first half of 2022.
- Gold could trade up to $3,000 per ounce.
- Bitcoin could fall to $5,000.
- Tesla shares could drop below $80, but Twitter's valuation could skyrocket.
Hedge fund manager Doug Kass has been navigating the stock market since the 1970s, so his annual “surprises” for the coming year should be required reading for investors. The self-described contrarian with a calculator is known for bold projections, and this year’s list of surprises doesn’t disappoint.
A stock market rally until June? A big run higher in gold? A reckoning for Bitcoin? A Tesla tumble? Those are some of Kass’s most intriguing surprises for 2022. Let’s dig in!
Stocks could rally, then fall
Kass is most comfortable swimming upstream. His annual list of surprises highlights possibilities underappreciated by Wall Street and Main Street investors.
One such possibility is that stocks will increase during the first six months of 2023 before turning lower in the year's second half. That would be unexpected. Most anticipate declining earnings and recession will make for a rocky performance in the year's first half, with better returns into year's end.
Certainly, corporate margins are under pressure from stubbornly high inflation, and a recession would be bad news for revenue. Yet, perhaps, too many have positioned for that outcome, making it more likely that stocks look beyond short-term worries and rally through June. Kass writes, “I have learned over the course of my investing career…How wrong conventional wisdom can consistently be.”
Instead, Kass thinks stocks could be about to head higher as inflation falls and the Federal Reserve pauses its hawkish interest rate policy.
“While I am not a fan of calendar/seasonal-based forecasts, I would point out that the first three months of a pre-election year have been lower only once in the last seven decades. Since 1950, 17 out of 18 first quarters of pre-election years have delivered positive stock market performance…There is no recession in 2023, and S&P profits in Q1 and Q2 beat expectations by a wide margin. Led by large-cap technology ("what is old is new again"), equities rise by +10% in the first half of the year as it initially appears that Jay Powell and the Fed have engineered a "soft landing." But equities fall back to break even by year-end as global economic growth reaccelerates, much higher inflation abruptly returns, and interest rates climb,” writes Kass.
Unfortunately, the rally will be short-lived. He expects a reopening of China and better-than-feared global economic growth will reignite inflation, including pushing oil back up toward $135 per barrel. As a result, the profit picture will deteriorate, disappointing investors who have become overly optimistic because of returns in the first half of the year.
Will gold glitter?
Inflation is considered a tailwind for commodities, but a strong dollar took a toll on precious metals like gold in 2022. That could soon change, according to Kass.
“There are a number of factors that take (under-owned) gold, currently at $1,800/oz, towards the $3,000 level late in the year:
* An earlier-than-expected reopening and discovery of an effective vaccine results in a China pivot more fully away from its zero-Covid policy. This coupled with a surprising resurgence of economic growth in Europe and in the U.S. unleash a surge in commodity prices and an acceleration of inflation in the last six months half of 2023.
* Fed policy tightening and snags in the Treasury market later in the year.
* Hard currencies are further supported by several factors:
1. A continued trend away from globalization and towards self-reliance.
2. A growing list of countries reduce their holdings of foreign exchange reserves and bonds -- and expand their gold holdings.
3. Global geopolitical tension as China makes moves aimed at Taiwan.
4. Countries look inward -- investing in improving supply chains, new energy sources, and other new national security priorities.
Moreover, as the price of cryptocurrencies continues to plummet, gold's popularity roars back, and so does its broader adoption as an asset class.”
We’ve already seen gold’s performance improve recently. The U.S. Dollar Index has been declining since September, and the SPDR Gold Shares ETF (GLD) has risen since October. If foreign banks become more aggressive with interest rates than the U.S., a weaker Dollar should help gold move upward toward Kass’ target in 2023.
Prepare for a Bitcoin bust
Bitcoin was a big beneficiary of expanding money supply because of low-interest rates and the COVID-era stimulus. Now that those supports are gone, it's facing a reckoning.
After peaking above $64,000, Bitcoin has collapsed below $17,000. That’s a painful drubbing. Unfortunately, there could be more downside in 2023 because of mounting negative news flow.
“Bitcoin collapses (to under $5,000). Michael Lewis' "FTX: The Movie" (starring Jonah Hill, who receives an Academy Award nomination) achieves record box-office receipts. The scale of the FTX fraud is far more reaching than thought, and Sam Bankman-Fried is imprisoned for 105 years (21 years times 5x leverage!)...Spokespersons for FTX face massive and lengthy legal actions. Surprisingly, it is determined that some of those spokespersons were complicit in leading/promoting investors into FTX -- without sufficient public disclosure of involvement…Kevin O'Leary's involvement as an FTX spokesman results in renewed focus on his The Learning Company's (previously known as Softkey) $4.2 billion sale to Mattel (MAT) -- generally viewed as one of the most disastrous and misleading acquisitions in history. O'Leary is forced to leave Shark Tank and becomes a minnow.”
Twitter outpaces Tesla
Musk agreed to acquire Twitter for $44 billion in April, but his interest didn't last long. He tried to walk away in July, but Twitter sued, forcing him to follow through on the deal in October. The distraction associated with acquiring Twitter, plus Musk's selling Tesla shares to finance the purchase, contributed to Tesla's shares tumbling over 70% since Spring.
The worst may not be over for the electric-vehicle company. Kass thinks Twitter will remain Musk's focus, eventually leading to his resignation as Tesla’s CEO.
“Musk reverses his decision to resign as CEO of Twitter, where he engineers an amazing recovery in sales/profits, but resigns his position at Tesla, as the company suffers from a rapidly changing competitive landscape and broadening customer dissatisfaction -- Tesla's shares trade under $80/share but Twitter is taken public, and Musk's investment is made whole!”
A stalling out of Tesla’s production below two million cars (expectations are for the production of 2.4 million vehicles in 2023) is likely because of increasing competition from major car manufacturers and erosion of Tesla’s core customer base due to Musk’s mercurial tweets, says Kass.
Meanwhile, Kass believes Musk will over-deliver on promises to revitalize Twitter, leading to record revenue and profit, allowing it to go public again with a valuation between $50 billion and $75 billion.
The Smart Play
Kass’s surprises were remarkably prescient in 2022. He accurately predicted that stocks would peak in early 2022 before falling sharply and that inflation would remain stubbornly high despite the Central Bank becoming the most hawkish since Paul Volcker wrestled with inflation in the 1980s.
However, Kass quickly points out that his surprises aren’t forecasts. Instead, they’re possibilities with a higher likelihood of happening than many expect. They aren’t gospel. Instead, they’re starting points for more rigorous thought.
Decelerating inflation could mean Wall Street analysts' outlook for declining corporate profit is too dour. Analysts are notoriously late to react to shifting trends, getting overly optimistic near peaks and pessimistic near bottoms. They’ve recently ratcheted back earnings forecasts to levels companies are more likely to beat than miss.
We shouldn’t dismiss worries over a recession altogether; however, the stock market is forward-looking. Individual stocks typically bottom before the stock market, and the market usually bottoms before the economy.
Given that backdrop, investors might want to do a little bargain shopping soon, particularly in big-cap technology stocks if the U.S. Dollar weakens.
If you’re intrigued by Kass’ thoughts on gold, consider picking up the SPDR Gold ETF. Individual gold stocks are also an option. For example, Real Money technical expert Bruce Kamich recently selected Hecla Mining (HL) as his “top pick for 2023 and maybe 2024” based on price charts and volume and momentum indicators. Using daily point-and-figure charting, a process dating back to the late 1800s, Kamich sees a price target of $8.75 for Hecla Mining, up over 60%.
As for Tesla, stocks don’t rise or fall in a straight line, so its shares aren’t likely to head to Kass’ $80 target without relief rallies. Active investors can buy weakness and sell strength until shares find their footing.
Significant secular tailwinds support Tesla, given electric vehicles represent only 6% of total U.S. car sales this year. However, high-interest rates devalue future cash flows, and a trend toward industry-wide valuations is likely since Tesla’s no longer the only game in town. Tesla trades at a forward price-to-earnings ratio of 19, down substantially from its peak yet still well above the single-digit P/Es associated with major competitors Toyota, General Motors, and Ford.
As for Bitcoin, cryptocurrencies are too risky for most investors. Until the money supply increases again, there’s better risk to reward elsewhere.
Overall, this year’s list contains ten surprises, plus a bonus of five other ideas he refers to as “also-rans.” You can read Kass’ full article in his daily investing diary on Real Money Pro.