From China to Omaha

 | Mar 04, 2013 | 10:40 AM EST  | Comments
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This commentary originally appeared at March 4 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.

China Syndrome

China's policy moves and soft economic data have put a damper on markets worldwide.

Reflecting the policy goings-on in China and the weakening growth signals, China's Shanghai Composite plunged by 3.7% overnight.

First, China is tightening on its property markets. China's State Council has imposed a personal income tax of 20% on profits from home sales. (Previously, home sellers had a choice to pay a 20% tax on the profit from property they sold or a 1% to 3% tax on the selling price, for which most sellers opted.)

Second, China's economic growth continues to show further signs of decelerating. The February China Non-Manufacturing Index was 54.5 vs. 56.2 in January. Though still in expansion, the current reading is the lowest since September 2012. The February Manufacturing Index was also weaker than expected, and, joined with the February decline in the service sector index, the data clearly suggest some moderation in China's economic growth after an eight-month acceleration that began in the summer.

The bulls see win/win: If China's economy weakens, fiscal and monetary policies can be used; if the economy strengthens, then all is fine in China.

Regardless of view, the message of the weakening Chinese bourses over the past two months seems to be crystal clear -- the Shanghai Composite is flat year-to-date -- that the region's growth is rolling over. And more generally, it does appear that global GDP growth has begun to slow somewhat.

The bulls seem to be of the view that China's slowing does not portend recession either in the U.S. or globally, as none of the excesses that typically precede a recession/economic stress (e.g., expanding inventory, rising inflation and inflationary expectations, an inverted yield curve, rising jobless claims and unemployment, etc.) are currently present domestically or in the global data. As such, bulls see the (monetary policy added) global economic expansion as self-sustaining, serving as a tailwind to stock prices and valuations.

The bears see it as different this time, as excessive global easing (for as far as the eye can see) underscores a structurally weak recovery (vulnerable to innumerable shocks), with deleveraging continuing and with more profound structural economic weakness facing the U.S., the peripheral EU countries and other areas of the world. They (read: the bears, such as myself) ask why investors should be/are willing to pay an average (five-decade) multiple of 15x given the above conditions.


Omaha, Here I Come!

Wow!

This morning I was surprised, honored and flattered to have Warren Buffett invite me to be the "credentialed bear" on a panel at Berkshire Hathaway's (BRK.A/BRK.B) annual meeting in Omaha during the first week of May.

Here is the tape of the Oracle offering me this role on CNBC's "Squawk Box" this morning.

Let me explain the events that led up to the invite.

As I have done over the past few decades on a certain late-winter Saturday morning (ever since I was a graduate student at Wharton), I woke up this Saturday and read Warren Buffett's letter to Berkshire Hathaway shareholders (see page 23).

In that letter Mr. Buffett wrote:

Finally -- to spice things up -- we would like to add to the panel a credentialed bear on Berkshire, preferably one who is short the stock. Not yet having a bear identified, we would like to hear from applicants. The only requirement is that you be an investment professional and negative on Berkshire. The three analysts will bring their own Berkshire-specific questions and alternate with the journalists and the audience in asking them.

Upon reading this, I emailed CNBC's Andrew Ross Sorkin and Becky Quick and asked them if they would be kind enough to forward a letter I wrote on Saturday that basically threw my hat in the Oracle's ring as that "credentialed bear."

I included in the email to Mr. Buffett my curriculum vitae and a column I wrote in March 2008 that explained the rationale behind why I was short Berkshire's shares back then almost five years ago. (It turned out to be a successful short and, surprisingly, for the right reasons.)

As well, I included references for Mr. Buffett of four hedge-hoggers and investment managers who were acquaintances of his, whom I knew he respected and whom were familiar with my body of work.

Andrew and Becky were really nice and forwarded my email to Mr. Buffett over the weekend, and the rest, as they say, is history.

I had absolutely no idea the invitation would be forthcoming and found out like everyone else while watching "Squawk Box" with Joe and Becky this morning!

Here are several recounts of the story of Mr. Buffett's invitation by Bloomberg, The Wall Street Journal and Nasdaq.

I am going to Disneyland -- I mean, Omaha!

And in Omaha I will be Daniel in the Lion's Den, wading in a sea of Warren Buffett's strongest admirers.

But I will be up to the challenge.

Stay tuned -- literally!

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