Doug Kass: Stocks and Gold May Rally Soon, But Tesla and Bitcoin Could Fall Further in 2023

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Doug Kass’ surprises for 2023 highlight a very varied list of possibilities. Stocks could challenge the masses, rally in the first half of 2022. Gold could trade as high as $3,000 an ounce. Bitcoin could drop 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-proclaimed calculator contrarian is known for his bold projections, and this year’s list of surprises doesn’t disappoint.

A stock market rally until June? A big run higher in gold? An account for Bitcoin? A fall of Tesla? These are some of Kass’ most intriguing surprises for 2022. Let’s get started!

Stocks could rebound, then fall

Kass is more comfortable swimming upstream. Its annual list of surprises highlights possibilities underestimated by Wall Street and Main Street investors.

One such possibility is that inventories rise in the first six months of 2023 before falling in the second half of the year. It would be unexpected. Most expect lower earnings and the recession to translate into a tough performance in the first half of the year, with better year-end returns.

Granted, corporate margins are under pressure from stubbornly high inflation, and a recession would be bad news for earnings. Still, too many may have positioned themselves for this outcome, making it more likely that stocks will look past short-term worries and rally through June. Kass writes, “I’ve learned over my investing career… how wrong conventional wisdom can always be.”

Instead, Kass believes stocks may be poised to rise as inflation declines and the Federal Reserve suspends its hawkish interest rate policy.

“Although I am not a fan of calendar/seasonal forecasts, I would point out that the first three months of a pre-election year have only been lower once in the last seven decades. Since 1950, 17 of the first 18 quarters of the pre-election years saw positive stock market performance… There is no recession in 2023, and S&P’s first and second quarter earnings have far exceeded expectations. Led by large-cap technology (“which is old becomes new again”), stocks rise +10% in the first half of the year as it initially appears that Jay Powell and the Fed staged a “soft landing”. But stocks fall back to break even at the end of the year as global economic growth picks up, much higher inflation abruptly returns and interest rates soar,” Kass writes.

Unfortunately, the rally will be short-lived. He expects a reopening of China and better-than-dreaded global economic growth to kick-start inflation, including pushing oil back towards $135 a barrel. As a result, the earnings picture will deteriorate, disappointing investors who have become overly optimistic due to first-half returns.

Will the gold shine?

Inflation is seen as a tailwind for commodities, but a strong dollar has wreaked havoc on precious metals like gold in 2022. That could soon change, according to Kass.

“There are a number of factors that are pushing (underheld) gold, currently at $1,800 an ounce, towards the $3,000 level at year-end:

* An earlier-than-expected reopening and the discovery of an effective vaccine lead to China pivoting further away from its zero-Covid policy. This, coupled with a surprising recovery in economic growth in Europe and the United States, has triggered a surge in commodity prices and an acceleration in inflation in the last six months of the 2023 half.

* Fed policy tightening and snags in the Treasury market later in the year.

* Hard currencies are further supported by several factors:

1. A continuing trend away from globalization and towards self-reliance.

2. A growing list of countries are reducing their holdings of foreign exchange reserves and bonds — and increasing their holdings of gold.

3. Global geopolitical tension as China moves to target Taiwan.

4. Countries are looking inward — investing in improved supply chains, new energy sources and other emerging national security priorities.

Additionally, as the price of cryptocurrencies continues to fall, gold’s popularity is surging back, as is its wider adoption as an asset class.

We have already seen the performance of gold improve recently. The US dollar index has been falling since September and the SPDR Gold Shares ETF (GLD) has risen since October. If foreign banks become more aggressive with interest rates than the United States, a weaker dollar should help gold move towards Kass’ target in 2023.

Prepare for a Bitcoin Bust

Bitcoin has been a big beneficiary of money supply expansion due to low interest rates and the COVID-era stimulus. Now that these supports have disappeared, he must face a settling of scores.

After peaking above $64,000, Bitcoin crashed below $17,000. It’s a painful beating. Unfortunately, there could be more downsides in 2023 due to the increased flow of negative news.

Kass writes:

“Bitcoin Crashes (to less than $5,000). Michael Lewis’s ‘FTX: The Movie’ (starring Oscar-nominated Jonah Hill) earns record box office receipts. The scale of the fraud FTX is much bigger than expected, and Sam Bankman-Fried is jailed for 105 years (21 years multiplied by 5x the leverage!)… FTX spokespersons face massive and lengthy lawsuits. Surprisingly, some of these spokespersons are determined to have been complicit in directing/promoting investors in FTX – without sufficient public disclosure of their involvement… The involvement of Kevin O’Leary as a spokesperson for FTX drives renewed interest in its business The Learning Company (formerly known as Softkey) $4.2 billion sale to Mattel (MAT) – widely regarded as one of the most disastrous and successful acquisitions misleading history O’Leary is forced to leave Shark Tan k and becomes a minnow.

Twitter overtakes Tesla

Musk agreed to acquire Twitter for $44 billion in April, but his interest didn’t last long. He tried to elope in July, but Twitter sued, forcing him to follow through with the deal in October. The distraction associated with the Twitter acquisition, along with Musk’s sale of Tesla stock to fund the purchase, has helped Tesla’s stock plunge more than 70% since the spring.

The worst may not be over for the electric vehicle company. Kass believes Twitter will remain Musk’s focus, which will ultimately lead to his resignation as CEO of Tesla.

“Musk is backtracking on his decision to step down as CEO of Twitter, where he engineered a stunning sales/earnings recovery, but is stepping down from his role at Tesla as the company suffers from a rapidly changing competitive landscape and a growing customer dissatisfaction – Tesla shares trade below $80/share but Twitter goes public and Musk’s investment pays off!

A stall in Tesla production below two million cars (expectations are for production of 2.4 million vehicles in 2023) is likely due to growing competition from major automakers and customer erosion. principal of Tesla due to Musk’s mercurial tweets, says Kass.

Meanwhile, Kass believes Musk will deliver on his promises to revitalize Twitter, generating record revenue and profits, allowing it to go public again with a valuation between $50 billion and $75 billion.

The smart game

Kass’ surprises were remarkably prescient in 2022. He accurately predicted that stocks would peak in early 2022 before falling sharply and inflation would remain stubbornly high despite the Central Bank becoming the most hawkish since Paul Volcker battled inflation in the 1980s.

However, Kass is quick to point out that his surprises are not predictions. Instead, they are possibilities with a higher probability than many realize. They are not evangelical. Instead, they are starting points for more rigorous reflection.

Decelerating inflation could mean that Wall Street analysts’ outlook for declining corporate earnings is too gloomy. Analysts are notoriously late in reacting to changing trends, becoming overly bullish near highs and bearish near lows. They recently lowered earnings forecasts to levels that companies are more likely to beat than miss.

We shouldn’t completely dismiss concerns about a recession; however, the stock market is looking to the future. Individual stocks usually bottom out before the stock market, and the market usually bottoms out before the economy.

Against this backdrop, investors may want to pick up some bargains soon, especially in large-cap tech stocks if the US dollar weakens.

If you are intrigued by Kass’ thoughts on gold, consider getting 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 possibly 2024” based on price charts and volume and momentum indicators. Using daily dot-and-digit charts, a process dating back to the late 1800s, Kamich sees a price target of $8.75 for Hecla Mining, up more than 60%.

As for Tesla, shares don’t rise or fall in a straight line, so its shares are unlikely to head towards Kass’ $80 target without relief rallies. Active investors can buy weakness and sell strength until stocks find their footing.

Significant secular tailwinds are supporting Tesla, given that electric vehicles account for just 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 as Tesla is no longer the only game in town. Tesla is trading at a forward price-to-earnings ratio of 19, down substantially from its peak but still well above the single-digit P/Es associated with major rivals Toyota, General Motors and Ford.

As for Bitcoin, cryptocurrencies are too risky for most investors. Until the money supply rises again, there is better risk to reward elsewhere.

Overall, this year’s list contains ten surprises, plus a bonus of five other ideas that he calls “too-rans.” You can read Kass’ full article in his Real Money Pro Daily Investing Diary.

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