Editor’s Note: In this series of articles, we include important or interesting videoclips with brief comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article.Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
What an amazing week this was? The way we see it, 3 different stories dominated the week:
- Explosive Rally in low-quality financial stocks and a rally in the broad US market to new 2009 highs
- Action in the U.S. Dollar
- Sell-off in Treasuries
Rally in the Financial Stocks & Broad U.S. Market
AIG, apart from being tarred until eternity as the ultimate symbol of the 2007-2008 financial mess, was a stock given up as dead. This week, out of the blue as it were, AIG stock doubled. The stock of CIT, another “failed” financial rose over 50% this week. Citibank, that symbol of once great American behemoths fallen like dinosaurs, rose over 20% this week on enormous volume.
While the rise in prices was amazing, the explosion in trading volumes of these stocks was stupendous. Despite what the average CNBC reporter tells us, we do not believe that mutual funds were behind this no holds barred buying.
Such volumes and such frenetic buying suggests a bonfire of huge short positions and a desperate run by managers to cover shorts before they get decimated. But that raises questions:
- Who are these idiots who were shorts these stocks and in such enormous quantities?
- What is their nature of their conviction that made them maintain their shorts until this week?
- Financials have been rallying now for weeks. So who are these idiots who did not begin covering their shorts in July?
- Readers may recall that, two years ago in August 2007, financial stocks sold off in what seemed like a panic decline. That sell-off was attributed later to the actions of huge Quantitative, Factor-Analysis driven Hedge Funds. Apparently, all such Quant funds followed similar factor models and all of them owned the same positions. So when one fund had to sell in large quantities, all Quant funds had to run for the exits to protect themselves from being run over. That made the sell-off so steep and violent.
- Last week’s vertical upside wall in Low Quality Financials seems a mirror image of the waterfall decline in these stocks in August 2007. Quant Funds tend to be very large and use high leverage. If you look at popular Quant strategies like Earnings Momentum, Alpha Surprise, Price-Book, Price-Momentum, you would realize that shorting low quality financials like AIG, CIT, Citibank, Bank of America would be a staple of these strategies. As in 2007, all the Quant Funds use the same or similar strategies. So we are inclined to believe the entire Factor-Analysis based Quant Funds space was severely short of these low quality financials. This would answer the first question we raised above.
- These Funds are run by their models and we mean Run. That is, managers of these funds do not the flexibility to use their intuition or any discretionary analysis to make changes to their portfolios. In most cases, the managers have to wait until their models turn and recommend covering the shorts. Since most of these funds use similar models, it seems plausible that most of these Quant Funds must have seen their models turn at the same time. As in August 2007, the action by a few funds to cover their shorts would have resulted in large scale buying of AIG, CIT, C, BAC and others. The resultant rally might have forced other Quant Funds to cover their shorts and created the buying Tsunami we saw last week. This we believe would answer the last two questions we raised above.
- Our first guess is that in a rally, CNBC Anchors get so happy and celebrative that they just don’t really care why the rally is taking place.
- The second and more disturbing guess is that CNBC has no contacts or knowledge of Quant Funds or their trading techniques. Their market analysts, like the respected Art Cashin or the astute Steve Grasso, have only worked with traditional trading desks. So they have very little to contribute in any meaningful way about Quant trading. This is not their fault but that of CNBC. This is why we have publicly urged CNBC to get smart market commentators who know the Quant Fund world (not the media-darling topic of high frequency trading but the staid, large world of Quant Factor Analysis).
This sort of market action and the lack of any serious discussion on CNBC about it may be forcing the average individual investors to conclude that the stock market is a shell game that they are not invited to play. This sort of statement was made by Sally Krawcheck, (the new Head of Global Wealth Management at BAC-Merrill Lynch) to the Becky-Carl-Joe Squawk Box team at CNBC. Did they follow up on her comment or our request of last week? No, they did not. Are we surprised? No, we are not. Are we disappointed? Yes, we are.
Like the “dog did not bark” parable of Sherlock Holmes, the strange action in Goldman Sachs was noticed by shrewd market observers like Pete Najarian of CNBC Fast Money (see clip 1 below). The stock of Goldman Sachs, the highest quality financial of them all, had begun flat-lining this week. On Friday, August 8, it opened 2 points higher and closed 3 points lower, a drop of 5 points from open to close. Is this stock providing a warning signal that the rally might be turning over? We shall find out next week.
The Action in the U.S. Dollar
On Thursday, June 4, the crazy conversation between veteran investor Jim Rogers and CNBC anchor Larry Kudlow turned into a vitriolicly celebratory eruption of U.S. Fed and U.S. Dollar bashing. We called this a CNBC Hall of Memories clip in our June 6 article (see clip 1 of Interesting Videoclips of the Week (May 30 – June 5)).
We wondered that day whether this clip would mark a bottom in the U.S.Dollar. It did and that bottom held until the morning of Friday, July 31. The Rogers-Kudlow bottom gave way (or violated as the Burnett-Haines pair would say) that morning and more decisively so on Monday, August 3. As an aside, neither the Erin Burnett – Mark Haines pair nor their CNBC colleagues seemed to notice the Rogers-Kudlow bottom on June 4 or its sharp violation on August 3. Perhaps the so-termed “Haines bottom” is more appealing to them.
We wonder whether the August 3 action in the dollar actually marked the “double bottom” in the U.S. Dollar. In market folklore, double bottoms are often considered important because of their historical tendency to mark significant turning points.
Has the U.S. Dollar finally turned on an intermediate term basis? We shall find out together. Apparently, Jim Cramer does not think so. On his Mad Money show, Jim Cramer remarked we are debasing our currency and said “Dollar rallied today, whoopdedo!” On other hand, Rick Bensignor, veteran Technician and Cramer’s colleague on his website, said the dollar has bottomed (see clip 4 below).
Would a bottom in the U.S. Dollar be important? Absolutely. This topic was discussed by Larry Kudlow, Art Cashin and Rick Santelli on Friday, August 8 (see clip 5 below).
Sell-Off in Treasuries
The Treasury market sold off this week. Our “Friends N Fun” CNBC Anchors could not hide their glee as the hated Treasuries sold off while stocks rallied. We do not begrudge them their joy. They are entitled to it because the sell-off in Treasuries was indeed real.
We have wondered June 10 was the low in long maturity U.S. Treasury prices and the high in U.S. Treasury yields. So far, it has been. Next week will bring another large auction of 10-Year and 30-Year Treasuries. Some people including Rick Santelli have predicted that the 10-year Treasury will test its 3.99% high level next week and perhaps break it. Now if this were old Trader Santelli speaking, we would listen. But this seemed to be the new Politico Santelli. So we remain unconvinced.
We have noticed that Treasuries sell off sharply before the week of upcoming Treasury Auctions. Then, as the Auctions prove successful, Treasuries rally after the auctions. Will this happen again next week? We shall find out together. Would old Trader Santelli have pointed this out to viewers as he used to? Yes. But since he did not, we do.
We are intrigued by the action in the 30-Year Treasury Bond. On June 10, the yield on the 10-year Treasury was 3.99% and the yield on the 30-Year Treasury was 4.90%. On Friday, the 10-year yield closed at 3.85% and the 30-year yield closed at 4.60%, a drop of 14 & 30 basis points from their highs respectively. So the 30-Year Treasury outperformed the 10-Year Treasury. In fact, the 30-Year Treasury Bond has outperformed the 10-year in both rallies (like in final week of July) and sell-offs (like last week). In stark contrast to this action, the 30-Year Treasury Bond underperformed dramatically during the sell-off in April & May.
Why could this be important? The 30-Year Treasury Bond is the security considered most sensitive to inflation. So is the outperformance of the 30-Year Treasury signaling a lessening of market’s inflation fears? Is this also a message of the rebound in the U.S. Dollar? We do not know but the market will tell us soon.
This week we feature the following clips:
- Word On The Street on CNBC Fast Money on Friday, August 7
- Tony Crescenzi of Pimco on Bloomberg on Wednesday, August 5
- Tony Crescenzi of Pimco on CNBC Squawk Box on Wednesday, August 5
- Rick Bensignor on CNBC Closing Bell on Tuesday, August 4
- Larry Kudlow, Art Cashin & Rick Santelli on the U.S. Dollar on Friday, August 7
- Jordan Kotick of Barclays Capital on CNBC Closing Bell on Wednesday, August 5
- Deutsche Bank Analyst and Harvard Professor on CNBC Street Signs on Thursday, August 6
- Jim Cramer on the SEC and Bank of America Settlement on Friday, August 7
1. Word on the Street – Opening segment on CNBC Fast Money – Friday, August 7 – 5:00 pm
The most interesting comment from this clip comes from Pete Najarian at minute 07:03 of this clip:
- “look at Goldman Sachs today, it was in negative territory the almost entire day…volatility in the stock has dropped all the way to 19 in the last 10 days from 80 a couple of months ago…the stock has been flat-lining, now it is falling off..”
You will see Joe Terranova state emphatically “Citigroup is about to bust above its 200 day moving average at 4.66”. If you check, you will find that Citi closed at $3.85. So the 4.66 level mentioned by Joe Terranova is 21% higher than its Friday close. So being 21% far off, is equivalent to “about to bust above” according to Joe Terranova?
If a Fast Money trader can get so giddy, how can the Fast Anchor Melissa Lee fall behind? So she said “Citigroup is approaching that 5 dollar level. Once it crosses $5, it becomes margin eligible and institutions actually start looking at that”. At this time, trader Tim Seymour had enough and he interjected laughingly pointing out that $5 is 30% away.
We were delighted to see Rick Santelli get a segment with the Fast Money regular traders last week. These segments were more intense, fast-paced with real trading insight than the traditional Fast Money segments. A particularly interesting comment came from Guy Adami on Thursday, August 6 when he said “Bull Markets end on great news”. He went on to suggest that a rally on Friday might signal the top of the current stock rally. Is he correct? We shall find out soon enough. Does his comment help individual investors? Yes, it does.
2. Tony Crescenzi with Margaret Brennan on Bloomberg – Wednesday, August 5 at 10:15 am
The tag line of the program was, as we recall, Crescenzi: “Allure of Treasuries remains”. The interview began with whether the Treasury market will suffer from indigestion from the huge supply of Treasuries. Crescenzi gave the answer he has always given, that the supply matters only in bear markets and stated emphatically that we are not in a Treasury bear market.
Then the anchor, Margaret Brennan, turned to Wednesday’s announcement that the Treasury was contemplating a re-introduction of the 30-Year TIP in lieu of the 20-Year TIP program (TIP stands for Treasury Inflation Protected).
This is an important announcement and one that merits a discussion. Strangely, no one at CNBC either noticed this announcement or commented on it. But, Margaret Brennan, a new Bloomberg Anchor & ex-CNBC reporter, noticed and asked Tony Crescenzi about it.
- Brennan – “what is your thought there about the level of appetite for a 30 yr TIP? Treasury mentioned this morning that they are considering replacing the 20 year TIP with a 30 year security?”
- Crescenzi – “..there was a lot of chatter about how the Chinese are interested more in TIPs and these could be coming from them,….interesting that they didn’t have to make a change to their conventional auctions like 2 yr 5yr but they are changing this – keep in mind also that TIPS have not been increased much as a % of the offerings in fact it had been shrinking so we have in fact might have expected that this might happen…”
It is an historical empirical observation that Asian Governments and Central Banks usually act as the worst of market timers and their actions often signal the reversal of the current opinion. In this context, does China’s request for a 30-year Treasury Inflation Protected security mark the top of the current inflation hysteria and does it suggest a peak in inflation expectations in the financial markets?
We asked in our opening discussion whether the outperformance by the 30-Year Bond and the bottom in the U.S. Dollar are suggesting that inflation expectations have peaked in the financial markets. The Chinese action serves as supporting evidence, in our opinion.
Kudos to Margaret Brennan for asking the question.
We are unable to provide a link to this videoclip because Bloomberg.com in their infinite wisdom do not provide one. Bloomberg is a wonderful company and their proprietary Bloomberg machines are superb. But, their website bloomberg.com is simply pathetic and of very little use to the individual investor. This is why we normally do not refer to Bloomberg video clips. In this case, we made an exception because the topic was important and for some reason it was not covered on CNBC.
3. Markets, Jobs & the Economy – Pimco’s Tony Crescenzi with the Squawk Box Team – Wednesday, August 5 – 8:35 am
Tony Crescenzi was on both CNBC and Bloomberg on Wednesday morning. He was asked completely different questions by the two networks and so his two interviews had no overlap at all. We found this interesting.
We have followed Tony Crescenzi since his days at Miller Tabak. We always listen when he is on air. This interview is no exception. Unlike Bloomberg, CNBC provides access to previously aired clips and for that we are grateful. Watch this clip.
Crescenzi said at one point that “inflation often bottoms with a lag after the recovery, sometimes by 2 years. So if the recession ended in the second quarter, inflation should bottom in mid-2011”. We might be dumb, but it would seem to us that if inflation were 2 years away, we should focus on the instrument that is best to own when inflation goes down, in other words, the 30-Year Treasury Bond.
We must be dumb. Because the CNBC Anchor Becky Quick asked just the opposite question at minute 05:33:
- Quick – Tony, would there be an argument, if you are pointing out that inflation would be coming potentially 2 years down the road, would there be an argument that people should not be investing in longer term bonds, if you are looking at this as the average investor, like 30-years or something like that?
- Crescenzi – If you are expecting inflation rate to fall of course it would helpful to long term bonds…..
Apparently Becky Quick thinks that, if your time horizon is 2 years, you should only own short maturity bonds. She does not seem to realize that if you buy 30-year bonds, you don’t have to own the bonds for 30 years. You can sell 30-Year Treasuries on any day and at any time during market hours. The average investor can buy the 30-Year bond at any time, say in next week’s auction, and sell that bond in a year or two after inflation goes down, as Crescenzi suggests it will.
Becky Quick does not seem to know that average investors can buy Treasury Bonds on the websites of brokers like Fidelity and Schwab. They can sell the bond just as simply on say, www.fidelity.com. They can also use ETFs like TLT and EDV to trade 20-30 year Treasury Bonds and TIP to trade 20-30 year Treasury Inflation Protected Bonds.
It is clear to us that Becky Quick has never owned a Treasury Bond in her career and so she speaks about Treasury Bonds as if they were a strange species. Becky Quick is not unique in this regard. We are convinced that the vast majority of CNBC Anchors have never owned a Treasury Bond in their lives.
Unfortunately, this lack of knowledge ends up damaging CNBC’s individual viewers. They get the subliminal message from anchors like Becky Quick that Treasury Bonds, especially the longer maturities, are not for the average investor.
CNBC Management needs to realize that the average Boomer is increasingly focused on Bonds because the critical need of the Boomer Generation is safe, secure income (see our May 30 article America’s Income Problem). These viewers also feel cheated by the stock market and market sirens like CNBC Anchors who inundate them with propaganda that only stocks can provide high returns. That has not been true for the past 10 years and that has not been true since the beginning of the bond-stock bull markets in 1981-1982. We provided analysis and charts from experts like Gary Shilling and James Bianco in our August 22, 2008 article Are CNBC Anchors on a Mission Against US Treasuries?
In June 2007, the Treasury yields peaked between 5.00% – 5.50%. Stocks were doing great and very few people took advantage of these high yields to lock up even short term bonds like 5 year Treasuries, let alone 30-Year Treasuries. Those who did will receive a guaranteed return of 25% (5 years at 5%) by June 2012. The stock market was around, say 13,500 in June 2007. So the Dow would have be at 16,875 in June 2012 to match the return of the 5 year Treasury. That means it would have to go up from say 80% from its Friday close of 9370 in the next 3 years, on top of the current 50% rally off the March 2009 lows. This simple calculation does not take into account the emotional turmoil investors suffered in 2008.
In contrast, the returns from the 30-year bond bought at 5% in June 2007 would have been greater than 50% by December 2008. You can make this calculation for just about any period and most average investors have. That is why Sallie Krawcheck told CNBC that the average investor thinks stock market is a game.
We think CNBC needs to embark on a major retraining effort to educate their anchors on how to invest or trade in Treasury Bonds. If they do not, they will find more and more viewers turning away from their network.
This is also an opportunity for competitors like Fox Business. If they really want to capture the average individual investor, they should devote about 15-20% of their airtime to investing in bonds. In TV as well as in the Brokerage Industry, the initial provider gets the greatest mind share and market share.
4. Today’s Market Action – Rick Bensignor with Bob Pisani – Tuesday, August 4 – 3:05 pm
Rick Bensignor of Execution LLC is a well regarded technical analyst. We feature this clip because of his views about the U.S. Dollar. Rick thinks that the short Dollar trade is extremely crowded and expects the dollar to rally. Listen to Rick Bensignor make his case.
5. Art Cashin & Rick Santelli with Larry Kudlow – Friday, August 7 – 11;50 am
Arthur Cashin, director of floor operations at UBS, and CNBC’s Rick Santelli discussed the market’s reaction to the July jobs report. The evening before on Larry Kudlow’s evening show, Larry had argued that the U.S. Dollar would rise with a strong jobs report and Rick Santelli had argued that the U.S. Dollar would fall. Larry Kudlow proved to be correct and he says so in this segment.
These are three venerable market observers and we expected a substantive discussion about the action in the Dollar and its impact on the various financial markets. Frankly, we were disappointed. The discussion was superficial and focused on the impact of a strong dollar on the US Stock market.
We expected a discussion about which sectors would outperform and which would underperform. We expected a discussion about how a strong dollar would impact inflation expectations and the shape of the 2 year – 10 year curve. We got nothing of the kind.
We recall the old adage that domestic revenue stocks outperform when the dollar rises. The old benchmark in this context used to be Walmart. Is that why, as we noticed, a measure of the Relative Strength of Walmart rose and crossed above the 50 level on Friday? Fast Money was no help either. In fact, Anchor Melissa Lee offered the illuminating comment about how “there are no catalysts for Walmart” in their segment “WMT to boost Retail Run-up? on Friday evening.
As we said, we expected more from a trio like Cashin-Kudlow-Santelli.
6. Bull Run Through August – Jordan Kotick with Melissa Francis – Wednesday, August 5 – 3:15 pm
As the title suggests, Jordan Kotick expects the stock rally to continue through the month of August. But he still says that this is a rally in a bear market. In his words, “this is not a buy & hold market..it is a period of multi-quarter rallies and multi-quarter declines..” Jordan predicts that the 2 year – 10 year spread will tighten and this tightening is a basis for his call for a continued rally.
Watch the action of Melissa Francis in this clip. She remains quiet while Jordan talks about a stock rally. Then she tries to shake him when he says that the 2-10 year spread will tighten. Melissa knows that the tightening spread usually means a rally in the 10 year Treasuries. We all know that CNBC Anchors, especially an inflationista like Melissa Francis, cannot tolerate a rally in the hated Treasuries. But Jordan Kotick remains firm in his prediction. Bravo, Jordan.
7. Drowning In Debt – Karen Weaver of Deutsche Bank and Prof. Susan Wachter of Wharton School with Erin Burnett – Thursday, August 6 – 2:10 pm
This is an important clip that discusses the findings of Karen Weaver that almost half of American homeowners will be underwater in 2011. The clip goes on to discuss some of the r
amifications of this analysis. Watch this clip.
8. Jim Cramer with his Outrage about the SEC – Bank of America Settlementt – Friday, August 7 – 6:50 pm
Jim Cramer expresses his outrage about SEC settling its case against Bank of America’s actions in its acquisition of Merrill Lynch. He is outraged that the SEC has essentially penalized the innocent shareholders of BAC by fining the Bank $33 million which will be paid by the shareholders rather than the executives who committed the actions. He congratulates Judge Jed S. Rakoff for staying the Settlement and ordering a hearing.
If you feel strongly against the shenanigans on Wall Street and the SEC’s cozy relationship with the big banks, watch this short clip.
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