Then Gary Kaminsky asked a terrific question – Curtis, walks us through … your outlook for interest rates for the rest of the year, what came out of your morning meeting based on last night’s action? This was one of the most articulate, succinct, clear-cut and useful fixed income interviews we have heard on CNBC. Thanks for this interview, Melissa. Frankly, this little interview has so much content and insight that it should be the topic of several Trade School clips for Fast Money. At this time, Erin Burnett asked the three guests “where is the best place is to put your money”: Gabelli said that they are bottoms up stock pickers and gave two stock ideas, Millicom (MICC) and National Fuel Gas (NFG). Mario Gabelli asked a question about Volpert’s best idea and what would happen to it under inflation. Bianco essentially said that the Fed does not have inflation under control. Erin Burnett excels at running this type of segment, especially when it is made of top-tier talent like this one. However, in her previous segments, the Fixed Income experts went out of their way to NOT disagree with each other. This is the only segment of its type where the two Fixed Income experts actually contested each other’s views. That made the segment more educational, more useful and more fun. So Erin, please include Jim Bianco in all future segments of this type, on Fed days and on other days like this one. This is how Mr. Gross thinks or finds a key on which to base his trades. This reminds us of March 2008 when he drew a lesson from the Fed’s orchestration of the Bear Stearns takeover by JP Morgan. For a few months after that, Bill Gross & Mohamed El-Erian came on CNBC and kept recommending investors to buy bonds issued by Brokerage Firm Holding Companies because in their opinion, the Fed had signaled these would be protected. In other words, Gross & El-Erian took their cue from the Fed and acted on it, big time. Unfortunately for them and for most investors, the Fed allowed Lehman to file for bankruptcy. If we recall correctly, that day proved to be the worst day ever for the Pimco Total Return Fund. So the strategy of basing trades on what the Fed does once can go wrong. But of course, the Lehman case will never be repeated, at least by the Bernanke Fed. Then Carl and Melissa asked Bill Gross about stocks and the Dollar. Mr. Gross said that maintaining current fed funds rate should be positive for equities and that a “strong dollar is a wild card” for the markets. Then he went on to speak of the Pimco “New Normal” concept of lower levels of growth going forward. Then Carl asked about the next move by the Fed. We highlighted some comments because this interview confused us. Consider his comments about steepening: We are confused. It seems to us that these two statements are diametrically opposite and mutually contradictory. This is why the investment conclusions of the two Gross statements also seem to be mutually contradictory. Can our readers help us with our confusion? So, according to this logic, it appears reasonable to believe that Bill Gross is actually making a Hold or a Buy & Hold recommendation on long duration Bonds. We wanted to know whether Mr. Gross agreed with our logic. So we requested a clarification from Pimco. We have not heard from Pimco so far. The most interesting exchange for us took place at minute 05:15 of the 08:58 minute clip. Then Meredith switched quickly to talking about regional banks. So she dodged Maria’s question. When you watch the clip, you will see that Maria did not understand the switch. Here we have our Most Useful Guest of 2009 speaking with the Most Useful Anchor of 2009 and the Guest pulled a fast one on the Anchor. That is like Maria beating Meredith in bank stock picking. Not good, Maria.
Editor’s Note: In this series of articles, we include important or interesting videoclips with our 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.
Stock Market at Peace & Ben the Trader
We have such short memories. By the end of the week, we could be excused for asking “what is Greece?”. Worries (or shall we say rumors) about Nakheel & Dubai World debt bothered the markets a bit. But, by the end of the week, we could not find any one interested in talking about it.
This has been the story since 2006. As long as the S&P 500 is ok, the entire world assumes a Panglossian stance. And the S&P 500, as we discuss later, is run by machines and the geniuses that control machine algorithms. This week the stock market found its inner peace and volatility ebbed away quietly.
This may be the reason that Ben Bernanke decided to pull the lever on his first discount rate hike of this cycle. Once derided as an academic, Ben has become a trader. He made the announcement on Thursday evening and thereby let the damage be done first to Asian markets. Most of the Asian markets we track were down over 1% overnight.
May be Ben did know the CPI number when he made the discount rate hike announcement. If so, he knew that a weak CPI would calm the Treasury market and the stock market by dissipating inflation concerns. That would contain the damage of his announcement.
Lo & behold, that is exactly what happened. After the release of the CPI, expert commentary suddenly shifted to a more quiet and bullish tone. The Treasury market & the Stock market stabilized. Then the Men with their Magnificent Machines took over.
But there is no doubt that Chairman Bernanke surprised veteran Bond investors. A few like Jim Bianco of Bianco Research (see clip 2 below) and David Kotok of Cumberland Investors had the courage to call Bernanke’s action a tightening. Others chose to treat the action as technical. In fact, the Fed itself took pains to spin this action as only technical in nature.
In any case, Bernanke earned new respect from the big guys. You hear this from both Bill Gross of Pimco (see clip 3 below) and Curtis Arledge of BlackRock (see clip 1 below). Now, investors have to be wary of Bernanke. We have argued before that Bernanke had to instill fear in large speculators because fear is a a pre-requisite for non-bubble markets. We believe that Bernanke has taken the first step towards instilling such fear and we congratulate him for it.
Outside of the box thinking permits us to give a good deal of credit to Robert Rubin for the stability of financial markets in the mid-1990s. Henry Paulson was an Investment Banker but Robert Rubin was a trader, He was, if we recall correctly, the head of the Risk Arbitrage desk at Goldman. As a trader, Rubin knew exactly when to strike fear in the markets and when to calm the fears. When we lost this trading feel in the early 2000s, we ended up creating a bubble.
So we hope that Bernanke will continue to surprise financial markets by announcing decisions not in policy meetings but at critical junctures in the markets. Fear of such action and the instability from such actions will allow Bernanke the freedom to not raise rates any more than he really wants to.
So we celebrate the transformation of Bernanke, the Academic into Bernanke, the Trader. This may be a bit premature, but, heck, we use every excuse we can to celebrate. That’s what New Orleans taught us in our youth.
Quantitative Managers
Last fall, we wrote on a few occasions about how the low-volume, low-volatility grinding up action in the stock market reminded us of 2006-2007. At that time, we virtually begged CNBC to find smart reporters with contacts who could report on the Quants. They could not bothered. We suppose it is an audience pleaser to report from the New York Stock Exchange and interview old fashioned stock traders about the action on the NYSE. The fact that over 60-70% of the trading volume takes place outside the NYSE is never mentioned.
So we tried to find our own sources, meager and unsmart as they might be. They told us the simple rule that when volatility goes down, the accuracy of statistical models goes up geometrically. In other words, the reliability of quant models, especially of the high frequency intra-day models, is higher on the days the VIX falls . (This actually may be a chicken-egg situation but let us not get bogged down in variance-swap discussions.) These models, we are told, are usually long-biased because the market, with large long-only players, is statistically long-biased.
This is why we notice that when volume goes down and volatility gets sucked away, the markets go up in a grinding manner. Such markets tend to frustrate and anger old fashioned traders, like say CNBC’s Art Cashin or Steve Grasso, because they have been trained to believe that volume is a necessary condition for credible rallies. Readers might recall that, since July 2009, floor traders like Cashin kept pooh-poohing the S&P rally while the rally kept going up in their proverbial faces.
This week’s action in the stock market was exactly the same, the volume was low, almost pathetic, volatility kept ebbing away, VIX kept going down and the S&P 500 kept grinding up.
However, these Stat models go awry when prices jump randomly as they do on news events. This is because price jumps cannot yet be modeled on reliable statistical basis. Yes, there is a lot of work being done on what are called Poisson Jump processes, but this work remains rudimentary. When price jump in a non-statistical manner, stock portfolios are hedged dynamically with VIX related trades. That is why VIX jumps and stocks go down sharply.
This is what we have been told. We hope to get feedback from our smart readers on this topic. We know we cannot rely on CNBC to discuss this stuff. They prefer to invent daily reasons why the market goes up or down.
From what we understand, the Quant managers are still buying cyclicals, commodity stocks and shorting Treasuries just like they did in the fall of 2009.
Treasuries
The action in US Treasuries also reminds us of 2006-2007. Treasuries began a strong rally in June 2006. This rally continued until November 2006. Then the sell off began in December 2006 (called perfectly by trader Rick Santelli in mid-December). The action in Treasuries was choppy in early 2007 and a major sell off began in April 2007 to culminate in a great buying opportunity in June 2007.
Frankly, we are unsure whether the 2009 Treasury market would behave like 2007 or 2005. Readers might recall that January 2005 saw a violent
rally in the Dollar and by March 2005, investors were worried about the pace of fed tightening. Then the high yield market blew up in April 2005 thanks to GM and the European situation worsened. The Treasury market had a great rally from March 2005 to June 2005. The NonFarm report released in the first week of June was very weak. That morning marked the top in Treasury prices (& the low in Treasury yields). By about 10:30am that morning, the Treasury rally began selling off. The sell off continued until October 2005.
Sovereign debt events and Fedspeak will decide how long duration Treasuries behave in the next few weeks. But there is little doubt in our mind that the Speculator positioning is just begging for a sharp rally. Large Speculators are short huge amounts of 30-Year Treasuries & 10-Year Treasuries while they are long massive amounts of 2-Year Treasuries, the maturity most vulnerable to Fed tightening.
The 30-year Treasury bond was sold and sold this week. At week’s end, the yield spread between the hated 10-Year Treasuries & the intensely hated 30-Year Treasuries reached 93 basis points, after having touched the extreme 100 basis points level on Thursday. If investors believe that the Fed is serious about removing liquidity, then the yield curve could flatten and force large speculators to sell the 2-Year and buy the 10-Year or the 30-Year. What a lovely bonfire that would make?
If this were not enough, we have the specter of Joe Terranova of CNBC Fast Money warning viewers about the Bubble in Treasuries both on Thursday & Friday. If that were not enough, Fast Money brought back its patron saint, Peter Schiff and he told viewers to sell 30-Year Treasuries if they owned any and not to buy any. Peter Schiff over rode all Fast Money Traders and exhorted his flock to buy Gold, Gold & Gold. Only Gary Kaminsky was scornful of Schiff’s views. Yes, Guy adami did disagree a little but quickly rolled over by highlighting the points on which he agrees with Schiff.
Does Fast Money or Peter Schiff know that George Soros, arguably the best macro trader of our time, thinks that Gold is now the ultimate bubble? If they know, do they care? Why should they if Maria Bartiromo, who interviewed Soros, refuses to discuss the Soros view? We all know how CNBC would have reacted if Soros had called Treasuries a bubble.
But Fast Money Edition 2010 is not the Fast Money of 2009. For yet another week, we have to thank Fast Money for daring to think outside their cherished box. On Friday, they invited Curtis Arledge, BlackRock’s Fixed Income CIO, to discuss the Fed action & Treasuries. This is a must watch clip and gets our pole position for the week (see clip 1 below). Never have we seen any one on Fast Money ever speak so boldly about 30-Year Treasuries. He even put Peter Schiff in his place. Will Guy Adami learn from Curtis Arledge?
If the BlackRock man was straight, narrow and bold, the Pimco guys were, well, what they usually are. See clip 3 below for the Greenspanish comments of Bill Gross. At least, Bill Gross expresses views that us mortals can try to decipher. His cerebral co-CIO Mohamed El-Erian gave viewers a soporific lecture. At the end of the interview, Erin Burnett asked him for his best idea and received another dissertation as an answer. With most guests, Erin would press for a clearly stated idea. But this was Pimco’s CEO and probably she remembered the CNBC “do not press Pimco” rule (see clip 4 below).
But Erin Burnett made up for this lapse with a terrific segment featuring Ken Volpert of Vanguard and James Bianco of Bianco Research. These two disagreed with each other. This is an absolutely must listen conversation for any investor (see clip 2 below).
Maria Bartiromo also convened an excellent panel on Thursday after the Fed announcement. She even included David Rosenberg, the economist who has been brilliantly prescient on the economy and correctly bullish on Treasuries. In fact, any one who listened to Rosenberg saved his or her networth from being cut in half and any one who bought long maturity Treasuries in June 2007 on Rosenberg’s recommendation made a pot of money in late 2008.
In this interview, Maria asked Karen Finerman of Fast Money for her (negative) views of US Treasuries. But she did NOT ask David Rosenberg for his views of US Treasuries.
Is this Rosenberg’s official CNBC punishment (see paragraph below) for being correct in his recommendations? Or is Maria simply reverting back to her 2007 cheerleader role for GLG2 (Global Liquidity & Global Growth). May be this is why Maria has never discussed the Soros view of Gold as the ultimate bubble of this time.
Currencies
King Dollar marched again this week and Knave Euro kept falling to his knees. So did the British Pound. Next week should bring more fun as Greece tries to raise money in the markets. Speculator positioning and resistance levels suggest that the dollar might consolidate its gains. But currency markets have a way of acting like tidal waves.
Some Wall Street firms downgraded their targets on the Euro to 1.32. 1.28 & 1.25. Then we heard the respected Gary Shilling on Bloomberg TV. Dr. Shilling said he expects the Euro to reach parity with the Dollar in 2010 and he expects a flood of money to flow into Treasuries as investors run from the Euro.
As we recall, it was Walter Zimmerman of United-ICAP who first made the parity prediction, way back & way early in September 2009. What does he think now? How would we know unless Maria Bartiromo invites him again? But we forget, Zimmerman said in October 2009 that Gold was a bubble. If Maria does not talk about Soros, she certainly is not going to talk to Zimmerman.
CNBC Anchors do tend to act in mysterious ways. They choose to not invite people who have been proven right and they keep inviting people who have been proven to be wrong, dreadfully wrong.
CNBC Quasi-Religion & It’s Icon
Of course, we speak of Mark Matson. This is a gentleman who keeps exhorting viewers to buy stocks right now otherwise they would miss getting aboard the “greatest wealth-creating engine”. This is a man who gleefully and proudly proclaims that his key to diversifying US stock portfolios is to invest in global stocks. We do not grudge anyone their views. Mr. Matson apparently believes what he says and he has every right to express his opinions on TV.
But we have realized that the Matson views represent the semi-official, quasi-religiou
s conviction of CNBC Anchors* and Mr. Matson could be described as an icon of sorts for this conviction. Look how he is treated by CNBC Anchors. First PowerLunch invited Mr. Matson. Last week, we heard Larry Kudlow heap verbal honors on him. This week, we saw Mark Matson featured in a debate on the Burnett-Haines show with another manager. At the end of this “debate”, Mark Haines dutifully said “Mark won”. Of course, this is the same Mark Haines who, according to TV statements of his co-anchor Erin Burnett, keeps his money under a mattress while publicly exhorting his viewers to buy stocks based on his own declarations of market bottoms. Of course, this is the same Mark Haines who kept singing the praises of technology stocks in late 1999-2000 as the lead anchor of Squawk Box. We can still hear the ringing “Qualcomm, Qualcomm” invocations of his colleagues Faber-Kernen in the first quarter of 2000.
These days, CNBC does try to bring on a couple of bears here and there. But the CNBC heart is where it has always been, in exhorting its trusting viewers to buy, buy and buy stocks and to get aboard the “greatest wealth-creating engine”.
This is why we advocate watching CNBC safely and repeating Caveat Viewer.
* We mean the day-time anchors and not the Fast Money Traders or Jim Cramer.
Featured Videoclips
This week, we feature the following videoclips:
1. The Word in the Street Now – Curtis Arledge of BlackRock on Fast Money Half-Time – Friday, February 19
BlackRock is the largest asset manager in the world. The firm is also renowned for its expertise in Fixed Income markets. Whenever Larry Fink and Peter Fisher of BlackRock appear on TV, we try to listen to every word they speak. So we looked forward to hearing what Mr. Arledge, BlackRock’s Chief Investment Officer for Fixed Income, had to say.
Watch this clip. The conversation with Mr. Arledge begins at minute 08:03 of the 12:51 minute clip. Melissa Lee begins the conversation by asking his opinion of the Treasury Yield Curve:
We have been critical of CNBC Anchors from time to time. But we have also given credit where it is due. Today, we give tremendous credit to Melissa Lee for her grace and composure in this interview. Both Peter Schiff and Gary Kaminsky overrode her in this segment and asked the questions they wanted to ask. We are glad they did because their questions were terrific. Unlike some of her colleagues, Melissa Lee did not pout or lose her composure. She stepped back and she let Peter & Gary ask their questions. This is the behavior of a confident, veteran anchor. Melissa sacrificed her ego to make her show even more useful for viewers like us. Well done, Melissa. We are happy that you are the anchor of this show.
Finally, after listening to Curtis Arledge, we wondered why Bill Gross can’t speak with such clarity? (see clip 3 below).
2. The New Normal – Jim Bianco, Mario Gabelli & Ken Volpert with CNBC’s Erin Burnett – Friday, February 19
This is one of our favorite clips of recent weeks. An absolute must watch in our opinion. Ken Volpert of Vanguard is the Manager of the second largest Bond Fund in America. Jim Bianco is an uncommonly shrewd analyst & guru of fixed income markets and the President of Bianco Research. Mario Gabelli is a veteran stock investor and principal of Gamco Investors.
Jim Bianco expressed the minority view (& contrary to the Bill Gross view – see clip 3 below) that the Fed action was actually a tightening. “It began yesterday”, he said. This is one of the reasons we like Mr. Bianco. He is not just intelligent and insightful. He is as courageous as he is bright. He tells it like it is. We recall him telling investors in 2006 that all risk assets were essentially the same trade. This was long before this idea got into the investment mainstream.
Mr. Bianco said that when the Fed stops buying mortgages, then money will have come out of other asset classes to buy mortgages otherwise mortgage rates would go up. Ken Volpert said that the spreads between Treasuries and mortgages would widen by about 25-50 basis points. But the fact that there will not be as much government buying in the bond market in general would mean all rates including treasury rates would go up as well. Mario Gabelli said that mortgage rates are a bargain now and if rates go up by 25 basis points, it is bupkus.
Then Jim Bianco made an interesting point (again contrary to the Bill Gross view – clip 4 below):
3. The Bond King’s Fed Outlook – Bill Gross on CNBC Squawk Box – Friday, February 19
We have the highest respect for Bill Gross as a tactical bond trader, especially as an interest rate trader. So we looked forward to hearing his views. This interview got interesting right away:
This is followed by an interesting discussion between guest host Rich Bernstein and Bill Gross about whether the Fed has ever got the tightening cycle right.
For us, the most interesting exchange began at minute 02:10 of this clip;
Remember the short end is the Fed Funds rate and that is set at zero. Bill Gross said he does not expect the Fed to raise the Fed funds rate for the next 6 months. So:
When we heard Mr. Gross and then when we watched the clip again, we were particularly struck by his comment “all bond managers need is a continuation of the existing spreads to in order to roll down that curve and make money as well”. Then we thought:
We then wondered how is Pimco positioned to take advantage of rolling down the Treasury Yield Curve? We recall both Bill Gross & Mohamed El-Erian telling us that they are underweight mortgages. We recall them telling us that investors should own German Bunds rather than US Treasuries. Actually El-Erian clarified this last week by saying Pimco had bought German Bunds vs. US Treasuries. He also told last week that the trade was basically over.
All this created the impression in our minds that Gross & Co, did not like long duration US Treasuries. This was also the impression that CNBC Anchors like Carl Quintannia got. In fact, Carl said to Bill Gross on January 8 that “Bill, people will now say, of course, now that Pimco has trimmed their Treasury holdings, let’s spend like sailors right” (see our clip the Glenn Beckization of Bill Gross in our January 3 – January 8 videoclips article).
But we must be candid. We do not recall Bill Gross ever making an explicit statement that Pimco did not own long duration US Treasuries or that Pimco was underweight long duration US Treasuries. In fact, we wondered in clip 1 of our January 9 – January 16 videoclips article whether Bill Gross was signaling that 10-year Treasury yields could fall between then and March 2009? In deed, we asked our readers “Folks, did Bill Gross just slip a curve ball past our plate?” Read that article to understand the reasons for our confusion.
After all of this, we still wonder how exactly is Mr. Gross positioned to take advantage of his own call for “rolling down the curve to make money?” Pimco is not going to tell us but will they tell CNBC anchors?
But therein lies the rub. Either CNBC Anchors are not confused like we are or they have no desire to question Mr. Gross in any serious and comprehensive manner. This time Carl Quintannia and Melissa Lee gave Mr. Gross a free pass. Previously it was Maria Bartiromo, Erin Burnett & Joe Kernen. Is it any surprise that we wonder whether CNBC has a “do not press Pimco” rule like the NBA’s widely believed but never acknowledged Jordan rule.
We are in awe of the talent of Bill Gross and his legendary trading acumen. Bill Gross is, to us, the Michael Jordan of interest rate trading. Our fervent hope is to learn to “trade a bit like Bill”.
This is why we listen to every word of Mr. Gross and try to decipher his meaning. Unfortunately, the more we listen the more confused we get. This is why we continue to seek help of our friendly CNBC Anchors. So far, they have not delivered.
4. Tough Calls for the Banking Sector – Meredith Whitney with Maria Bartiromo – Thursday, February 18
Meredith Whitney needs no introduction to any investor, especially to any investor in Banks stocks. Unlike many analysts, Meredith is a “trading” analyst. Not only is she right on the fundamentals of her sector, her recommendations work out as trades as well. This is why we gave her our 2009 award for Most Useful Guest.
This interview is similar. Ms. Whitney explains why she is bearish on bank stocks and why she expects these stocks to fall by another 10-15%. The CNBC website provides 3 summaries of her comments at The Market View, at Whitney On Financials and at Bank Profits Ready to Tumble, Stocks to Fall: Whitney.
As we watched this exchange, we recalled Whitney’s appearance on Squawk Box on December 8. Joe Kernen was on top of his game in that interview. He asked tough questions and pressed her when Whitney answered. He blamed her for extending her bank franchise into being a seer on the broad markets. It was fun to watch Joe put Meredith on the defensive. At one point, Meredith almost apologetically said to Joe that she doesn’t have estimates for Caterpillar. (see clip 2 of our December 6 – December 12 videoclips article).
May be Meredith remembered the Kernen treatment and that is why she artfully dodged Maria’s question. But how did Maria let her? Was she just rushing through the interview or was she not adequately prepared? In any case, we are disappointed, Maria.
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Interesting Videoclips of the Week (February 14 – February 20)
