How we wish another great investor, Bill Gross, could speak with such clarity? (see clip 3 below).
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.
Auf Wiedersehen Not Goodbye
Two weeks ago, we titled a section Goodbye Greece. What we should have said is See You Later, Greece. Because Greece made a comeback in currency markets on Thursday & Friday. This was thanks to Chancellor Angela Merkel of Germany who essentially said financial aid to Greece was verboten. Investors are beginning to realize that German austerity cannot coexist with Greek profligacy.
Greece initially threatened to go to the IMF. But Germany essentially called the bluff by suggesting that Greece should indeed seek help from the IMF. The atmospherics are awful for the Euro which went to two week lows against the U.S.Dollar on Friday. As if on cue, the British pound plummeted.
The Merkel comments came a couple of days after the statement by German Finance Minister Schauble that if Greece, or any other eurozone member, could not right their finances, they should be ejected from the eurozone. This statement takes the crisis to a entirely new level. It seems that Germany is demanding to be the judge and the jury of the European Monetary Union rather than its richest member.
For a fresh, insightful viewpoint about Germany’s “new” role, read the free article Mitteleuropa Redux on the Stratfor website.
David Rosenberg of Gluskin Sheff revealed interesting statistics about the month of March in his daily commentary. He pointed out that many important recent tops in the stock market have come in the month of March. This tallies with the “decennial theory” laid out by his ex-colleague Mary Ann Bartels of BAC-Merrill Lynch (see Equities section in our article about December 6 – December 12 videoclips)
We note that the widely followed strategist Byron Wien has become neutral on the stock market (see clip 4 below). The CNBC Fast Money were fast on their feet and expressed their concerns about the stock market on Thursday (see clip 5 below).
Robert Prechter has been both timely and correct since November 2009. He told CNBC’s Maria Bartiromo that the stock market is making a double top here in March. He also thinks Oil is making a double top while Gold made a double top in December (see clip 2 below).
Quant Golden Age Redux
We have been writing since August 2009 that the low volume, volatility-draining, grinding action in the stock market suggests the large but invisible presence of quantitative managers to us. We have also publicly asked CNBC to devote some effort to provide some color on this critical area.
This week, Bob Pisani, CNBC’s stock reporter, decided to speak on this topic. He said that high frequency traders are suffering because of the lack of volatility in the stock market. We don’t know where Mr. Pisani gets his color, but he does not seem to realize that High Frequency Trading is only one facet of the Quant Strategies panorama. The largest and most popular quant strategies involve factor analysis in which specific strategies are used to isolate and focus on specific fundamental factors. These factors are then used to construct quant models.
The capacity and leverage in such factor-based quant strategies peaked in August 2007 according to Savita Subramaniam of BAC-Merrill Lynch. Her recent report titled Quant golden age redux argues that factor-based quantitative strategies might be poised to outperform in 2010 & 2011. The major risk is the re-emergence of macro and a spike in volatility.
Treasuries continued to behave well despite the move to new 52 week highs in the stock market earlier this week. But the catcalls against Treasuries continue. This week Marc Faber of “The Gloom, Boom and Doom Report” told CNBC that he expects Treasury yields to rise to between 10 & 20 per cent over the next 5 to 10 years because of inflation and oversupply. Mr. Faber also believes that the markets have created their own gold standard because of “uncertainties regarding other asset classes”.
Meredith Whitney is also negative on Agency MBS and on Treasuries (see clip 1 below). We respect Ms. Whitney but we respectfully point out that if her warnings about a housing double-dip and significant writedowns by Banks come true, long maturity Treasuries could mount a ferocious rally.
In the meantime, the 30-10 year yield spread indicator discussed by CNBC’s Rick Santelli continues to deliver on its historical promise. (see Did Rick make an actionable call? Section of our March 7 – March 13 videoclips article). His comments on CNBC on Thursday March 11 seems to have created a local bottom in Treasury prices and a local top in Treasury yields. The yield on the 30-year Treasury has fallen from 4.70% on that day to about 4.57% on Friday, March 19.
A fundamental bullish factor for long term Treasuries was revealed in a BAC-Merrill Lynch report Corporate Pensions; Trigger Happy by analyst John Haugh. Mr.Haugh writes that “Currently, we see a significant overall desire to reduce surplus volatility within corporate pension plans. This will typically be achieved by the continuing sale of equities and buying of bonds. In fact, the desire is so strong, major consulting firms are building entire teams focused on liability driven investing (LDI) and asset managers are prepping sales and marketing to be ready for the push.”
But, as Mr. Haugh writes, “Nearly every rate forecaster in Bloomberg’s current rate forecast survey believes we should see increasing lo
ng-end (10– and 30–yr) Treasury rates in the future.” As a result, Mr. Haugh reports that many plan fiduciaries are holding off on extending duration until interest rates actually rise (emphasis ours).
This may prove to be a huge and costly gamble because, as Mr. Haugh points out, median Wall Street pandits have overestimated forecasts by 80 basis points on average.
This seems to be a large amount of demand waiting on the sidelines to buy long maturity Treasuries, especially 30-year Treasuries. After all, what instrument in America delivers the safest, most liquid and the longest non-callable duration? The 30-Year Treasury, of course.
What happens when plan fiduciaries wake up and smell the reality that long Treasury yields are headed downhill? A stampede to buy the 30-Year Treasuries? Then what happens to the 100,000+ contracts short position in 30-Year Treasury Futures? A new bonfire of the anti-Treasury vanities?
If corporate plan fiduciaries start buying long maturity Treasuries, would we miss Chinese buying or lack of buying? We think not. CNBC Anchors, especially Sue Herrera, are you listening?
This week, we feature the following videoclips:
1. Meredith Whitney on CNBC Worldwide Exchange – Tuesday, March 16
Meredith Whitney appeared as the guest host of worldwide exchange for a full hour. Her comments are spread across four different clips:
A summary of her views can be read at Housing Market Sure to Double-Dip: Whitney on cnbc.com.
Meredith usually expresses her views with stunning clarity and this appearance was no exception. Read her remarks from the first clip listed above. These provide a simple, succinct road map to her conclusions:
How we wish another great investor, Bill Gross, could speak with such clarity? (see clip 3 below).
2. Permabear’s Perspective on Stocks – Robert Prechter with CNBC’s Maria Bartiromo – Friday, March 19
We have featured the comments of Mr. Prechter, President of Elliott Wave International, in other articles on this Blog. Mr. Prechter was early & wrong in his bullish call on the Dollar in September 2009. His timing was impeccable in his December 12, 2009 interview on Bloomberg TV.
Maria Bartiromo opened the interview by telling viewers that Mr. Prechter had warned against the dangers of deflationary deflation. Mr. Prechter reminded viewers that he turned bullish on stocks in the fourth week of February 2009 because of extreme conditions of fear and valuation. Now he sees just the opposite conditions and his clear message to viewers is to put “safety” first. Mr. Prechter said categorically that the U.S. Dollar is the only place he likes being long.
He thinks this is a bear market rally and discussed a number of indicators to make his point. Maria then asked the key question “so what do I do then, in terms of preserving what I have? How would you look at this market over the next year or two?” Prechter replied:
- “My watchword has been safety….As far as I am concerned, what you should be doing is putting your money in to the safest possible instruments right now, the Dollar is going in your favor and so cash is working out really, really well and you need to have it in the safest institutions as well. But I am quite sure that if we talk a year from now or 2 years from now, we are going to see a lot lower stock prices, some good bargains and I hope an opportunity to buy.”
Then Maria asked him about international markets, commodities and whether he would put money in Gold or Oil. Prechter replied:
- One of the themes we had an year ago what we have been calling, all the same market..people have caught on to that. But ever since the 1st quarter of 2009, everything has been rallying. The stock market it seems to me, has been making a double top against January. Guess what’s making a double top? Oil. Most people don’t think those two should trade together and they have been trading exactly together. Some things have already topped out. The Utilities topped out in December. Gold & Silver topped in December. The Dollar bottomed in November. Now that the Dollar has changed trend, it is now trending upward. I don’t think that is over yet. You have some weakness in some of the metals markets. I definitely would not touch them. I think they were overvalued in December and that was another one of the extremes we talked about because that indicator got to only 3% Bears, 97% Bulls of the traders were bullish on Gold heading into that peak. That is the kind of thing we saw a year ago in the stock market. So think about it, if that kind of reading got you a 60% rally in the stock market, the same kind of reading in the metals, you need to be aware of the risks there, could mean a number of months on the downside if not more rather than just a few weeks”.
Talk about being clear and succinct. Maria did an excellent job of asking key questions and letting Prechter answer. But we were disappointed that Maria did not ask him about Corporate Bonds & Municipal Bonds. Unfortunately, CNBC Anchors just don’t think about Bonds. So we reproduce below the quotes of Mr.Prechter from his Bloomberg interview on December 12 (see our article about December 6 – December 12 clips):
- We are about to roll into the 3rd Elliott wave down – this is the place where the news & the markets are really in sync…Problems in Dubai, Greece, Spain, London – they are all coming out in the fringe area of debt markets and we are going to see the debt problems migrate into the United States & Europe as the year (2010) progresses
- We are in a deflationary environment in which debt is repaid or defaulted & we will see more and more of this as the year progresses..2010 will be a very very big year of credit defaults and people need to be careful where they invest the money – they are putting their money in dangerous places like junk bonds, munis & corporates. I think you want the safest possible debt you can find..
That is what we call a dark prophecy.
3. Reacting to FOMC Decision – Bill Gross, David Kelly & Ken Volpert with CNBC’s Erin Burnett & Steve Liesman – Tuesday, March 16
This is one of the most interesting segments on CNBC. It takes place immediately after the release of the Fed statement about the decisions taken that afternoon by the FOMC, the Federal Open Markets Committee. Because the participants are forced to react to the most important live event in the interest rates arena, the discussions are unrehearsed.
The importance of this segment is also based on the quality of the participants, Bill Gross, the Bond King, and Ken Volpert of Vanguard, the two largest bond fund managers in America. This week, for some reason, Erin Burnett invited David Kelly, a strategist from JP Morgan Mutual Funds, to be the 3rd member of this panel. The only clue we have is the public declaration by Erin’s co-anchor Mark Haines that he likes Kelly’s lilting Irish accent.
We prefer to focus on the content and not on any particular accent. Mr. Kelly quickly proved that he did not belong in the company of fixed income experts like Gross & Volpert. At minute 08:31 of the 09:35 minute clip, Mr. Kelly gave the usual tired and false spiel by saying that the “Fed will pay a heavy price for doing that (signaling a change in statement) because as soon as they do that, interest rates are going to move up”.
CNBC’s Steve Liesman immediately pounced on David Kelly by interrupting “Not necessarily David, what about the yield curve, if short term interest rates rise, a pivot around long term interest rates”. At this point, Ken Volpert said “that is a good point, you have a yield curve between 2 & 10 years about 275 basis points wide, it has priced in a lot of rate rises going forward, so actually the market is actually pricing in a lot of that, so actually if the fed preempts and gets inflation expectations down, the longer end of the curve could actually perform pretty well”.
David Kelly said “I wouldn’t bet that way” to which Ken Volpert laughingly replied “I would”. At this point, Erin Burnett interjected saying “that’s what makes a market. right”.
Who would you bet with? A proven bond market star like Ken Volpert or a talker & mutual fund strategist salesman like David Kelly. Ken Volpert is an expert and shows his expertise in measured manner. Mr.Volpert also has investment history on his side.
The real surprise of this segment is the hands-off posture of Bill Gross, the Bond King. We would have expected him to step into the yield curve discussion but he remained silent. We were disappointed. Bill Gross used to practice the Talleyrand maxim of “speech was given to us to conceal our thoughts”. Now he seems to have gone scriptural and begun practicing “let thy speech be ye, ye or nay nay for whatever exceedeth it cometh of evil”.
Come on, Mr. Gross, do not disappoint us so. We want to trade like you. Just be clear and succinct like Meredith Whitney, Robert Prechter in clips above or Byron Wien in clip 4 below. Is that so hard? *
May we offer a suggestion for your next Fed segment, Ms. Burnett? How about completing the holy Trinity of bond managers by inviting Curtis Arledge of BlackRock to this segment? Perhaps, the presence of BlackRock might make the Pimco CIO speak more clearly. Curtis Arledge rather than David Kelly, now that is a trade we will gladly do.
Let us be clear. We do not mean any disrespect to Mr. David Kelly. He is a strategist at JP Morgan and usually finds a way to always like stocks. Nothing wrong with that, but frankly, a little inappropriate for the expert interest rates panel following a FOMC statement. He is suitable for PowerLunch, but not for your flagship segment, Erin. And yes, he has a nice lilting Irish accent, but again not as perfect as our old friends from Dublin and County Cork.
Finally, we point out that a summary of the Gross, Volpert comments can be found at the summary Fed Move Means Risky Treasurys: Pimco’s Gross by JeeYeon Park on cnbc.com. This summary, frankly, seems totally out of sync with the comments in the videoclip. Hear the clip and then read the summary. You will see what we mean.
Note: Jon Najarian of Fast Money informed viewers on the Fast Money Half Time reports on Tuesday March 16 and on Thursday, March 11 that Pimco was engaged in selling June straddles & strangles. This according to Dr. Najarian means that Pimco does not expect long term Treasury rates to move substantially until June.
4. Strategy Session – Byron Wien with CNBC’s Trish Regan – Monday, March 15
Byron Wien, we believe, is a strategist at Blackstone and not at Pequot Capital management as the cnbc website describes him. Mr. Wien was previously the Equity Strategist at Morgan Stanley.
Mr. Wien was bullish during the entire bull run in 2009. So we were a little surprised to hear that he is now bearish. He thinks that markets have reached a point where there is an excess of optimism and valuations are pretty full. He predicts that intermediate and long term interest rates are going to rise and that is going to provide some headwinds for the stock market. He is positive on certain segments within Health Care. He is positive on Technology and on Basic Materials.
We need to throw a flag for Trish Regan mispronouncing Byron’s name as “Wine” instead of “Wien”. There is no simply excuse for such rude behavior.
Maria Bartiromo, see what happens to your show when you take a day off!
5. Word on the Street – Fast Money Opening Segment – Thursday, March 18
Kudos to the Fast Money Traders for honestly and correcting warning viewers about the overbought and overextended condition of the stock market. Tim Seymour spoke about the RSI (relative strength index) of the S&P & the Transports; Seymour added that they had put on more shorts and dialed back on the longs; Guy Adami expressed his concern about the reversals he saw on Thursday; Joe Terranova spoke specifically about the reversal in Ford and Karen Finerman said that she had taken some money off the table. Joe Terranova had been making his point that Gold is in a bubble and his call made viewers money on Friday in Gold’s sharp decline.
As we have said before, Fast Money 2010 seems to be a much improved edition. Now if they could only find it in their hearts and minds to ever get non-bearish on long term Treasuries!
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