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.
Neither A Borrower Nor A Lender Be?
This may be exactly what the US Equity Market is saying. Forget about Bonds of all kinds and buy Stocks. Last Friday was a 90% down day and the market was riveted with the SEC fraud case against Goldman. A week later, the US market averages hit a new 2010 high. The week also featured a surrender by Greece and the potential of a restructuring of Greece debt in the near future. The Dow Jones opened lower on Thursday and dropped 102 points in early morning. Then it reversed on a dime to close up on the day and went to new 2010 highs on Friday.
Our friendly CNBC anchors kept describing the market as resilient. No question about it. But it reminded us again of 2007. The subprime problem first surfaced in February 2007. The market rebounded from that scare and kept going up despite the contagion that was spreading through the credit markets. April 2007 was especially a terrific month for risk assets. Just like the 2009-2010 rally, the 2006-2007 rally was derided as a low-volume suspect rally.
The pressure is on active managers to keep up with the averages. That may be why high beta growth stocks are being bought on every dip and even without dips. Managers who are behind cannot catch up without buying stocks that keep melting up leading to a virtuous circle. The faith underlying the market rally is the conviction that US Economy has turned, US housing is about to turn and global growth is on. This is why corporate credit keeps rallying up despite obvious issues in Sovereign Debt.
Greece is now nearly done as an issue and perhaps Portugal is next. One European Official said on Thursday that the EU will not let problems crop in Portugal or other PIGGS. This gave risk assets a strong bid and the rally was on. That statement reminded us of the interview on May 22, 2007 between Hank Paulson and Maria Bartiromo in which Paulson said ” I believe the correction (in housing) is largely behind us“. The resilient equity market of 2007 believed Paulson and kept on rallying until July 2007. Unfortunately, the contagion kept spreading to more and more sectors of the credit markets until fall 2007 when the dam broke and the equity market woke up.
We were glad to hear the erudite Mohamed El -Erian of Pimco describe Greece as Europe’s equivalent of the subprime problems of 2007. Hear him make the case in clip 1 below. He also made the distinction between the strong cyclical tailwinds propelling the markets and the strong secular headwinds facing the economy. Perhaps he was alluding to Tony Crescenzi’s article with the same title on Pimco.com.
This week we saw the Indian Reserve Bank raised its rate by a tiny 25 basis points and Governor Subbarao said that they will know when they have hit the “Nirvan” rate. Until they see it, they will keep going. The Canadian Loonie rallied above parity to the US Dollar when the Canadian Central Bank sent signals about tightening in the summer. The Australian Central Bank is also expected to tighten in the near future.
Consumer discretionary stocks have been on a rampage as the best beneficiary of recovery and as the outperformer when rates rise. High end consumers seem to be back with a vengeance every where in the world. Bloomberg reported that Apple IPads were selling in India at the ridiculous price of $2,250 because consumers with money refuse to wait until Apple launches the product internationally.
Will Ben Bernanke sound any warning about draining liquidity during the Fed statement next week? Even if he does, will it have any impact? On Friday, the Fed seemed to send to signals that they are ready to sell some Mortgage Assets later in the year. The markets yawned. It is not clear to us that the markets will believe any hawkish Fed statement until we see a clear sign of job growth.
That may happen in early May with a stronger than expected Non Farm Payroll report. How long duration Treasuries behave then will be an important tell. So far, the Treasury action in 2010 has been a yawner. The 30 year & the 10 year Treasuries yielded 4.64% % & 3.84% on December 31, 2009. On Friday, the corresponding yields were 4.66% & 3.81%.
The months of May & June have been pivotal for the past 7 years. For the past four years and in 2004, the Treasury market fell steeply in May & June to create a major buying opportunity in June. In 2003 & 2005, the Treasury market rallied to new highs in May and June. The peak in June 2003 & 2005 proved to be a significant selling opportunity.
The Fed action next week and the April Non-Farm payroll report might create a catalyst for some volatility in long duration Treasuries.
CNBC Anchors on Long Rates
Our friendly CNBC Anchors seem to have made up their mind as a team. Their leader Maria Bartiromo began an interview with a fixed income manager with “Is there a Bubble in Fixed Income?”. This is the 2007 Global Liquidity Global Growth head cheerleader who, to our recollection, has never believed that stocks are in a bubble, not in 1999 and not in 2007.
On Power Lunch, a noted stock mutual manager proclaimed that he would not own any bonds. This was of course preaching to the Power Lunch choir. A financial advisor said to Erin Burnett & Mark Haines of CNBC’s Squawk on the Street “we know where rates are going”. On the real Squawk box, a fixed income manager said “Every one on this desk would say rates are going up”. Not a single CNBC Anchor expressed any dissent or asked any questions. They all seem to accept these statements with the conviction “so it is written” of the religious faithful.
Perhaps, CNBC Anchors know that the seasonally weak period is ahead of us and they are simply being market timers!
SEC vs. Goldman
We remarked last week that by the time this case is decided, no one will care. Heck, the markets stopped caring in a week. May be, that was the message of the President’s address on Thursday afternoon. It was after that address that the stock market rallied, the US Dollar fell and Treasuries sold off.
- Mohamed El-Erian on CNBC on Friday, April 23
- Ashraf Laidi on CNBC on Friday, April 23
- Jordan Kotick on CNBC on Wednesday, April 21
- Marc Faber on CNBC on
- Marilyn Cohen on CNBC on Wednesday April 21
1. Greece Asks for Aid – Mohamed El-Erian on CNBC Squawk Box – Friday, April 23
Mohamed El-Erian is the CEO & Co-CIO of Pimco. He called the Greece situation complicated and asked how long will it take the markets to worry about contagion. He added, “For Europe, Greece is proving to be what the subprime was to us. In the sense that, in the beginning everybody said it is only 2% of European GDP, it is contained, it is isolated, don’t worry about it. Now people are worrying about the Euro. It is going to be interesting to see how this plays out”.
A summary of his comments can be found at Greek Bailout Will Make Investors Cautious Again on cnbc.com. A few excerpts are below:
- Figuring out how to coordinate the financial rescue operation will be among the most difficult challenges, he said.
- “The “concentric circles” of the conflicting interests in the Greek bailout will determine market reaction.”
- “Safe havens, they get impacted positively. Banks get impacted negatively,” El-Erian said. “This is going to play out not in one go. This is both a liquidity and sovereignty issue. It is complex.”
- “US Treasurys could get a boost from the Greek rescue……while European investors who are overexposed to the troubled nation will need to adjust their portfolios.”
- “It’s not about Greece, it’s about the shock to the public finances that has occurred as the result of the crisis,” El-Erian said. “It’s a more general phenomenon that we’re going to be dealing with for the rest of the year.”
Tony Crescenzi, a colleague of Mohamed El-Erian, has discussed his concept of two opposing forces at work, the cyclical tailwinds propelling the markets and the structural headwinds facing the economies. Dr. El-Erian talked about this concept in response to a question from Joe Kernen.
2. Exhaustion in Risk Appetite – Ashraf Laidi with CNBC’s Maria Bartiromo – Friday, April 23
Mr. Laidi is Chief Market Strategist with CMC Markets. He discussed his concept that the Baltic Dry Index leads the action in risk assets like commodity currencies & commodities.
Mr. Laidi said:
- “The Baltic Dry Index is basically for shipping costs for dry goods and raw materials. The cost of these ships is not just a matter of demand but if supply, the availability of ships…When oil reached a peak in July 08, the Baltic Dry Index reached a peak in June 08, we saw the same thing in November 09 when it peaked one month before Gold ,Oil peaked in December 09 and in mid-March of this year, the Baltic Dry Index reached apeak around March 15-16, which is exactly one month before April 16, when Oil, Copper, Gold all reached a peak and now what does this mean? Does this mean we are going to see further declines in each of these, that is the big question…”.
Maria then asked him whether he was seeing a change in the fundamentals of demand. Mr. Laidi answered:
- “the Chinese Trade balance hit its first deficit in 4 years last month and that was the result of skyrocketing imports..now with the knowledge that they might be stockpiling this stuff, do you think they are further going to increase their imports?”
Mr. Laidi added that he “could not point to a real change in fundamentals and that we might only see a minor correction in Gold & copper. He added that he does not see signs of a more than 7-8% correction.”
He then asked Maria to look at the Gold-Oil Ratio and said “each time this ratio hits multi-month lows and it starts to recover, as it starts to recover meaning that the denominator Oil comes down, that usually leads to a subsequent decline in stocks..”
3. Tick By Tick – Jordan Kotick with CNBC’s Maria Bartiromo – Wednesday, April 21
Jordan Kotick is a technical analyst with Barclays Capital. We have featured his interviews on several occasions in the past. We find Jordan to be succinct and clear. This time is no exception.
Jordan Kotick talked about problems in Greece worsening a day before the Eurostat figures and two days before the decision by Greece to activate the bailout package. Jordan also said “we are starting to see some contagion.”. He then turned the spotlight to Portugal. He said that credit spreads in Portugal are getting blown out and that Portugal looks very much like Greece looked six months ago.
Mr. Kotick returned to Closing Bell on Friday, April 23 to discuss the aftermath of the Greece decision. CNBC’s Bob Pisani opened the interview by pointing out the comments of a European official that Portugal and Spain would not have the same problems that Greece did. Mr. Kotick said that the “spreads in Portugal look very similar to we saw in Greece“. Kotick also said that “Gold in Euro terms is breaking to all time new highs…. and it is not done to the top side.”
Finally Kotick said that stocks are going higher because small caps are leading.
4. Marc Faber with CNBC’s Bernard Lo & Karen Tso – Wednesday, April 21
Marc Faber, the well known Editor of the The Gloom, Boom & Doom Report, is a colorful speaker. In our experience, he tends to lay out his views in a graphic, almost grandiose manner. He is always an interesting listen even if his record is a mixed.
Mr. Faber’s interview is in 4 clips:
- Agricultural Commodities Look Attractive
- Is China’s Growth Sustainable?
- Cash Will Be ‘A Disaster’
- Governments Will Bankrupt ‘Us’
A summary of Marc Faber views can be found at Governments Will ‘Bankrupt Us” on cnbc.com. A few excerpts are below:
“What I object to the current government intervention in so-called ‘solving the crisis’, (is that) they haven’t solved anything. They’ve just postponed it.”
“If you print money like in Zimbabwe… the purchasing power of money goes down, and the standards of living go down, and eventually, you have a civil war,” he added.
- “Paper money (will go) down relative to precious metals. So in that environment, I think you…should all accumulate some gold.”
He also warned that China’s growth was “completely unsustainable in the long run,” highlighting the red-hot property sector.
5. Investing in Bonds – Marilyn Cohen of Envision Capital on CNBC Squawk Box – Wednesday, April 21
Ms. Cohen is the Founder & CEO of Envision Capital and the author of a book called Bonds NOW!
This interview, in a Dickensian sense, contained the best of bonds interviews and the worst of bond interviews. The best includes a discussion of two of our favorite topics, the risk in owning Bond Funds and the outlook for Municipals. The best also includes a clear and passionate expression of views by Ms. Cohen. The worst is the quasi-religious conviction about the upcoming massacre in long duration bonds. The worst also includes the visible lack of knowledge of the CNBC Squawk Box crew about Bonds in general and duration in particular.
Becky Quick began the interview by proclaiming that the Recession changed the nature of the Bond Market and added that it is a new landscape. She did not condescend to explain why. Bond markets have lived through recessions and expansions since bonds were invented. Was Ms. Quick trying to be needlessly and erroneously dramatic?
Ms. Cohen began by saying that “the Fixed Income market has been unbelievably embraced by baby boomers. They said “get me the heck out of stocks, I can’t take it anymore”…. We have seen more flows into Bond funds than ever before…”
Then Becky Quick uttered CNBC’s most cherished conviction and said “some people think we are in a bond bubble and that this is the exact wrong time to be getting into bonds…..what are the real risks here?“
Ms. Cohen answered:
- “I am one of those people and I think we are in a bond fund bubble because of the massive flows of money going into bond funds, all kinds of bond funds, Munis to investment grade corporates in 2009 than we have seen in the last 10 years“.
Then she added:
- “I think what people need to do is book some of those profits. out of your long term bond funds and buy individual bonds in the front of the yield curve, 7 years and in, sacrifice yield now for preservation of capital and I think there will be unbelievable opportunity because rates are going up and every body at this desk would say that rates are going up..it is a matter of when and people in long term bond funds are going to get massacred …”
We completely agree with Ms. Cohen that people should move from bond funds into individual bonds. After all, investing in a Bond Fund is actually equity investing because the value of a bond fund is the price of the portfolio of the bond fund. In other words, the value of a bond fund investment is the equity value of the investor’s pro-rata ownership of the Fund’s portfolio. So bond funds behave in price just like stock funds do.
Investors in individual bonds are guaranteed their money back when the bond matures, except in the case of default. Investors in Bond funds are NEVER guaranteed return of their capital. Bond funds, in our view, are trading vehicles on the direction of interest rate movements and credit spreads. So we totally concur with Ms. Cohen about bond funds.
But we object, in fact object strenuously (Demi Moore would be proud of us), to the blase conviction that investors in long term bonds are going to be massacred. We are appalled that the Squawk Anchor crew let that statement go unchallenged.
America’s greatest bond investors have told CNBC Anchors that they find the long end of the bond market attractive and that the long end would probably rally when the Fed tightens. These investors are Kenneth Volpert of Vanguard, Curtis Arledge and Peter Fisher of BlackRock, Head Honchos of two of the finest firms in fixed income. Tony Crescenzi of Pimco has also expressed the view that the long end could face an easing of price pressures in the second half of 2010.
Personally, we are more inclined to side with these top tier bond investors than Ms. Cohen. But, what about Joe Kernen, Becky Quick and Carl Quintannia? Don’t they recall what these great bond investors told their colleagues? Or do they not watch other CNBC shows? May be, CNBC Anchors are just supposed to come in every day, read from their teleprompter, engage in causal, humorous banter and then go home. That might explain why the Squawk Anchors appeared disinterested and clueless in this entire interview.
In our experience, good investors are usually confident but rarely arrogant. They tend to express their views as forecasts rather than quasi-religious convictions. Prophesies of massacre are usually the preserve of fire & brimstone preachers, not managers of other people’s money.
The above represents the worst of the interview. The best of the interview consisted of Ms. Cohen’s comments about the Muni market. Ms. Cohen said:
- “Corporate bonds, I am not worried about. Their credit quality has improved dramatically. Their balance sheets are in great shape….But that’s not true with Municipal Bonds…There is a huge disconnect between the finances of how these states, cities and counties are doing versus the low yields and I want people to know about that disconnect is getting more and more dramatic because everybody is worried about higher tax rates….a lot of hospitals and cities have done interest rate swaps.. of which they have to get out of, post collateral and individuals are going to get murdered.. know what you own…”
In response to a question from Becky Quick, Ms. Cohen said that she expects some municipalities to go bankrupt and “that is the curve ball that ruins the muni market for awhile”.
Becky Quick asked her best question at the end “If somebody is looking at a portfolio and trying to figure out how much they should have allocated to bonds, what would you think is a fair one?….let’s say you are a 50 year old looking to retire in 15-20 years”.
Ms. Cohen answered ” then your allocation should be like within 30-40% maximum, you are young enough to participate in the equity market, the older you get the more conservative you have to be..” Then she delivered a succinct message:
- “there is a flight to munis like we have never seen before because of higher tax rate and we have a shrinking muni market because of the Build America bonds….So we see a shrinking muni market, increasing demand and credit quality is not what you think it is..“ (emphasis ours)
Now that is among the best of muni interviews we have seen on CNBC.
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