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.
Words of the Wise!
- I think the exposures of our banks to Europe are pretty well understood and contained – Neal Kashkari – Friday, May 19 (see clip 1 below)
- Investors should “avoid financials at all costs, particularly in the banking sector” – Meredith Whitney – Monday, May 17 (see clip 2 below)
- European banks are in even worse shape than their US counterparts,….would not invest in them “in a million years.” – Meredith Whitney – Monday, May 17 (see clip 2 below)
- Decline that has happened in Euro will add 8/10th of one per cent to Europe’s growth – Barton Biggs – Thursday, May 20 (see clip 3 below)
- If you don’t get an event, a Lehman Brothers II in Europe in 48 hours, those stocks are gonna go up – Jim Cramer – Wednesday, March 19 (see clip 5 below)
- There is another wave to go, individual investors became very worried about their 401(K)s…as they were just coming up for air and now they are very worried they are going right back down again ….the dollar and I think dollar-denominated assets are slowly becoming the assets of choice … this the beginning of something that is much longer term – Richard Bernstein – Friday, May 21
- The lesson of 2002 is that market priced for perfection does not even need a classic double-dip to falter – a simple growth relapse will do the trick – David Rosenberg – Friday, May 21
Kudos to CNBC’s Sue Herera for her simple remark on Friday that “there was an exhaustion of selling last night“. We are fans of simplicity and as far as we are concerned, Ms. Herera called it true. The selloff on Thursday had all the signs of another liquidation and the S&P opened on Friday morning with a swoosh down move. This swoosh only lasted for a couple of minutes. As soon as Friday’s expiration at the open was concluded, stocks bounced back. We do not know whether it was shorts covering ahead of the weekend, or a bounce from the end of the relentless selling pressure.
Not sure it matters. Stocks went down to retest the flash crash low of about 1065 on S&P. The successful retest was the story of the rest of the day. We wonder, like many people we heard including Doug Kass of Seebreeze Partners or Mark Haines of CNBC, whether this will prove to a low at least for the short to intermediate term. The history of local bottoms made on option expiration mornings is pretty solid.
Euro & Gold
Euro bottomed a day and two before stocks bottomed. Thursday saw a liquidation of global growth currencies and metal stocks. These bounced reasonably well on Friday. The words from last week of Robert Prechter, Walter Zimmerman and CNBC Fast Money’s Anthony Scaramacci proved true. Gold sold off all week. The selloff in Gold preceded the bottom in the Euro by about 3-4 days.
The large speculator short positions in the Euro remain almost as extreme as in the past week. But small speculators seem to have covered most of their shorts in the Euro.
The hands down winner of the week were long maturity Treasuries. The 2-10 yr yield curve flattened by about 22 basis points this week. The yield on the 30-Year Treasury touched 4.002% early Friday morning as stock futures went down. The bond market backed off from this big number and closed down 4-6 ticks across all maturities. Frankly, that is impressive. In prior weeks, the bond fell by much more on Friday afternoons ahead of looming auction supply.
We did not expect the 30-yield to break through 4% on its first try especially with the supply of $113 billion looming ahead of next week. We recall that 4% proved to be serious resistance in October-November 2009. At that time, the 30-Year yield broke through 4% for a short time to trade around 3.95%. Then it reversed as if on a dime and went back to 4.70% by December 2009.
This was similar to the behavior in November 2007. But in November 2008, the 30-Year tested 4% once and then decisively went through 4% the second time. In 2008, it kept going until the yield hit 2.50% in December 2008.
The 10-year German Bund did hit an all time low in yield this week and closed at 2.67%. Bill Gross told CNBC’s Erin Burnett that US Treasuries and German Bunds were the two best assets to own in these turbulent times (see clip 6 below). It is nice to have you on our side, Mr. Gross.
In contrast, Steve Cortez of CNBC Fast Money told viewers to sell and short Treasuries. He said he sold and sold Treasuries on Friday until his fingers hurt. But never does Mr. Cortez tell us nor is he ever asked by others which Treasuries he sells. After all, selling 5-year Treasuries is very different than selling 30-Year or 10-year Treasuries. This is because today large speculators are long 5-Year Treasury futures while they are extremely short 10-Year Treasury futures.
How short? We were stunned to see that the huge speculative short position in the 10-Year Treasury actually increased this week to 267,229 short contracts from 239,797 short contracts the week before, an increase of 11% on the week. Amazing given this week’s ferocious rally in the 10-Year Treasury.
All eyes should be on this asset class next week, actually until the all-important Payroll number number on Friday, June 4.
- Neal Kashkari on CNBC on Friday, May 21
- Meredith Whitney on CNBC on Monday, May 17
- Barton Biggs on Bloomberg on Thursday, May 20
- David Faber with Hedge Fund Heavyweights on Wednesday, May 19
- Jim Cramer on Mad Money on Wednesday, May 19
- Bill Gross and Mohamed El-Erian on CNBC on Friday, May 21
- Secretary Tim Geithner on CNBC on Wednesday, May 19
1. Pimco’s Take on Financial Reform – Neal Kashkari, Father of the Mother of all Bailouts – TARP, with Erin Burnett – Friday, May 21
We respect do-ers far more than talkers. As far as TARP is concerned, there has been no greater do-er than Neal Kashkari. This young man was thrust into the utterly thankless job of implementing the TARP program, the biggest and most unpopular bailout in American history. History will look back at his work with deep respect, we think.
These days, many TV pandits have called the trillion dollar Euro fund as Le TARP II. We were very interested in hearing Mr. Kashkari’s views on this subject. He did not disappoint us:
- Burnett – people are now talking about the big bailout in Europe, that is the equivalent of the US TARP in terms of its size and hopefully its efficacy …. do you think that’s fair?
- Kashkari – I don’t. TARP was focused on solving a capital problem which was the financial system did not have enough capital. Europe is now so far focused on liquidity helping them get over their funding problems, but it has not yet dealt with solvency or actually being able to pay back their debt. So we are not near end of the Europe (problem), not by a long shot..
- Burnett – ….when you put it that way, I guess it is a pretty stark way to put it..the real issue is in front of us and they have already put in a trillion..
- Kashkari – I agree. I think that they really need to get their political leaders together to address the long term solvency issue – can the peripherals afford their level of debt? not just continuing their funding.Can they fundamentally afford the level of debt they have accumulated?And we don’t yet know the answer to that.
- Burnett – so everyone is trying make these analogies, it is interesting when you don’t think that’s fair – another one is Ok Greece is, let us just say, the Bear Stearns, Greece is gonna get sort of saved although it is gonna take some pain like Bear Stearns was when JPMorgan bought it. But if that analogy holds, then you still do have Lehman and Fannie and Freddie and AIG..all in the distance.
- Kashkari – Extreme financial crisis take many years to work out, What’s happening in Europe is a continuation of, it is an extension of what we experienced in the US.. it is going take probably years rather than months to ultimately resolve and Greece is a big issue, Spain is a big issue, the sequence isn’t very important, the solution for one can affect the others. Policy makers in Europe are scared right now – they want to defend the Euro, but they also want to preserve the ECB’s credibility, there is a tension there, and they ultimately want to deal with this long term solvency issue but in a way it does not terrify creditors to other countries.
- Burnett – during the whole TARP in the US, you dealt with European leaders, bankers all the time..do you think that they are going to be able to get organized, get this together, implement it and then stick by the promises they make?
- Kashkari – I think its tough..because you are dealing with many different individual countries, their own political processes, we all exist in a political reality we just can’t wave those away..the politics in Europe are magnified by the fact that you have many different country legislatures that have to act…it is going to be a hard coordination problem.
- Burnett – another thing you knew from the inside that there is a big difference during the crisis between how the American banks dealt with it and how the US government dealt with them via the TARP and how European banks dealt with it.and did not deal with all the problems and bad loans etc. that they had. So now here they are in jeopardy again with very close to links to our banks. Is there a real risk that this contagion does directly affect our financial system yet again?
- Kashkari – I think it is limited. I think the exposures of our banks to Europe are pretty well understood and contained. That’s a dangerous word to use but it seems to be moderate. I think whether they can get their act together is still an open question.
- Burnett – and what about the TARP here in the US, I know that it may take years before there can be a verdict and obviously you are someone who set it up and wanted it to succeed. What would be your verdict about where we are now if you were to grade it? Where has it been successful and where has it failed?
- Kashkari – I think it has been a resounding success far exceeding my own expectations. I saw that the latest estimates are that the cost is going to be around a 100 billion dollars. That’s way lower than anything I predicted at the depth of the crisis. Frankly at the worst moments, I didn’t know we would get any money back and the fact that we are getting most of it back is a resounding success. Where it has been more challenging is increasing lending, getting lending out to small businesses, we went to Congress to ask for TARP to prevent a financial collapse. I think it succeeded in doing that but it has not yet reached its full potential in terms of getting credit flowing again to our communities.
- Burnett – What about GM? there is a lot of frustration around this because GM has been putting out ads that they have been paying taxpayers back, perhaps it did using another pool of governmenet money but clearly the US taxpayer is very very underwater in GM especially because of the equity investment. Do you think GM and GMAC will ever be able to pay it back or is that money taxpayers may just want to say we are not gonna see that again?
- Kashkari – I think it is going to be hard for GM, Chrysler, AIG to fully pay back the taxpayers. Again I am pleasantly surprised that we have seen any money back from the auto companies. I think every dollar we get back is a good thing and I hope that GM is on the path to long term viability.
Burnett – So does the financial reform bill …. in that bill do you think that it will avert the need for more giant bailouts or another TARP down the line?
- Kashkari – It is hard to know ..in a normal crisis when an individual institution runs into trouble, some of these ideas like resolution authority can work. We still don’t know what to do if we have another extreme crisis where the entire system is put at risk. My fear is that we are going to declare victory when we pass this bill and think that we have solved all of our problems. We need to study this for the next 3-5 years and then come back when we know a lot more than we know today.
- Burnett – do you think, do you have any issue, big picture with the things everyone raises. Hey rating agencies are not dealt with, Fannie & Freddie are not dealt with..the derivatives part of it appears to be too draconian in some ways and may be too light in other ways – do you share these concerns?
- Kashkari – I do. I think we absolutely have to deal with Fannie & Freddie. That is a huge issue that needs to be addressed. I think that this bill is so complex. In a few years we are going to know a bunch of things that they got wrong and we are going to have come back and fix some the things that may have been too extreme. I think net net it is a good step in the the right direction but we are not done yet.
This is one of the best interviews we have heard for awhile. First we have to feel blessed that we live in a country that has the emotional strength and sound intelligence to create, structure and successfully implement a program like TARP. We do not have the confidence that Europe has it. This is why we do believe that the Euro will, after a period, resume its downtrend perhaps toward parity.
We remember that after the creation of TARP, the bottom of the equity market took about 4-6 months to form. So we are not sanguine that any local bottom reached in the near term will hold for long. We do think investors have been exhausted after the past few weeks and that markets will stabilize. Then some time later, we will all wake up again and the next step in this crisis will begin.
The only thing missing in this interview is the acknowledgement of the enormous role played by Chairman Ben Bernanke. Without his innovative and dedicated support, TARP might have failed.
So we thank Erin Burnett for this superb interview and we join Jim Cramer in saying “booyah” to Neel Kashkari .
While we are relieved that US Banks do not have a substantial exposure to Europe’s crisis, we cannot let our guard down. Why? Listen to Meredith Whitney talk about US Banks next.
2. Whitney Talks Small Biz – Meredith Whitney with Maria Bartiromo – Monday, March 17
Another clear-cut and succinct interview by Meredith Whitney. A summary of her comments can be found at Investors Should Avoid Banks At All Costs on cnbc.com. A few excerpts are below:
- “Politicians have proven far worse than our worst expectations,….It could be very bad for banks.”
- Some of these regulatory proposals are going to make it so difficult for everyone involved that you’ll see, I think, at least another $1.3 trillion (of credit) sucked out of the system.
- Investors should “avoid financials at all costs, particularly in the banking sector”
- “European banks are in even worse shape than their US counterparts,” and she “would not invest in them “in a million years.”
Her general outlook for the second half of 2010 “..more consumers to lose their jobs and have even more limited access to credit. The housing market will likely see a double dip, while the stock market will be “bleak.”
This is where our favorite bottle of single malt comes in handy.
3. Barton Biggs with Bloomberg’s Matt Miller & Carol Massar – Thursday, May 20
Barton Biggs, the Managing Partner of Traxis Partners is an interesting speaker. A few of his comments are below:
- everybody is… because they are nervous and because we & everybody else are apprehensive about the mistake we made in 2008 about not taking one of these things seriously enough and know that it would very bad for our businesses to have another bad year like 2008, that is not to protect capital in a bear market..and so everybody has said Oh my God, this could be terrible and Europe might blow up and so we got to head to shore..(emphasis ours)
- I think the chances of Europe blowing up are very very small. and meanwhile the recovery both in US and emerging markets is still probably strong and healthy
- I think it is ridiculous I think it is a buying opportunity ..
- But are we buying? No. Because we probably own too many stocks already..
- Decline that has happened in euro will add 8/10th of one per cent to Europe’s growth
Want to see real apprehensiveness on part of Hedge Fund managers? See the next clip.
4. Hedge Fund Managers Discuss Their Views with CNBC’s David Faber – Wednesday, May 19
David Faber spoke to the a number of experiences hedge fund managers. We present two clips below:
- Hedge Fund Titans Meet – Michael Novogratz of Fortress
Mr. Novogratz is the apprehensive Hedge Fund manager described by Barton Biggs in clip 3 above. His key point “Usually when markets crack as severely as they’re cracking today, it’s the start of a new regime.” Read a summary of his comments at Time to Play US Anti-Growth Trade at cnbc.com.
- Hedge Fund Heavy Hitter Weighs In – Marc Lasry of Avenue Capital
Mr. Lasry is an experienced investor in distressed assets. In this clip, he describes his style.
A good summary of all Faber interviews can be found at Hedge Fund Chiefs: De-Risking For Survival at cnbc.com
5. Stop Trading. Listen to Cramer – Wednesday, March 19
Jim Cramer makes an interesting and bold statement in this short segment:
- He (Geithner) is an adult. I don’t like what I hear out of Germany, a lot of yakking but if Geithner is right and there is really no huge crisis and we don’t get some Lehman Brothers in the next 48 hours out of Europe, I am beginning to think that we are going to become a little more inured to how bad Europe is…
- If you don’t get an event, a Lehman Brothers II in Europe in 48 hours, those stocks are gonna go up….
6. Bill Gross and Mohamed El-Erian with CNBC’s Erin Burnett – Friday, May 21
First we need to congratulate Erin Burnett for asking the question dearest to our heart. This is an all-time first for a CNBC Anchor. Erin Burnett actually asked Bill Gross & Mohamed El-Erian how they are personally invested (clip 2 below). They did not really answer the question. Instead they said they are mostly on the sidelines. We realize Erin Burnett did not push them but baby steps are fine when a trail is being blazed. Will other CNBC Anchors follow and will Erin Burnett keep it up? We fervently hope so.
The interview is in two clips:
In the second clip, Bill Gross says that Green is Bonds and Red is for Stocks meaning that Bonds are better than Stocks. Erin Burnett deftly defended Bill Gross from any criticism by saying his earlier prediction that stocks would do better than bonds was for the long term. This is why we have said that her show is Pimco’s Home Court on Financial TV. Frankly, we don’t mind because Erin can get Bill Gross to speak more openly than anyone else.
That is important because Bill Gross is the Michael Jordan of interest rates trading. But in these clips, we saw a tired Bill Gross. He did not seem to have his usual energy and his opinions had a defensive edge to them.
At minute 05:21 of the first clip, Bill Gross said about Treasury Bonds “..the 10-Year Treasury at 3.2% and the 30-year Treasury at 4.4%..”. We nearly fell off our chair. The 10-Year Treasury was trading exactly at 3.2% but the 30-Year Treasury was trading at 4.09% and not 4.40%.
Folks, this is a difference of about 6% in price. Friday was no average day. That morning the 30-Year Treasury yield nearly broke below the big number of 4%. How could the Bond King have made a mistake of such proportions? This is like Jim Cramer saying that Dow Jones was at 10,600 on a day when the Dow nearly broke 10,000 on the downside.
We have never heard him make a misstatement about yields of such proportions. What is going on with Bill Gross? Is he more of a CEO now? Is he no longer involved in trading on an active basis? Ours is an inquiring mind and it sure wants to know why & how Mr. Gross lost track of the Bond’s yield. Actually, as far as we can tell, the 30-year Treasury last closed with a 4.4 handle more than a week ago on May 13. Does that mean Mr. Gross had not observed the bond’s yield for over a week? As we said, very strange!
7. Secretary Tim Geithner with Erin Burnett – Wednesday, May 19
This is a long interview. The exclusive transcript can be read at cnbc.com.
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