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.
Who’s Your Daddy?
The Stock Market said, China, you are our Daddy. Last week, there was such gloom about the US economy that we ourselves felt the story about the weakness was too pat. No, we do not mean that the US economy was not weak but that the gloom about the weakness was perhaps too thick.
In any case, China indicated on Tuesday morning that they had taken their foot off the brake a wee bit. And the resource stocks said Thank You, Daddy. Look at the results. In 4 trading days, CLF went from 45 to 55; FCX went from 60 to 70 and X went from 40 to 48. Then, Dow companies delivered good earnings, especially companies like CAT, the beneficiary of emerging markets spending on infrastructure.
On Wednesday, the market dropped like a rock when Chairman Bernanke began his Humphrey Hawkins testimony. In retrospect, this was a boon for any one who bought the weakness. Actually it need not have been in retrospect. This has been a pattern since the days of Greenspan. The decline on the first day of Humphrey Hawkins is almost always followed by a rally on the second day of Humphrey-Hawkins.
The European news was just as important. The European data, especially the PMI, came in stronger than expected, yes weak expectations. Then on Friday, the sort of meaningless stress tests came in benign. Regardless of the curve on which these tests were graded, the markets saw that the prospect of Sovereign defaults had faded and that was enough for a rally on Friday afternoon.
The stock rally took S&P 500 just above 1100 and the 30-year bond yield just above 4%. Next week is the end of July, usually a positive week. So the skies seem clear at least as we write this note. This of course does tally with the clips we featured last week of Mary Ann Bartels and Charles Nenner who sort of conceded a rally into August.
So Risk was deemed on by the end of the past week. How long it remains on remains to be seen!
Currencies & Treasuries
The Euro, the Pound and the Aussie Dollar kept their rally going this week. Who would have thought a few weeks ago that the Euro would see 1.30 so soon. Of course, it has not seen that level yet, or at least for more than a fleeting moment. We remain doubtful about the Euro rally well past 1.30. Perhaps, because we remember the admonition of Robert Prechter to Maria Bartiromo.
Treasuries finally weakened on Thursday and Friday after reaching new lows (barely new lows) in yield on Wednesday during the Bernanke-inspired selloff in stocks. If risk is on, then Treasuries might not be.
We would not be surprised to see a moderate selloff in Treasuries, perhaps the 10-year going to 3.20% yield as Larry Fink of BlackRock said on Bloomberg TV. That is really a refresher and not a sell-off, a refresher we would gladly welcome.
After all, we saw this sort of risk-is-back rally in August-September 2007. Such a rally rises when the gloom has become too thick and fears too debilitating. Then after a few weeks of the risk rally, the gloom turns into euphoria and the outlook seems exuberant. Then reality strikes.
As we have said before, we are naive simpletons. But we would not be surprised to see such history rhyme again, perhaps by late August or early September.
An Amazon of a comeback
On Thursday, Amazon reported its earnings. The stock dropped like a stone from the $120 close to near $100. Then as if on a dime, the stock began recovering. It closed the after-market (if there is indeed such a close) near $106. It opened on Friday just below $106 and rose steadily to $119 at Friday’s close without any meaningful intra-day decline. Frankly, we do not recall seeing anything like this before.
- Donald Straszheim & Ian Bremmer on CNBC’s Closing Bell on Monday, July 19
- Doug Kass on CNBC’s Fast Money on Wednesday, July 21
- Walter Zimmerman on CNBC’s Closing Bell on Thursday, July 22
- Richard Kinder on CNBC’s Mad Money on Thursday, July 22
- Tony Crescenzi & David Lutz on CNBC’s Street Signs on Wednesday, July 21
- CNBC’s Jane Wells on CNBC Closing Bell on Friday, July 23
1. Tougher Times Ahead for China? – Donald Straszheim & Ian Bremmer with CNBC’s Maria Bartiromo – Monday, July 19
Since the apparent easing of China’s posture proved to be the trigger for this week’s rally, it seemed natural to let a China clip get our pole position of the week. Donald Straszheim is a veteran China-hand and we always like to hear his views. We remind readers that Mr. Straszheim was bearish when he needed to be, for example on Monday, July 27, 2009 when he told Maria Bartiromo “I would caution that part of this growth that China is enjoying right now seems a little artificial to me.because it is an enormous push through the state owned banks to push lending to state owned enterprises and an enormous push through state owned enterprises to invest in capacity that I don’t really think either China or the world needs”. (see clip 6 of our Videoclips article for week of July 26-August 1, 2009 ).
This pair of Straszheim and Bremmer gave an insightful interview to Maria Bartiromo on Friday, February 5, 2010 (see clip 3 of our Videoclips article for February 1 – February 6 week ). We like to go back and see what CNBC guests said during their prior appearances. That often tells us whom to listen to and whom to ignore.
- Bartiromo – Don, China’s second quarter GDP growth 10.3%, not in line with what you are seeing; what is ISI group’s research and number-crunching tell you about the direction of China’s growth and whether that has real implications to the rest of the world?
- Straszheim – China is slowing, Maria. The first quarter was extraordinarily rapid, too hot in fact. That’s why China launched a series of measures to slow their economy; they have accomplished that; we see a second half of 2010 in which the growth rate is 7-8%, that’s still I think pretty good. Most important, the inflation story is over. China does not have an inflation problem. We can all be happy about that.
- Bartiromo – you know, 7-8% growth obviously, think about where we are in the United States, is a fantastic number, but Ian, what kind of implications does an economy that goes from almost 12% growth to 8% growth have on the rest of the world? We are all betting on China, here as far as the demand picture and that’s a huge move.
- Bremmer – We are betting on China and a lot of our multinationals are now coming out and saying they are concerned because they are having a harder time investing in what should be the most exciting market for them anywhere, given that the West is problematic. There is no question that this downturn is going to have an impact; everyone is looking at where the big numbers are – in the United States, the consumption is going down particularly at the high end, in Europe, everyone is defensive on the Euro because it has to have years of serious fiscal austerity and now China’s very good clip but it is supposed to be the world’s best story and it still is but it is not an exuberant story., it is a story that will allow them political stability and very strong economic growth. That by itself is not going to be moving us as a world economy motoring ahead.
- Bartiromo – I am trying to figure out what this means for US investors, and what this means for multinational corporations that are based in the United States. Is this going to be another negative?
- Bremmer – It is a negative. There is no question. If the Chinese are actually trying to cool down what has been overheated growth and at the same time, their own state champions, their own state-owned as well as privately owned companies, the ones that they are seriously preferencing and they don’t need outside capital the way they used to; certain multinationals will do incredibly well in China, health care for example, a booming sector, green alternative energy, a booming sector but the big US multinationals, the GEs, the Microsofts, the places where you see CEOs publicly fulminating; those are going to have a much harder time in what should be and what is the world’s most exciting economic story.
- Bartiromo – Really, an unbelievable development here. Don, A nation depends on its exports. We know that China is trying to transition, I am going to get into that with both of you, from an export-led economy to a consumer-led economy. But right now, it is about exports, lets face it and the two biggest buyers are US & Europe. They are not in a buying mood.
- Straszheim – That is exactly right, Maria and this is why China’s growth rate is slower and why there is not a great deal we can do about it. If China’s export markets are weaker, China’s economy is going to suffer because
- Bartiromo – How do I want to invest around that?
- Straszheim – Well, one of the things China is trying to do is to take a long time is lift their consumer sector relative to the trade and the export sector. Remember there are 500 million people in China who have made about 8% or so annual yearly income gains for the last 25 years. They want to work and consume.
- Bartiromo – you are saying invest in the consumer sector?
- Straszheim – That is a market still available to western companies; it is one that all of Europe and all of America focused on..
- Bartiromo – Do you think China ultimately becomes the largest economy in the world? David Rubenstein of Carlyle told me that in 15-20 years, the US drops to number 3.
- Bremmer – I take the other side of that. Economists love to do path-dependency. A lot of my economist friends in the 70’s & 80’s used to say that the Soviet Economy is going to be the world’s largest but the Soviet economy does not exist right? I don’t think that Chinese Government exists in this form in 30 years time; the inability to engage in indigenous innovation given the nature of their education system based largely on rote; the fact that the West isn’t willing to provide the same level of technology that gets ripped off; so they are going to have to do it internally; fighting with the Indians over scarce resources, massive demographic problems as labor gets more expensive and non-competitive, the environmental problems, water, land aggregation and air not to mention the fact that an authoritarian government that requires 8% consistent growth with climate change and the rest going on. As a political scientist, I don’t see that happening in 20 years.
- Bartiromo – I understand your point and it is really an important point. But as far as an investor out there what do I want to do?
- Bremmer – First of all, I buy Don which is Long Don. There is no question we want to see the consumer sector. We want to see all of those areas in the Chinese economy where they need the West, health care, alternative energy.
We liked this clip. A few questions come to mind, especially regarding Bremmer’s views about multinationals. Every guest on CNBC, especially the equity-fee-collector stock managers, tell us that US Multinationals are cheaper today than they have ever been. After hearing Bremmer, we wonder whether that is justified. Most of these multinationals depend on foreign markets, especially markets like China’s. Why should China allow these companies to come in and profit on China’s growth? Look at the United States. It has been a protected economy for so long. Ask foreign banks how difficult is it to get permission to open a bank in the US. Ask television networks how hard it is to get a broadcast license and then a space on cable network platforms. Then compare with say CNBC which is in virtually every market in the world, compare with P&G, with Colgate.
So far, other countries and their corporations have stayed silent because the USA has been the largest market and making the US angry would be counter-productive. But this is changing. Countries around the world and especially China are going to get much tougher on foreign multinationals. Think of other growth markets, the Middle East and the Gulf countries, they might do the same. This we think is a secular problem and perhaps the market in its infinite wisdom has begun pricing this in.
Perhaps Maria Bartiromo should read this week’s Washington Post. The paper had two articles that focused on how the USA is embarked on an effort to “contain” China the way it did the Soviet Union in the 1960’s & 1970’s. These 2 articles focus on Vietnam and on Indonesia. Vietnam is already a hot frontier market and a traditional competitor of China, both militarily and economically. Indonesia is the largest ASEAN country and the world’s largest Muslim country, so dear to President Obama’s heart. But Indonesia is enormously strategic with its position near the Malacca Straits and its economy is growing at a rate that is persuading some analysts to talk about BRIIC (BRIC plus Indonesia).
China sees this clearly. How China reacts to this and to its own deep problems remains to be seen. Do we see China accelerate its plans to favor its own companies and limit the growth of US Multinationals? It is going to be a very interesting story to watch, perhaps too interesting. We recall that the moves to “contain” Japan in the 1930’s led Japan to attack Pearl Harbor and occupy most of South East Asia.
So Maria, don’t stop with this one clip. Begin a series of segments on geo-strategy and its long term implications on US Multinationals. Not every one invests just for tomorrow.
2. Bull Market or BS? Doug Kass on CNBC Fast Money – Wednesday, July 21
It was Doug Kass who made the bold prediction that the market has seen its lows for the year. He did so on Tuesday, July 6 on CNBC Fast Money (see clip 2 of our July 3-July 9 Videoclips article).
Doug Kass told CNBC on Wednesday, July 21, that he sees a trading range market between 1025 to 1150 on the S&P 500. Read a summary of his views at Market Range Bound With Defined Floor & Ceiling at cnbc.com.
We would like to give a shoutout to Tim Seymour of Fast Money. On Thursday’s show, Tim suggested buying Nokia in the after-market ahead of its earnings on Friday morning. Then on Friday’s show, he suggested holding the stock until it reaches about 10.24, if we recall correctly. What we like here is the completeness of the trade – Tim told us when to buy NOK and then after the trade worked, Tim told us when to sell it.
May we suggest that Fast Monay follow this practice with all recommendations. Tell viewers when or how to close the trades you recommend.
3. Bearish Case for Gold – Walter Zimmerman with CNBC’s Maria Bartiromo – Thursday, July 22
This is a superb interview in our opinion. Both the guest Walter Zimmerman and the interviewer Maria Bartiromo are succinct and to the point. The interview tells the story with charts and pictures rather than just words. More Pictures & Less Lectures – that’s what works. Strategy Session, take notice please.
Maria opened the interview with the comments that Nouriel Roubini, in his latest note to clients, said that there was now significant downside risk in Gold. Then she introduced Walter Zimmerman by saying his new technical work supports this view.
Maria showed charts of Gold prices with Gold Momentum which show a clear decline in momentum as Gold prices rose, a clear divergence, similar to the move in 2008. Then she showed the sentiment chart which clearly shows flagging momentum. Then she asked Walter Zimmerman to state his case.
- Zimmerman – You never want to see a market make new all time highs at the same time that momentum is waning;…you see the same exact message from the sentiment indicator…in a momentum play like Gold, there are no fundamental indicators, you can’t point to earnings, you can’t point to PE ratio, …the gold producers peaked way back in 2008…it is very very unusual to have new all time highs in Gold and the gold producers not participate …
- Bartiromo – So the bottom line is you say sell your positions in Gold.
- Zimmerman – Take profits
- Bartiromo – what about gold mining stocks?
- Zimmerman – If Gold is gonna correct, then the mining stocks are going to get hit
4. Profits in Pipelines? – Richard Kinder with CNBC’s Jim Cramer – Thursday, July 22
Kinder Morgan Energy Partners has been a great equity income play for investors. Those who don’t know it should look up the 10 year chart on their favorite charting software (bigcharts, yahoo finance etc.). The security KMP has more than tripled in the last 10 years while providing a high dividend yield. Jim Cramer calls this a “money machine“. No lost decade for KMP investors.
Richard Kinder, the Chairman-CEO of KMP, has been a highly respected figure in the energy industry. This is an excellent interview and a must watch. A good summary can be found at Kinder Morgan Is a Money Machine on cnbc.com
Jim does a superb job of asking Mr. Kinder about whether the expected IPO of Kinder Morgan, (the parent and the General Partner of Kinder Morgan Partners), would end up as competitive alternate to KMP for investors. Mr. Kinder said explicitly that if the IPO were to happen, it would be as a C-corporation. Very few CNBC anchors would have the savvy and the courage to ask such a direct and crucial question.
One statement of Mr. Kinder seems important to us from a macro perspective (at minute 03:40 of the clip):
- We are beginning to see a turnaround runaround in the economy at least through the lens of our business; I am not sure it is real and sustainable but at least it is positive in most respects.
Thanks Jim for this interview.
5. Parsing Bernanke’s Comments on Monetary Policy – David Lutz & Tony Crescenzi with CNBC’s Erin Burnett & Steve Liesman – Wednesday, July 21
When Bernanke’s testimony was released on Wednesday at about 2 pm, the stock market began selling off. The sell off accelerated as Bernanke testimony continued. Given the impact of this testimony, we thought it appropriate to include a good clip with expert guests parsing Bernanke’s testimony. The experts are Tony Crescenzi of Pimco and David Lutz of Stifel Nicholaus.
You can read the entire testimony at Bernanke’s testimony to Senate banking panel on cnbc.com.
As an aside, we suggest readers, at least patient readers, should watch the views of Martin Feldstein on CNBC’s Squawk on the Street on Tuesday, July 20 at 10:33 am. We are not very patient and we could not stand Mark Haines imposing his views on Dr. Feldstein, who is highly respected. Erin Burnett was doing a good job until Mark Haines decided to force his agenda.
This is not the first time Mark Haines has been less than cordial with Dr. Feldstein. We recall that Mark Haines was extraordinarily rude during Dr. Feldstein’s previous interview on Wednesday August 19, 2009 on CNBC’s Squawk on the Street. We discussed this rude behavior in clip 7 of our Videoclips Article for week of August 16- August 22, 2009 . We ended that discussion with “In our opinion, the behavior of Mark Haines towards Martin Feldstein was both ugly and anti-good, or simply put, repulsive.”
So we have a basic question. Given the antipathy Mark Haines has shown to Dr. Martin Feldstein, why does Squawk on the Street allow Mark Haines to participate in any interview with Dr. Feldstein. Erin Burnett is more than capable of conducting a thorough and professional interview, isn’t she?
6. Cities in Pain – by CNBC’s Jane Wells – Friday, July 23
We have said before that Jane Wells is one of our favorite reporters and this segment shows why. This is not an investment clip and so we cover this at the end. But it really should be the top clip because of the subject matter is of national importance and the investigative reporting of Jane Wells is excellent.
- This is going to get your blood boiling; you knows Cities from coast to coast are closing parks, laying off police officers to make ends meet. So when the folks in Bell, California, a blue-collar immigrant community of 38,000 where the unemployment rate tops 16%, when they found out that the City’s manager makes nearly $800,000 a year, they went nuts. There was a near riot at City Hall after the LA Times discovered how much city manager was making…turns out that Police Chief there is also making over $450,000; City council members are now facing recall for allowing this. The Manager and the Police chief and the Assistant Manager have all resigned but will still get life time pensions totalling tens of million of dollars. Attorney General Jerry Brown who is running for Governor and who makes a fifth of what the City manager made, has launched an investigation to see if any laws were broken. …..More Cities More Pain.
Then Jane Wells talked about Newark, NJ, where the Mayor is cutting everything including toilet paper, She shows the Mayor stating why a plan to raise taxes retroactively for the whole year would only make things worse:
- People will see tax bills into the thousands and it will ultimately mean massive foreclosure rates, massive delinquency rates, and other challenges that we might have
This is story of America’s cities – massive cuts in citizen services and large increases on taxpayers to pay for rampantly high life long pensions. A graphic in this clip states the City Manager of the above California city would get an annual pension of $600,000 for life.
Yes, Jane this clip did get our blood boiling. Soon the country will or at least should demand a retroactive law to cut down local government pensions paid to previous workers. An alternative solution might be to transfer all local government pension obligations to the same Govt agency that inherited private sector pensions. Then pensioners can be paid pro rata based on what agency’s funding. The country, we are afraid, simply cannot afford life long pensions.
But if pensions are restructured, can municipal bonds be far behind?
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