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.
Mr. Geithner Surfaces
Last week we wrote “Tim Geithner, the Secretary of the Treasury, is neither to be seen nor heard.“ (Bernanke for Financial President – Interesting Videoclips October 9 – October 15 ). Lo & Behold! Mr. Geithner resurfaced this week in an emphatic fashion. He told the Commonwealth Club of California that “The United States of America and no country around the world can devalue its way to prosperity, to competitiveness. It is not a viable, feasible strategy and we will not engage in it.”.
Mr. Geithner said this on Monday and Presto, the Chinese Government raised interest rates on Tuesday morning. Is this part of the rumored China-Fed deal Jim Bianco had discussed the week before (see clip 2 – Interesting Videoclips October 9 – October 15 )?
We are inclined to think so. Then Larry Kudlow announced on Thursday morning (at around 11:10 am) that he was “sniffing a Geithner-Bernanke deal” for a stronger dollar and smaller QEII. We noticed that the stock market almost immediately began selling off. Jon Najarian of CNBC Fast Money dismissed the Kudlow statement as insignificant that afternoon. We do not claim to have Dr. Najarian’s acumen, but we present the 15-minute SPY chart of the last two days. Notice the sell off that began just after 11 am on Thursday.
We believe that Larry Kudlow has excellent sources and we trust his antennae. This is not a minor issue. We think the existence of a China-Treasury-Fed deal is an existential question for the rally in risk assets that began on August 27 with the Bernanke speech in Jackson Hole.
Mr. James Bullard as the Bernanke “Herald”?
We mean this in an honorific sense and not in a diminutive manner in any way. Through out history, Kings have used heralds to transmit their true meaning to their allies and adversaries. Such a Herald had to be a trusted, senior confidant of the King. It is in this manner that we wondered last week whether the St. Louis Federal Reserve President James Bullard has been serving as the Herald for Ben Bernanke, the de facto King of America’s Economic Policy at this time.
This week, Mr. Bullard made clear statements about QEII. His statements, as quoted on newschannels, include:
- 3rd Qtr GDP may be a little stronger than 2nd
- Bullard in ‘sharp disagreement’ with ‘big bang’ of purchases
- Bullard favors ‘small increments’ in Fed Policy actions
- Bullard says disinflation trend ‘has flattened out’
- Bullard: We are not here to ratify what the markets think (emphasis ours)
Wow! That last statement is powerful. Does this mean that Bernanke is set to disappoint the markets on November 3rd? Recall that is exactly what Chairman Bernanke did on October 31, 2007. On that day, the Dow Jones closed at 13,930 and the S&P 500 closed at 1549.
This is why we wonder about the role of James Bullard in today’s FOMC. If he is indeed the Herald for Dr. Bernanke, then we should all look out below as far as risk assets are concerned.
If Chairmen Bernanke refuses to ratify on November 3 what the markets think now, then we can guess what will happen to risk assets. We can guess a substantial rally in the US Dollar. But, we are not clear what would happen to Treasuries.
We do think that the entire Treasury curve has benefited in price due to the prospect of huge buying of US Treasury securities ahead of QEII. But the spread between 30-10 year yields has risen to unprecedented levels closing at 138 basis points on Friday after reaching 143 basis points on Tuesday. So if Bernanke announces a smaller than expected QE on November 3, we would expect the 30-10 year spread to come in sharply and we would expect TIPS to underperform Nominal Treasuries.
But that is as far as we are willing to project. We remain unclear as to the directional trade in long maturity Treasuries. But, in full disclosure, we devoutely wish for a sharp sell off in Treasury prices and rise in yields.
Was the Sarcasm Intended at Us?
Many experts in the Investment Blogosphere are firm believers in the stupidity of the Fed, of the certainty of an eventual explosion in long maturity interest rates and the eventual demise of the US Dollar. We have dissented from this consensus of bright minds by remaining bullish on 30-Year Treasuries until this summer and by our belief that the US Dollar will be a better haven of safety.
Until this week we had not been attacked for our opinions.That might have changed this week. We are the coiners of the term “Tepper Corollary”, we believe. We began using this term on October 2 after coining the term Tepper Dictum the week before.
This week, we were told of a sarcastic comment in the Blogosphere about the term Tepper Corollary. That caustic comment questioned whether the term Tepper Lemma will be coined next.
We are not experts, we know. In fact, we pride ourselves on being rather simple if not simpletons. But we hope to be allowed to point out that a Lemma is a stepping stone to a Theorem and a Corollary follows a Theorem. So it would be hard to construct a Lemma after building a Corollary, at least in the traditional Mathematical convention.
- Jim Rogers on CNBC Kudlow Report on Friday, October 22
- Dan Niles on CNBC Fast Money on Thursday, October 21
- Talcott Franklin on CNBC Strategy Session on Thursday, October 21
- Kathy Patrick on CNBC Closing bell on Tuesday, October 19
1. Geithner Dollar Protector – Jim Rogers with CNBC’s Larry Kudlow (09:30 minute clip) – Friday, October 22
In this clip, Larry Kudlow continued to pound away at his theme of Tim Geithner as a Hard Money King Dollar Protector. This is an important question because this weekend, Global Finance Ministers meet in Seoul, South Korea. That is why we chose this clip for our pole position for this week.
Larry Kudlow correctly said at the beginning of this clip that the US Dollar will be at the top of the agenda. He then showed a clip of Treasury Secretary Geithner saying “The United States of America and no country around the world can devalue its way to prosperity, to competitiveness. It is not a viable, feasible strategy and we will not engage in it.” Larry Kudlow called this statement huge.
The next day, in a Wall Street Journal interview, Mr. Geithner said “The Dollar is low enough relative to the Euro and the Yen”. Larry Kudlow said that he strongly hoped that Geithner truly believes this and wondered if Geithner “has not persuaded Ben Bernanke to go absolutely minimal on any QE2 money pumping or may be better yet, we don’t need QE2 at all”.
Then he asked the question “Is the Dollar set for a rebound? And if so what might that do to stocks?” Then he brought in Jim Rogers and Andy Busch of BMO Capital Markets.
Jim Rogers was his usual self. After bashing Geithner & Bernanke as he usually does, Rogers said “The Dollar is so low right now and there are so many bears including me that I would expect the Dollar to rally for awhile.” Mr. Busch agreed and added that the expectations for QE are outrageous right now.
Then Larry Kudlow asked Jim Rogers what a Dollar rally would do to Gold & Commodities. Rogers said “Obviously , if the Dollar is going to rise for awhile, the opposite is true of Gold. Larry, everybody is bullish of Gold too, 95-98% of the people are bullish on Gold. That’s never good for any asset, no matter what it is. I won Gold, I am not selling Gold but I would not buy it now not with 98% of people in the word bullish”.
People ask us why we tend to review CNBC clips rather than say Bloomberg clips. The first and foremost reason is that clips on the Bloomberg website tend to be excerpts which we abhor. We want to hear every word the expert guest says and not some excerpted version based on the biases of Bloomberg webmasters. In contrast, CNBC puts the entire unedited set of clips on their website.
Secondly, Bloomberg interviewers tend to be pure Journalists and as a result the expert Guests tend to be wooden or less forthcoming. For example, watch the Jim Rogers interview with Larry Kudlow in this videoclip and then watch the clip of Jim Rogers speaking to a Bloomberg Journalist on Bloomberg.com.
2. Bull Market or BS? – Dan Niles on CNBC Fast Money (03:29 minute clip) – Thursday, October 21
Dan Niles, the Co-CIO of Alpha One Capital Partners, used to be a highly regarded Technology Analyst on Wall Street. He has been correct in his predictions in his prior appearances on CNBC Fast Money. This is a short, direct clip.
- Melissa Lee – Dan, in terms of the strength, it does seem like a Apple-led tech rally. So how long do you think the overall strength in technology lasts?
- Dan Niles – yeah, .., I just view this as a big reflation trade in terms of Quantitative Easing II on November 3rd, everybody is geared up for that, I think once that’s done, you know, then we go back to looking at fundamentals, and that’s when you have a much larger problem on your hands. Because it has been a narrow rally..
- Guy Adami – Dan, what about the fundamentals?….My sense is once the margins start to go south, especially names like Intel, it is extraordinarily hard for them to go back north and peak margins tend to lead to peak stock prices in these names. Is that where we are right now?
- Dan Niles – yeah, you are absolutely correct. With Intel if you remember where we left it was in 1-3 months I would go back to looking at the name and your point gross margins are at record levels, operating margins are at record levels, you know they missed Q3, their guide for Q4 was 3% growth which is anemic as well and then you have two down quarters probably in the March and June quarters coming up. When you have down revenues, that’s when you see margin compression. So for me Intel is the most interesting out of all the semiconductors; you could short other names at least with Intel, you had bad Q3, Q4 but with a lot of the other ones, you are just starting to miss, that’s what bothers me there.
- Joe Terranova – Dan, recently the cloud computing trade is sort of falling apart, how do you determine who is the winner, who is the loser in this space? Break it down for us.
- Dan Niles – You are absolutely correct. Everybody has been throwing money at the space and not really thinking through it. For me the easy thing is one thing we all know that there are a lot of smartphones out there, lot more video content being pushed around by these smartphones. You ultimately need to store this somewhere. So the area that I am looking at is the storage plays, they may not be as “sexy” as some of the others, but as you are jamming more video content around the globe, that’s when you are going to need it. So, we have investments in a name like NTAP, we own a little bit of Brocade as well, but these are not the “sexiest” names but I think they are some of the safer names as opposed to some of the other stuff you are looking at, outsourced hosting and things like that.
3. Mortgage Fraud Clearing House – Talcott Franklin on CNBC’s Strategy Session (10:57 minutes clip) – Thursday, October 21
This week, Bank of America fell because of concerns about their liability in RMBS Securities. The Bank was asked to accept the putback of some mortgage securities by Pimco, BlackRock and the NY Fed. There is deep concern about what the potential liabilities are about the issues related to the putbacks of “fraudulent or misrepresented mortgages” in the words of CNBC’s Gary Kaminsky.
David Faber explained that in order for investors to recoup losses on these mortgage securities, they need 25% of the Holders of a particular bond issue to force the Trustee to take action. To do so, he explained what is being used is a clearinghouse, which aggregates various claims.
David Faber added that according to Talcott Franklin, the man who runs that clearing house, those claims now stand in excess of half trillion dollars. Mr. Franklin said that the phone at his firm has not stopped ringing. They have now reached 6,700 mortgage deals out of which they have 25% + holders in 2,6000 mortgage deals, 1,150 deals with over 50% holders and 600 deals with over 66% holders. He explained that a lot of his clients are institutions with fiduciary obligations to teachers, firemen and people with insurance policies. As he eloquently put it “some day some teacher is going to wake up and find out she has no pension though no fault of her own”.
The rest of the clip is a good discussion between Mr. Franklin and the FaberInsky duo. It is interesting to watch how Gary Kaminsky thinks & talks like a Money Manager whose clients have lost money in these mortgages and David Faber thinks & talks like a guy whose key sources are Bankers.
A friendly suggestion for Faber & Kaminsky. Get into a real scrap of an argument between yourselves. Both of you have represented the two sides in this fight for your entire careers. It would be both fun and educational.
4. Suing Bank of America – Kathy Patrick with CNBC’s Maria Bartiromo (04:08 minute clip) – Tuesday, October 19
Ms. Patrick of the Law Firm Gibbs & Bruns is the lead Attorney representing eight large institutional investor firms in a suit against Bank of America. This is a very direct clip.
- Bartiromo – Tell me exactly what you are seeking?
- Patrick – Very simple. We want to enforce the Holders’ contract rights…Today’s action starts the clock ticking. At the end of 120 days, two separate 60-day periods, if the issues of non-performance are not addressed or cured, then our clients will be able to enforce their rights in court.
- Bartiromo – You just heard what Brian Moynihan said on tape….that they are not going to stand for this. Where do you feel your client has this right?
- Patrick – To use his metaphor, it is not a question of buying a Vega and wanting a Mercedes, it is a question of buying a Vega and getting a Vega.That’s not what happened here. Representations made to my bond holders when they purchased these securities, they are contractual representations about the credit quality of the mortgages and our clients are concerned that the mortgages in question did not, at the time they were securitizing, conform to those representations. And it is hardly surprising that our clients want their contracts performed and performed as promised.
- Bartiromo – How are long are you willing to go for this and how much are you willing to push for a dollar amount in terms of seeking the best outcome for the clients?
- Patrick – We are willing to take this as far as it needs to go in order to get the contract enforced in the way they are supposed to be performed….the issue is not ease of lending or the availability of credit to deserving borrowers, the issue is were the credits as represented when the notes were securitized. It is simply a matter of if you tell my bondholder that this is an owner occupied property and it is not owner-occupied, that’s an incorrect fact. And an owner-occupied property has a very different credit quality than an investment property where someone has 20 properties and may default strategically. Those are important representations. They were required by the contract precisely for those creditworthiness and rating issues. And our clients are entitled to have those enforced.
- Bartiromo – Understood and you are making this very clear.
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