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.
All Systems Go at the Fed
We keep reading that this new Fed is democratic and that there is civil war at the Fed. The Financial Markets don’t believe it. Bernanke spoke on August 27 at Jackson Hole. Since then, stock markets and risk assets have been on a phenomenal roll. When the Fed is so aggressively behind risk buyers, should we really be surprised that September 2010 was the best September in 71 years?
At every interesting juncture in the financial markets, some on at the Fed speaks up and adds juice. October is a scary month, you say. Not to worry. On the morning of October 1, NY Fed President Dudley spoke of the Fed’s determination to pump liquidity via QE2. Unlike Bernanke, Dudley gave semi-specific numbers – enough QE2 to act like a 50-75 basis points cut in the Federal Funds rate.
All this adds up to the David Tepper dictum or its corollary – Buy when the stock market dips in response to economic data. On Friday, after the Inventory-Sales deterioration in the ISM bothered people and the opening euphoria faded, the Bulls remembered the Tepper corollary – so they stepped in and bought. Those in doubt should check out the FCX intra-day chart from 10:30 am onwards on Friday.
We saw the same action on Tuesday, after the release of the consumer numbers. First a dip in the stock market and then a rally because every piece of weak data makes the Fed more determined to do QE2. We can’t wait for next Friday’s employment report to see if this corollary holds.
So we are in a perfect panglossian world – China data keeps being strong providing a firm bid underneath to risk names. The US Fed is getting more determined to pour in more and more liquidity. So, what’s not to like?
September-October 07 and September-October 09
We distinctly recall the Sep-Oct 07 period. Bernanke cut the discount rate in mid August 2007 and the Fed statement at the September 2007 meeting was very dovish. The U.S. Dollar got trashed and the risk assets went on a rampage until his more hawkish Fed statement on October 31, 2007. In case, you don’t remember, October 2007 was the high in the stock market.
While the Bernanke Fed has behaved in a similar manner so far, we doubt if he will get hawkish at the November 2, 2010 meeting. Unless, of course, the Dollar has gone through the floor and Gold has gone much higher by then. Will Bernanke then be worried about being summoned to a Republican Capital Hill to explain why he is killing the U.S. Dollar? So a great deal may depend on what the polls show by election day.
Last year, may also provide a parallel to this period. We recall the market action after the release of a bad employment number in the first week of September, 2009. The stock market sold off initially and then began a rally that virtually lasted till the end of 2009. The U.S. Dollar was sold and sold in this move. In fact, we believe that the decline of the Dollar was an important factor in the risk assets rally last fall.
Look what the U.S. Dollar has done for the past month or so. FXE, the Euro ETF, has rallied to 137.25 from 126.85 on August 26, the day before the Bernanke speech. If this doesn’t remind you of last year, what can?
We recall that Robert Prechter, Walter Zimmermann came on CNBC in September 2009 to talk about a beginning of a major secular rally in the U.S. Dollar to potential parity with the Euro.
Well, this week, Robert Prechter came on CNBC to recommend buying the U.S. Dollar and to warn that investors were being provided their 3rd major Selling opportunity of 2010, the first two being January and April (see clip1 below). Walter Zimmermann told CNBC a month or so ago the U.S. Dollar will begin a major rally and commodities will fall.
We recall that, last year, Prechter & Zimmermann proved very wrong until late November 2009 in their Dollar call. How will their forecasts fare this year?
The race may not go to the swift and the strong but that’s the way to bet, or so we have been told. The Bernanke-Dudley team have been swift to act and the strength of the Fed’s pumping machine is massive. This may be why S&P could go to 1220 as Rick Bensignor believes (see clip 4 below).
At some point, Prechter-Zimmermann & co. will be right on their U.S. Dollar call. If it is like 07, they will be right in October 2010 and if it like 2009, not until later in the year when the Teppers of the world cash in their profits.
The One Difference
In September 2007, US Treasuries suffered as Risk Assets rallied. Last year, Treasuries began a 4th quarter sell-off in October. So far, the long maturity Treasuries have proved fairly resilient. Hedge Funds or Large Speculator remain long the entire Treasury yield curve.
Is this a bar-bell strategy? Or is it a hedge against a sudden fall in risk assets? Historically, long maturity Treasuries have been the best hedge against a steep, sudden fall in risk assets.
Sell Signal in EM?
Michael Hartnett of BAC-Merrill Lynch said this week that based on the EM inflows indicator, a sell signal on EM has been triggered. According to him, this the 3rd strongest signal on record (April 06 and October 09 were stronger). His recommendation “Buy Protection Now”.
The China Tail Risk
The buying from China is the fundamental underpinning of the risk trade, the global growth trade and the commodities trade. The story about Chinese building overcapacity is an old one by now. People have worried about it for so long that they have become inured to it. And why not, over investment does not create problems until liquidity beings to dry up. But those who believe in worrying about this tail risk should hear what the astute and informed Kirby Daley told CNBC’s Erin Burnett.
The real tail risk in our opinion is much more sinister, the risk of China turning into a mercantile, nationalistic, invading country like Japan of the 1930s. More and more smart folks have begun warning about this possibility and worrying about the drop in US naval capacity.
Those who care should read the article Keeping Pacific The Pacific by Seth Cropsey in Foreign Affairs. The by-line of this article is The Looming U.S.-China Naval Rivalry. Who is Mr. Cropsey, you ask? Merely, the Deputy Undersecretary of the Navy during the Reagan & Bush (Senior) Administration as well as a naval officer for about 20 years. A couple of excerpts from this thoughtful article:
- The notion that might makes right has precedent in Asia. So does the use of naval power to support might. In the sixteenth century, Spanish ships seized the Philippines, while England enjoyed naval superiority in East Asia during its reign of empire in the nineteenth and twentieth centuries.
- But to Chinese leaders, the most instructive example of nautical might translating into political power is that of Japan. Japan’s history is an especially prescient warning about the dangers to Asia of an ambitious, well-armed regional hegemon. After becoming the dominant naval force in the Western Pacific during the first part of the twentieth century, Japan invaded, subjugated, and oppressed its neighbors, rapidly expanding its domain of control. Its ability to transport troops and material through the ocean made it a legitimate threat, from India to Hawaii.
This is one tail risk you cannot hedge with 30-Year US Treasuries, we suspect.
- Robert Prechter on CNBC on Monday, September 27
- Meredith Whitney on CNBC on Tuesday, September 28
- Bill Gross on CNBC on Tuesday, September 28
- Rick Bensignor on CNBC on Tuesday, September 28
1. Robert Prechter with CNBC’s Maria Bartiromo (07:41 minute clip) – Monday, September 27
Maria opened the segment by highlighting the accurate calls by Mr. Prechter- His call to buy the U.S. Dollar in November 2009 and his call to Sell the U.S. Dollar in June 2009. These calls netted investors 15% returns according to the CNBC slide.
- Prechter – All I am going to do today is talk about what we see in the technical indicators for this year so far. I think we have had 3 good selling opportunities in the stock market this year, ….in January,…in April and we are building up to another one this year, in late September, possibly early October.
- Prechter – I don’t think there is any indication that we have made the major bottom (in stocks)……the market has been topping in 2010, it has been giving investors several opportunities to get out…..the right investment position here is defensiveness…my message is safety above all right now…
- Bartiromo – what do I do if I buy into the idea (of a substantial decline in stocks)?
- Prechter – That is a great question because most people are choosing exact wrong thing right now…high yield bonds, because a lot of people are saying I don’t want to play stocks any more…so I am going to buy yield, I am going to chase yield, (high yield issuance) is at a record for the last 10 years, over $175 billion worth, investors are snapping them like crazy..to me this is a repeat of the last 4 times that investors made a really bad mistake by over committing to a market, the Nasdaq in 2000, Real Estate in 2006, Blue Chips in 2007 and Commodities in 2008. What do they love now? High Yield Bonds. If the economists are correct and we are heading into a recovery, they will do great and that’s why everyone is buying them because they believe the economists are correct. I think they are wrong. I think this is a partial recovery in an ongoing depression, this is the worst thing you can put your money in right now. Don’t fall for it. Don’t buy the junk bonds that everyone is so interested in. You want the safest end of the spectrum which to me is still Treasury Bonds.
- Prechter – We talked in June and the Swiss Franc looked really really good, that had an 18% jump, that’s after the 20% jump in the dollar we had.Right now, we have got a two-step reaction in the Dollar, only 5% bulls on the Dollar, Cash is going to do very well, between today and a few months from now..
- Bartiromo – In order to protect my assets, I want to do some Treasuries and I want to raise cash?
- Prechter – You want to be in cash, that’s exactly right…..Not only is cash going to do well in terms of preserving your purchasing power, I think it is going to do well in terms of relative value as you watch your dollars go up against foreign currencies. I know people think that is impossible right now, the Fed has said they are going to inflate for ever, they are going to monetize another 2 trillion dollars worth of bonds, but those are exactly the kinds of total conviction environments where I like to look at the other side and say is everybody believing the story too strongly? At this point, I would say that is very very likely.
Take this for it is worth. As far as we can tell, Mr. Prechter has been spot on in FX, on both buy & sell side of the Dollar. We think he is dead right on High Yield bonds. Investors should be frightened that the Fed is so panicked about the US Economy that it is willing to kill the Dollar. If the Fed is so worried, why stay in High Yield Bonds? By the way, liquidity in these is bad in good times and virtually non-existent when you must sell.
The middle part of this interview is about the long term call by Mr. Prechter about a massive decline in stocks over the next few years. Listen to the clip for that piece and read the summary of this view in July 2010 titled A Market Forecast that says Take Cover .
2. Next Shoe to Drop – Meredith Whitney with CNBC’s Maria Bartiromo (10:12 minute clip) – Tuesday, September 28
Meredith Whitney appeared on CNBC to discuss her new report on the condition of the States. This is a critically important topic and who better to discuss it than the first analyst to predict dividend cuts at Citibank before the credit crisis.
Fortunately for us, CNBC put up then entire transcript of this interview on CNBC.com. We think this transcript should be read again and again. We provide a few excerpts below:
- Whitney – THE SIMILARITIES BETWEEN THE STATES AND THE BANKS ARE EXTREME TO THE EXTENT THAT THE STATES HAVE BEEN SPENDING DRAMATICALLY, GROWING LEVERAGE DRAMATICALLY. MUNI DEBT HAS DOUBLED SINCE 2000, BUT SPENDING HAS ALSO GROWN WAY FASTER THAN REVENUE. SO SPENDING IN THE LAST — FROM 2000 TO 2008 GREW 60% WHILE REVENUES GREW 45%.WELL, STATES HAVE TO HAVE CONSTITUTIONALLY BALANCED BUDGETS. SO HOW DO THEY DO THIS? OFF BALANCE SHEET LEVERAGE. SO IN TERMS OF PENSION FUNDING.
- Whitney – SO YOU HAVE TO LOOK AT THE STATES AND THE RISKS THAT THE STATE — THE STATE POSE BECA– USE I THINK THE CRISIS WITH THE STATES WILL RESULT IN AN ATTEMPT AT LEAST FOR THE THIRD NEAR TRILLION DOLLAR BAILOUT. THAT HAS CONSEQUENCES ON THE DOLLAR, ON JUST ABOUT EVERYTHING. IT CERTAINLY HAS CONSEQUENCES ON THE U.S. RECOVERY. SO IT’S A MACRO CALL, AND YOU CAN ALSO PLAY MICRO IN TERMS OF WHAT’S GOING TO HAPPEN? WE DON’T THINK THERE’S A RISK WITH THE STATE DEBT SERVICE. WE VERY MUCH THINK THERE’S A RISK WITH THE MUNICIPAL LOCAL DEBT SERVICE.(emphasis ours).
- Whitney – THE U.S. BANKS HAVE CAPITALIZED THEMSELVES VERY WELL.SO THE U.S. BANKS WHEN YOU LOOK AT A DOUBLE-DIP IN HOUSING ARE GOING TO BE BETTER POSITIONED. I THINK THE STATES ARE GOING TO BE THE ONES WHO REALLY ARE NOT PREPARED AND REALLY SUFFER FROM A DOUBLE-DIP IN HOUSING. BUT I THINK FROM AN INVESTMENT VEHICLE FOR THE BANKS, A BIG PORTION, THE MAJORITY OF THE PORTION OF THE PROFIT CENTER OF THE BANKS FOR THE LAST YEAR HAS BEEN WALL STREET REVENUES. AND WALL STREET REVENUES ARE HORRIBLE RIGHT NOW. AND I THINK YOU GO THROUGH YOUR THIRD YEAR, REALLY, WEAK EARNINGS, AND THE BANKS ARE WELL OVERSTAFFED.
- Whitney – THIS WILL BE THEIR LAST QUARTER WHERE THEY CAN DODGE THE CREDIT BULLET. AND BY THAT I MEAN WITH HOUSING. CASE SHILLER CAME OUT TODAY AND IT WAS NOT A GOOD NUMBER, BUT NOT A BAD NUMBER. AS THE CASE SHILLER INDEX IS CALCULATED, IT’S A LAGGED ROLLING — A ROLLING LAGGED AVERAGE. SO WE THINK THAT OCTOBER — THIS WILL BE AFTER THE BANKS REPORT, YOU’LL SEE A REALLY UGLY CASE SHILLER NUMBER.WHICH MEANS THE FOURTH QUARTER WILL BE VERY VERY TOUGH FOR THE BANKS.
- Bartiromo – ARE THERE ANY BANKS YOU WOULD BUY GOING INTO THE EARNINGS SEASON IN THE FOURTH QUARTER?
- Whitney: NO, NO.
- Bartiromo – 80,000 CUTS IN THE FINANCIAL SERVICES INDUSTRY?
- Whitney – AND I MEANT IN THE U.S., BY THE WAY.
- Bartiromo – WHEN DO YOU THINK THIS STARTS TO HAPPEN?
- Whitney –I THINK THAT THE BON– USES ARE GOING TO BE REALLY, REALLY BAD AT YEAR END. AND SO THEY’LL HELP — THEY’LL HOPE FOR SOME ATTRITION ON THAT BASES. PEOPLE JUST LEAVING SAYING THIS IS NOT WORTH IT. AFTER THAT, THEY’LL HAVE — I THINK YOU’LL SEE LAYOFFS CERTAINLY IN THE FIRST QUARTER.
- Bartiromo – FIRST QUARTER OF 2011. SO DO YOU THINK THAT’S PRICED INTO THE MARKET AT THIS POINT?
- Whitney – NO
That’s what you get from a Meredith Whitney interview, a strong desire for a stiff drink or Prozac. But, if she proves as right here as she did in her last predictions, people who listen to her will save a lot of money.
3. Bond King Shares Gloomy Outlook – Bill Gross with CNBC’s Erin Burnett (06:11 minute clip) – Tuesday, September 28
Bill Gross appeared on Erin Burnett’s show to discuss his October Investment Outlook. Listen to him in this clip or read a summary of his views at Say Good-Bye to Double Digit Returns on CNBC.com. A couple of excerpts are below:
- Even the wildest bulls on Wall Street and worldwide bourses would be hard-pressed to manufacture 12 percent equity returns from nominal GDP growth of 2 to 3 percent,
- they are faced with 2.5 percent yielding bonds and stocks staring straight into normal real growth rates of 2 percent or less.
This clip is a brief discussion about Gross’s October Investment Outlook titled Stan Druckenmiller is Leaving. We urge you to read this piece. The article makes the following 3 main points:
- The New Normal has a new set of rules. What once pumped asset prices and favored the production of paper, as opposed to things, is now in retrograde.
- The hard cold reality from Stan Druckenmiller’s “old normal” is that prosperity and over consumption was driven by asset inflation that in turn was leverage and interest rate correlated.
- Investors are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns.
Read this article.
4. Closing Bell Countdown – Rick Bensignor on CNBC Closing Bell (05:33 minute clip) – Tuesday, September 28
Frankly, after writing about the above 3 clips, we simply had to feature a positive clip if only for our own sanity. So here is Rick Bensignor who uses a different technical model than the Elliott Wave work of Robert Prechter.
- Bensignor – 4th Quarter; I still think we push higher, at least possibly up to elections….I think you got to be in stocks. We turned bullish early last week….the laws of physics say we need to push to the upside, get the whole bearish case out of the way, get people excessively bullish which would probably occur somewhere between 1150 & 1220 and then it will time to retract again.
So may be he is not wildly bullish, but a move to 1220 after the views of Prechter/Whitney/Gross? We will take it.
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