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.
Happy New Year to all of Us
What a beginning to the New Year! William Daley as the new Chief of Staff and Gene Sperling as the Economic Advisor. This is good bye to Nancy Pelosi and hello to Bill Clinton. Was that the mid-term election or a Magic Wand?
David Rosenberg to ADP Survey “Drop Dead”
Well, Mr. Rosenberg did not use this classic New York phrase. Instead he asked “At what point do these folks at ADP just throw in the towel and discontinue the survey?” His point is that ADP’s “methodology is obviously doing more harm than good?” He adds that the through 2010, “the average miss absolute “miss” was 90K and when the typical headline figure is something around 150K”. Not a trivial miss as he points out.
The anti-star of the week was Gold & its cousin Silver. Gold fell 4% this week. The U.S. Dollar rallied and the Euro broke its 200 day moving average. European Debt problems resurfaced. The action in European Banks was awful. But the US stock indices and the commodity stocks were resilient. They did not go down when they should have. But they did not go up much either. And they ignored Europe. Perhaps like wine, nothing matters before its time.
The ADP report did substantial damage to the Bond market, especially to the 30-year Treasury Bond. It fell by over 2 points on ADP-Wednesday and yields rose 13.3 bps that day. That accounts for the bulk of the 15 basis points yield rise for the entire week.
We noticed a Tepper-Corollary type action in Bonds. The 30-Year Bond fell hard when the economic data surprised on the upside like on ADP-Wednesday AND it underperformed when the economic data came in weaker than expected like on Payroll-Friday. This is shown in our favorite 30-5 year yield spread which rose every single day this week to close at 252 basis points up from 233 basis points on December 31. During the Treasury rally on Payroll-Friday, the 30-5 yr yield spread rose by 8 basis points.
So is it a case of good data being bad for the 30-Year Bond because of growth and a case of bad data being bad for the 30-Year Treasury because of QE3? No other reason for the 30-Year to underperform on a Payroll Friday. We remind readers that the 30-5 yr yield spread rose by 12 basis points on December 3, the day when that Non-Farm payroll number came in much weaker than expected.
We like to watch this 30-5 year yield spread instead of the old 10-2 year yield spread. As long as the Fed remains at zero for an extended-extended period of time, the 2-year Treasury cannot function as a market indicator. So we replace it by the 5-year, the long end of the short duration part of the yield curve and compare it to the 30-year, the long end of the long duration curve and the truly independent voice of inflation & growth fears.
Now we wait for the 30-year auction next week. That should be fun.
The Death Knell of the Greatest Asset Bull Market Ever?
This was the call made by Dennis Gartman on Thursday, the day before the Non-Farm payroll number. We applaud the audacity to make such a call the day before the most important monthly number for the Bond market. But, that is the hallmark of Dennis Gartman. See Clip 1 below for his call and rationale for a 25-Year Bear Market in Bonds.
Mr. Gartman has lots of high & mighty company in his call against long maturity Treasuries. First and foremost is the Bond King Bill Gross himself. He likened people who own the long bond to male praying mantises who continue pelvic thrusts as their heads are being eaten by their female mating partner.
Ben Inker, the strategist at GMO was much more restrained. In an interview with Barron’s, Mr. Inker said “stocks are somewhat expensive and bonds are pretty close to disastrously expensive.” Mr. Inker favors cash.
And so does Doug Kass, the President of Seebreeze Partners. He announced on Thursday that a large part of his portfolio is in cash and that he is waiting to go short in a big way (see clip 2 below). One of his reasons for being cautious on stocks – rising interest rates. His friend Jim Cramer agrees on the rates call but not on the caution about stocks.
And this call seems to make sense. The US Economy has begun to grow, the Emerging Markets are growing fast and furious. With such growth, stocks and commodities are the places to be. Rates have to rise when faced with such growth. And rates are so low, so very low that they will have to rise a lot. That will create a massive reallocation of money from safety-first Treasuries to give-me-returns stocks and commodities. This is the chorus of the investing high & mighty.
What’s not to like in this logic? Memory is such a tricky thing. It intrudes when it shouldn’t.
“a sneak preview of the unfolding generational bond bear market”
With these words, Jim Grant of the Grant’s Interest Rate Observer announced the end of the Great post-1982 Bull market in Bonds. Yes, the death of the same bull market whose dirge Dennis Gartman sang this Thursday.
Jim Grant made his prophecy on June 4, 2004, over six and half years ago. He added then “If past is prologue, they (rates) might go up for a very long time.”
And Mr. Grant is probably the foremost historian of interest rate cycles. Read what he wrote at that time:
- Interest-rate markets are long-trending markets. In the United States, they have risen and fallen at generational intervals for more than 150 years. No one theory can explain why? Cycles of inflation and deflation are also long-trending, and systems of monetary organization have risen and fallen at multidecade intervals since the late 19th century.
- Therefore, inquiring minds will ask: What makes us think we can call the next 20 years? Our reply is that a 20-year forecast is defensible if the bond market is still long-trending and if the bull market is over. Believing those things to be true, we expect that yields will go on rising for as far as the eye can see – in fact further.”
Neither Gartman this week nor Grant in 2004 provided any rationale or based their call on a great macro event. The key phrase of Mr. Grant above was “if the bull market is over“.
Well, the Treasury market answered with a resounding NO by its behavior from 2004 to 2008. It went to higher highs in prices and lower lows in interest rates. The low in the 10-year yield in December 2008 was 100 basis points lower (or 33% lower) than the previous low in June 2003.
Look what the Treasury Market faced from 2004 to 2007 – a huge housing bubble, a huge global credit and liquidity bubble, the explosive rise in commodities, sustained fast growth in the world’s most populous countries – Had we ever seen such a Global Liquidity & Growth period before?
But despite these massive sustained forces, the maligned, despised U.S. Treasury Bull Market refused to die. Heck, it never even got sick.
So if the greatest global bubble in investment history could not kill the U.S. Treasury Market, why should an anemic recovery or even a strong recovery do so now? We are not smart enough to know the answer. We do know that Mr. Grant proved to be terribly wrong. We shall wait to find out whether Mr. Gartman proves to be right.
The Seductive Call of the Sirens
The urge to call the end of the 29 year Treasury Bull market must be strong, seductively strong. This allure has drawn in Dennis Gartman, Jim Grant, Julian Robertson, great minds all. They look into the future and see rates rising up. And why not? It is so logical, so clear to all bright minds.
And it promises untold riches for decades because Bond Bear markets last for a long time. The world looked the same to incredibly smart Hedge Fund minds six-seven years ago. The world was coming out of the telecom-technology bust, the Fed was pumping money and the Fed crown prince was promising to throw money out of helicopters.
And so some large celebrated hedge funds loaded up by shorting long duration Treasuries. But the dumb market did not respond. So these bright minds, seduced by the Sirens of Inflationary Growth kept adding to their losing trades secure in their own logic, contemptous of the dumb Bond market and reassured by the “conundrum” preaching Greenspan. The result – Gambler’s Ruin. These funds are no longer with us.
So we leave the brilliance of logic to brilliant minds, the pursuit of sensual sirens to the sailors. We are content to remain meek and in the safety of our shore.
- Dennis Gartman on CNBC Fast Money on Thursday, January 6
- Doug Kass on CNBC Fast Money on Thursday, January 6
- Bill Gross on CNBC StreetSigns on Wednesday, January 5
- Predictions for 2011 – Bremmer, Cramer, Doll, Wien
- David Grayson on CNBC Street Signs on Wednesday, January 5
1. Greatest Asset Bull Ever Dead? Dennis Gartman on CNBC Fast Money (04:11 minute clip) – Thursday, January 6
The end of the greatest bull market ever? If this does not deserve the pole position of the week, then what does? Dennis Gartman, the famous and distinguished founder of The Gartman Letter announced “The great bull market in bonds has ended“.
Melissa Lee, the anchor of Fast Money, lived up to our recent accolades. Rather than swooning at the prospect of a Treasury Bear market like her CNBC Anchor colleagues, Melissa asked a direct question:
- Lee – How much conviction do you have behind that statement? Are you short the bond market at this point or you just say its over?
- Gartman – I will tell you what, I am not short yet; I am going to start getting short; I have missed the top. There is no question. You have to remember when bonds made their low in 1982, you missed the bond market low by two years, you had plenty of time to get long of bonds. Rates fell by a good 26 years on their way down. Before that when you had a bear market in bonds, you had a 30-year bear market. Bonds make these tectonic plates shifts. They don’t move for a year or two; they move for decades. I suspect we are probably seeing the end of an amazing bull move when interest rates had gone from, I can remember trading the long bond at 14.25%; we are not going back to 14.25%, at least not in my life time but we are going to take the long bond to 8% and I can remember the 8% of 1986 which was a famous 10-year; rates will get there again.
- Terranova – I agree with you completely. (Note – Mr. Terranova changed his mind the next morning and recommended viewers buy TLT, the long Treasury ETF). We just had Douggie Kass on right now talking about cash. What you are talking about is a massive reallocation out of fixed income; that capital has to go somewhere and I know when you drop cash on your foot it doesn’t hurt. Where does it go?
- Gartman – …that cash will really go to the equities market over time; if we put ourselves into the future 20 years from now and look back and say what we missed, I think we will end up having missed a starting bear market in debt and an incipient bull market in equities. I really think that’s what is going on. The world is progressing, the world around us is getting stronger; 3 billion people are moving into the economy; we may be a little exuberant in the stock market here for awhile and you might have a 5% or 10% correction which I doubt but money is coming out of debt and it is going into equities.
- Scaramucci – Dennis, if we are at 8%, what are the meetings going on like at the Fed, is Ben Bernanke happy? Is he raising rates dramatically? Where is the economy? Where is the state of the American consumer/retail stocks?
- Gartman – Anthony, if we are going to take the long bond to 8%, it is not gonna get there next year, it is not going to get there in 2 years, it is not going to get there in 4 years. It is going to take a relatively long period of time to get the yields back to those levels. I don’t think Bernanke gets upset if we are trading the long bond at 5.25% sometime in the next 2 years.
- Scaramucci – …..I guess what I am getting at it is a pretty good environment if we get to 8% right? Ultimately, the real demand for money, not inflation, will probably boost interest rates which is ultimately good for the economy.
- Gartman – You betcha. That’s exactly what is gonna happen……Rates are going to go up, inflation will drive them a little bit but real driver behind rates rising is going to be expanded economic growth around the world and in the United States. Demand for money will drive rates up.
- If Mr. Gartman is right, he will make a boatload of money and so will you if you follow him blindly.
- But Mr. Gartman is wrong, his stop loss discipline will get triggered and he will only lose a little money. The vast majority of inexperienced individual investors do not abide by a strict stop loss discipline and they might lose a bundle.
So remember the third and most important trading rule of Dennis Gartman Never Add to a Losing Trade (see clip 4 of our Videoclips of December 18 – December 23 article).
For more views in agreement with Dennis Gartman, read the summary by John Melloy, Executive Producer of Fast Money on CNBC.com.
Since Joe Terranova of Fast Money mentioned Doug Kass, we might as well hear from Mr. Kass next.
2. Why Kass is in Cash – Doug Kass on CNBC Fast Money – Thursday, January 6
Doug Kass has been bearish on the stock market for some time and wrong. It seems that Mr. Kass is getting even more bearish and has a “large amount of his portfolio in cash”. And he is waiting to make the big short trade.
Watch the clip or read the detailed summary titled In Cash, Waiting to make the Big Short Trade on CNBC.com. Mr. Kass argues that there are four catalysts that are being overlooked by the bulls and these will ultimately cause the P/Es to contract:
- ‘Wimpy Syndrome” in Congress – As we move closer to the 2012 election, neither Republicans or Democrats may not have the political will to confront the deficit. “And I full expect partisanship to replace the move toward the center by both parties,” he says.
- Structural Job Loss – While the jobs picture has brightened somewhat, the large roster of unemployed will remain with us in the new year owing to a structural disequilibrium in the labor market and the secular rise in hiring temporary workers.
- Rising rates – Interest rates are rising and are likely to continue to rise – providing competition to equities.
- ‘Screwflation’ – The middle class is being screwed, they’re facing wage deflation, higher costs, 10 years of flat stocks and 3 years of lower housing prices.
3. PIMCO’s Gross Shares 2011 Outlook – Bill Gross with CNBC’s Erin Burnett – Wednesday, January 5, 2011
Despite his recent track record at public predictions on interest rates, Bill Gross remains the Bond King. So his views on 2011 should be interesting to all.
When asked to choose between stocks and commodities, Mr. Gross unhesitatingly chose stocks. He also disapproved of Gold as an investment. Mr. Gross believes, rationally we think, that investments should produce income and Gold does not. Mr. Gross summarized his investment outlook he had posted on the Pimco website. Caution – the opening analogy and its description presents a disturbing image.
Mr. Gross also describes his interpretation of the “Buddha” mind and “Nirvaan”. At some point, we might try to educate Mr. Gross about his mix up between the concept of “Buddhi” (wisdom not intelligence) and the person of Gautam “Buddha”, called so because he developed “Buddhi”. After all, the control of Buddhi over Mind (Intelligence is an attribute of mind) is the foundation of the concept of Yog.
In any case, below are the main conclusions of Mr. Gross:
- Avoid long term bonds and follow bond strategies like those of Pimco Total Return Fund. The way to do so is by safe spreads that emphasize credit, as opposed to durational risk.
- These safe spreads include emerging market corporates and sovereigns with higher initial real interest rates and wider credit spreads; floating as opposed to fixed interest rate obligations; and importantly currency exposure other than the dollar.
- For stocks, go to where the growth is – developing as opposed to developed markets; find countries and currencies that appear to have their act under control; Canada, Brazil and Mexico.
- Fear the consequences of mindless US deficit spending as far as the mantis eye can see – Higher inflation, weaker dollar and the eventual loss of America’s AAA sovereign credit rating are the primary consequences.
4. Predictions for 2011 – During the week of January 3 – January 7
In this clip, we include a series of predictions from leading investment gurus:
- Top Global Risks for 2011 – By Ian Bremmer of the Eurasia Group
- Cramer’s Top Dow Picks – By Jim Cramer, who else?
- Doll’s 2011 Portfolio Review – By Robert Doll of Blackrock
- Top Frontier Picks for 2011 – Cliff Quisenberry of Caravan Capital – Mongolia anyone?
- Ten Predictions That Pop – Byron Wien of Blackstone
5. Touring Tunisia: From Star Wars to the Sahara – David Grayson with CNBC’s Erin Burnett – Wednesday, January 5
Two million bottles of wine, nuclear-resistant scorpions and home of Hannibal – the colorful imagery used to introduce Tunisia by the travel-addicted Erin Burnett. Tunisia is Africa’s northern most country, about 100 miles south of Sicily and a neighbor of Libya, another favorite destination of Ms. Burnett.
Once the wealthiest province of the Roman Empire, Ms. Burnett tells us that Tunisia is now among the world’s top phosphate producers and the world’s largest producer of dates. It also has 20% of the world’s olive trees. Right away we have two questions. First, why didn’t BHP Billton try to buy or mine Tunisia rather than trying to buy Potash? And second, why aren’t the Chinese all over Tunisia? They are increasing their presence in nearby Italy. So why not Tunisia? We wonder because ours is an inquiring mind!
Other facts you might like to know:
- Raiders of the Lost Ark, Star Wars, the English Patient (we never saw this one thanks to Elaine Bennis of Seinfeld) were filmed in Tunisia.
- Since its independence in 1956, Tunisia has had only 2 presidents. Its total population is 10 million and 6 million tourists visit Tunisia a year.
So how do you trade Tunisia? To answer this question, Ms. Burnett invited David Grayson of Auerbach Grayson. His ideas – Tunisi Telecom that is about to be privatized in Q1 2011, Tunisiana, another telecom company, to be privatized this year, and Poulina, a diversified chicken conglomerate with a market cap of $1.1billion, which was up 40% in 2010.
Ever the broker, Mr. Grayson describesd the country as moderate and the government as very stable. The broker and the anchor aren’t going to tell you the other side which we found on CNBC.com:
- U.S. worried by Tunisia riots, internet freedoms – January 7, 2011
- Desperate act leads to unrest in Tunisia – January 2, 2011
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