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.
We made our statement about the much-ballyhooed Egyptian Revolution in choosing the title The Pharaoh is Dead, Long Live the Regime for the first paragraph of our article The New Egypt – More Questions Than Answers?
After all, the Regime not only survived but actually got more powers. Mubarak is gone, his son Gamal is gone. But the new Supreme Military Council is much more powerful than Mr. Mubarak ever was. The Parliament is dissolved, the Constitution scrapped and all powers are concentrated into the Council. On Friday, February 18, the Council announced that it will not allow strikes to continue.
We also worried whether the opposition to the Military Junta in Egypt would create uncomfortable controversies over Israel that will make the Egyptian Military risk breaking with the Egyptian people and becoming lackeys of Israel & America or turning against Israel. But we did not foresee the machinations beginning so soon.
This week, the Egyptian Military had little choice but to allow Iranian Warships to sail through the Suez Canal and dock in Syrian ports. There was no legal basis for refusing permission to the ships and doing so would have allowed the opposition to protest against the Egyptian Military. This permission cannot sit well with Israel. This is a small provocation and Israel wisely let it go. But this will be the first of many and stronger provocations, we fear.
On Friday, the USA vetoed a draft resolution that sought to condemn Israel over Jewish Settlements. The rest of the Security Council voted for the resolution, we understand. The USA vetoed it. We fear this will be but the first of the many acts in which the USA may find itself against the entire Muslim World. It did not matter when the Muslim world was ruled by dictators or authoritarian governments.
But today the Governments in the Middle East are forced to consider the views of their people. And unfortunately, the people in the Muslim world are getting more anti-American and anti-Israeli. On Saturday, the New york Times reported that an influential Sunni cleric who is banned from the United States and Britain for supporting violence against Israel and US forces in Iraq delivered his first public sermon in Cairo in 50 years on Friday. Read the chilling quotes in the article Afghan imams wage political battle against U.S. in the Washington Post. For example, Abdul Bashir Hafif, an imam at a private mosque in a wealthy Kabul neighborhood, said “Americans are considered to be Christians and Jews.” Apparently, according to Imam Hafif that is sufficient reason to hate Americans.
This is a sentiment, we fear, will spread through a populist (not to be confused with institutionally democratic) Middle East. If this happens, it will become a major negative for the USA and needless to say for the stock markets except perhaps stocks with Canadian Oil sands exposure.
Now that we have depressed you, let us jump into the deep end of the pool. Because Egypt and everything we wrote above might be sort of minor.
Bahrain – Start of the Real battle in the Middle East?
This week, the Persian Gulf took a turn. If this is not a head fake and proves to be really a turn, then it is a monumental event. Egypt could be trivial by comparison. For a detailed discussion, read our article Bahrain – Start of the Real Battle in the Middle East? The key question is how do you spell the big kahuna of oil fields in the Middle East? Do you spell it as Saudi Arabia or do you spell it as Iran?
Now do you see why we could rationally say Forget Egypt?
Madison, Wisconsin – The New Fort Sumter?
The first shots of the 21st Century American Civil War may have been fired this week. The Governor of Wisconsin fired a salvo that galvanized the Union membership and the pro-Union people of Wisconsin. The marchers occupied the capital building of Wisconsin. The Democratic opposition ran away to another state to avoid voting on this issue.
Astute seers like David Rosenberg regard this as proof that bondholders will remain whole in this dispute between unions, pension recipients and taxpayers. We are not convinced. It might be so in the first rounds but we are unwilling to call the winners in this war. No one comes away unscathed in a civil war.
Hedge Fund Manager Kyle Bass seems to see this crisis the way Meredith Whitney does (& as Jim Chanos does). State GOs would end up fine but Munis issued by local municipalities could be a different story (see clip 2 below). On Friday, Doug Kass joined this group of worry-warts by speaking on Fast Money about the gravity of the Muni crisis.
Stock Market – Nothing Matters Before Its Time
Of course, none of this matters to the stock market. At least not yet. Not even another tightening move by China mattered. The S&P closed up 1% for the week. The 30-Year bond was unchanged and the yield curve steepened a bit. This was despite some strong PPI and CPI numbers. Gold went up 2.4%. The unquestioned winner was Silver which exploded up 9%. The bulk of the gains in Gold and Silver came on Friday.
For those who might want to see a correction, we point out a faint ray of an indicator. Our proprietary Maria Bartiromo indicators no longer work because of her changeover. Readers might recall that we expressed these complaints when we awarded Ms. Bartiromo our Most Useful Financial Anchor of 2010 award on January 1, 2011.
But at 3:36 pm on Friday, we saw a beaming Maria Bartiromo lend a cheer for further gains by saying “Market Climbs a Wall of Worry”. Only Maria could describe the past few weeks or months as “climbing a wall of worry”! Has she noticed the VIX, we wonder?
Is this a rebirth of the old reliable Maria Indicator? We shall find out together. For the record, the SPY was at 134.24 when Ms. Bartiromo gave us “wall of worry” cheer. Be careful though because Maria’s bullishness on Friday was only about 20% of the peak Maria bullishness.
May be she should learn from Chairman Bernanke, who was as complacent and self-congratulatory as ever on Friday. And why shouldn’t he be? He is the new Oracle as well as the Guiding Hand of the Markets. Of course, Guiding Hand might be a understated term for someone who is both a regulator and a player.
- Oleg Deripaska with CNBC’s Erin Burnett on Tuesday, February 15
- Tony Crescenzi with Bloomberg’s Margaret Brennan on Friday, February 18
- Laszlo Birinyi on CNBC Squawk on the Street on Wednesday, February 16
- Kyle Bass on CNBC Strategy Session on Wednesday, February 16
- Dan Niles on CNBC Closing Bell on Tuesday, February 15
1. Oleg Deripaska, a Russian Oligarch with CNBC’s Erin Burnett – Tuesday, February 15
Frankly, we have not been interested in Russian oligarchs or in Russian business, mainly due to their image. This series of segments between Mr. Deripaska and Ms. Burnett intrigued us and we will begin paying greater attention to Russian companies. The interview is in 5 clips:
- One-on-One with Russian Oligarch (03:18 minute clip)
- One-on-One with Russian Oligarch, Pt. 2 (03:18 minute clip)
- Oleg the Oligarch (03:37 minute clip)
- One-on-One with Deripaska (06:40 minute clip)
- One-on-One with Russian Oligarch (03:24 minute clip)
What’s the first thing you notice? CNBC’s singular lack of creativity in naming these clips? When you watch the clips, you will notice that Mr. Deripaska does not believe in being charming. John Chambers, he is not. Most of the time, he is a dour personality who gives short answers.
But his answers are interesting as the CNBC Transcript of the interview demonstrates. We really recommend reading the entire transcript. A few excerpts are below:
- BURNETT: So, what do you think the downside is, or is there any downside?
- DERIPASKA: From quantitative easing?
- BURNETT: uh-uh
- DERIPASKA: Well, it is bringing up soft commodity prices. It is reflected in the food prices. You know, basic inflation. It is affecting stability in countries with a high proportion of low-income people. We’ve seen the effects of that in the Middle East.
- BURNETT: So, what about China? You’ve chosen to list your companies there, and you do a lot of business there. Do you think that China can keep growing at ten percent a year?
- DERIPASKA: I mean, China will definitely grow until– you know, 2015. Then they have this, you know– leadership transition. But their policy, you know, is to support– urbanization. They are trying to develop more of their western regions. And– of course– the opportunity for– for people to use, retail credit, and financial instruments is creating a lot of demand for product like cars and kitchen appliances and also driving a boom in the housing market.
- BURNETT: So, the demand from China, it’s all real?
- DERIPASKA: It’s all real, but not in aluminum. In aluminum, they’re almost self-sufficient. But they will become a net importer of aluminum in say 2012– 2013.
- BURNETT: Everyone says this is the century for Asia.. It used to be about America, now it’s about Asia. Do you agree?
- DERIPASKA: They’re very dynamic. And– they’re producing as many engineers as they need. Well, for example…in the United States., President Bush announced a nuclear strategy. But if you look at the age of nuclear engineers, which work for U.S. companies, they’re over 50 average…in China, they’re in their mid-30’s, you know. Maybe even even younger. That’s why it a different dynamic. Although America has its– own opportunity, especially as they, you know, realize that their market is letting America sell to America. You don’t need to spend so much money in the Middle East.
- BURNETT: You’re looking at the Americas, too, aren’t you?
- DERIPASKA: Canada is very important for Russia. There are a few countries, which are very important for Russia. You know, regarding China, if you look at Australia, 20– almost 20 percent of Australian GDP is based on China, and China demand. In Russia, it’s less than two percent.
- BURNETT: Less than two percent based on China?
- DERIPASKA: Yes.
- BURNETT: Wow. (we concur, wow).
- DERIPASKA: We (Russia) still have a very, you know, European focus. And– it’s good. You know, and it’s actually created a lot of opportunity. Russia could provide, you know, an excellent logistic. You know, if you– you know, go by train. You know, you can go from Shanghai to Europe, you know, in less than 16 days. By sea, it takes more than 40 days….And look at Canada! Canada is the same climate zone. Russia– you know, part of the Russian growth will be in– in direction to the north and Siberia. And all the solution, you know, for– for everything. For, roads, you know, for– in exploration, you know, you can find in Canada.
- BURNETT: Well, then, of course, I have to ask you, because a lot of people, when they hear safe, Russia is not the first place they that think of. They hear Russia, and they think– they think about the mafia, and they think about– stories about journalists getting killed. And they’ve been afraid. I mean, recently we had what, three IPOs pulled in London. Some people say it’s ’cause investors are scared. What do you say to those investors?
- DERIPASKA: Just, you know, try to understand the reality. You know, for example, if you have a court case somewhere, where will you get fair– real, you know, justice and real results? You will spend in India maybe– I don’t know, 25 years and you will not get results. In Russia, you know, three, three and a half years maximum, and you can reach a supreme court decision, and it will be definitely be a fair decision. In China– it’s better not to start in any court case because it’s so politically driven. That’s why in this– you know, in– in this aspect, you know, Russia’s much more safe. If you look at– let’s say– development by Russian region, of course Moscow is different. You know, Moscow is very hot, you know, everyone wants to– to be there….the rest of Russia needs investors too. And if you look at the south of Russia, or Siberia, and parts of and west is very welcome. And every government will do whatever it needs to do to protect investors’ interests.
- BURNETT: You– I know you’re planning for a carbon tax with– you know, EuroSibEnergo, hydro power. And I know you’ve talked a lot about nuclear and– moving in that direction. Which of those is going to be a bigger bet for you basic element? Hydro or nuclear?
- DERIPASKA: At the moment– you can develop hydro. And– you know, a hydro project, you know, is fastest, seven years. And– our recent development in– and– in part– memoranda which was sent with Zanzipar, one of the biggest Chinese companies, actually provides us an opportunity to– to develop up to ten gigawatts in eastern Siberia, near China border. Partially it would be for the Russian market, and– and part would be for export.
- DERIPASKA: Now, I think it’s a unique opportunity for Russia, because we have a cycle. Which made a super cycle. You can buy whatever product, whatever company is important for your strategy. And it’s actually, you know, in– in a unique time.
Well, Mr. Deripaska sold us on learning more about Russian companies and Russian macro.
2. Tony Crescenzi with Bloomberg’s Margaret Brennan (05:56 minutes clip) – Friday, February 18
Mr. Crescenzi is a smart investor and a clear speaker. He is an Executive Vice President and a Strategist at Pimco, the giant Bond Firm. We have covered many of his appearances on Financial TV. In this clip, Mr. Crescenzi dares to suggest that the Markets are making a mistake. Actually he also says ignore the economists. How can we not give this contrarian clip a high ranking position for this week?
The first couple of minutes of the clip is a discussion of headline CPI and core CPI. The key question and answer comes at minute 04:05 of the clip:
- Brennan – You are a market participant, you are a strategist. You just say “ignore the economists”?
- Crescenzi – Sometimes. For example, the last couple of years, the markets have been expecting the Fed to eventually reverse its zero interest policy and push rates higher again. And the market again is priced for the Fed to raise interest by December, in fact by March of 2012, the Bond market, we know this Fed Fund Futures, Euro Dollar Contracts and other things, the market is priced for the Fed to raise interest rates almost 75 basis points by that point. So half point hike roughly by the first quarter of next year. So the markets have been wrong repeatedly. Usually when the markets look about 4 or 5 quarters, they tend to be wrong and you can judge this by the performance of the Euro dollar contracts. The Euro Dollar contracts are tied to the Fed Funds rate, the rate the Fed controls. So the market we think again will be wrong in the timing of the first Fed rate hike. The market is continuously pushing that out. There is always this feeling that the economy will get better, strong enough for the Fed to reverse its policy.
- Brennan – Let me get you to the escape velocity question.When can we get out of the emergency funding and support? But I want to ask you, how much is QE distorting things and how much is the global uncertainty and the instability in the middle east once again creating buyers of Treasuries, thus changing the thesis again and again?
- Crescenzi – Probably not as substantially.The Dollar did not perform all that well during the upheaval in Egypt and the continued upheaval in the Middle East. There isn’t tremendous movement into Treasuries. But it is the deepest, most liquid market and so money will flow to Treasuries in times of worry and anxiety.
- Brennan – Still? the least dirty shirt, isn’t that the term?
- Crescenzi – You can call it that for awhile longer.
First, if Mr. Crescenzi is right, then how good does a 3-year Treasury at 1.30% look? You could roll down the curve and pick up incremental return as you slide.
Secondly, do you notice that Ms. Brennan is as committed to the “I hate Treasuries” jihad as her ex-colleagues at CNBC?
3. The Bull Case – Laszlo Birinyi on CNBC Squawk on the Street – Wednesday, February 16
Mr. Birinyi is famed for his focused strategy and for his track record. He has been dead right for the past two years in remaining steadfastly bullish.
His views were summarized by CNBC in Stocks Will Rise 60% by 2013 on CNBC.com. A couple of excerpts are below:
- “The S&P will more than double in the next two-and-a-half years in a best-case scenario,”
- “There was an extraordinary start to this bull market, and when you have starts similar to this, you end up with some very substantial moves,”
- “We’re out there and very comfortable being bullish.”
- Birinyi’ lowest prediction is that the S&P rise 31 percent by September of 2013.
- “Looking at the market’s history, which we found to be a usefeul guide in the past and has been a useful guide for the last two years, we’re going to continue to dance with who ‘brung’ us,”
4. Kyle Bass on CNBC Strategy Session – Wednesday, February 16
Kyle Bass is the managing partner of Hayman Capital Partners. We first heard Mr. Bass during his appearance on Strategy Session on August 17, 2010. At that time, we found his views to be fresh and decidedly in the tail risk camp. We covered these views rather extensively in our article Interesting Videoclips of August 15 – August 21, 2010.
When we heard Mr. Bass this week, we found his views have not changed. He is as bearish on Japan and Europe. But this time he took the time to address the Muni Bond situation. His interview is in three clips:
- Muni Meltdown (01:27 minute clip)
- Europe’s Day of Reckoning (07:52 minute clip)
- Sayonara Japan (10:30 minute clip)
- Bass: China Inflation could hit 10% Next Quarter (04:33 minute clip)
- “There are going to be a number of muni defaults, but it’s where you draw the line,” he said. “Will states be allowed to default? Will legislation be introduced to allow states to restructure? I don’t believe that’s the case. I believe states will not default”
- “Cities and counties likely will sustain the bulk of the damage…..look at the balance sheets and make your own idiosyncratic decisions.”
- “When you get down to city, county and project-level municipal finance, I think those are all open season for defaults”
- Bass – I think, when you look at Q2 prints of CPI, core CPI, inflation, headline numbers, are going to show, Russia +15%, China +10%, if you remember yesterday there was some angst, some consternation that China printed what a 4.9%, and that was too much and that they had to slow it down, the next one is gonna be 10% if food prices stay where they are today,
- Faber – And what’s the result of all that?
- Bass – Again, its gonna move things into the spotlight, hey we are going to cool down some of these emerging market economies, if you look at EM vs. DM, you see developed markets outperforming emerging markets,
- Faber – China, the ultimate question is, can they ultimately engineer a soft landing? As is the question with Brazil to some extent and India as well?
- Bass – I just think it is important to pay attention to the headline because the Q2 numbers are going to be huge.
- Faber – Do you own Gold in the fund?
- Bass – We do. It is a 8-10% position in the fund……It’s just another currency. The Yen is likely to drop against a basket of world currencies, the US Dollar, if we keep printing it at half-billion dollars a day, it will drop and the Euro, somehow they are going to have to bail this out with whatever without admitting defeat on the front end..So I just own something you can’t print. It’s just another currency. It is not that I love something that is heavy and yellow… We own it physical.
- Faber – If your scenario proves correct, then I would assume the Yen is going to fall in value a great deal if they actually have to start printing money potentially.
- Bass – You mean if they print more, they have monetized 53 trillion yen of debt so far. Bank of Japan owns 10% of Sovereign Debt of the country. So the question is how fast will they have to print more? Currencies tend to overshoot because they discount future inflation expectations. You know a move from 83 yen to 120 yen is not that big a move in the grand scheme of things.
- Faber – You may want to own the Nikkei in that environment, not short it?
- Bass – yes, on the front end. When you think about Japan, it does not have any natural resources, so you have to think about the supply chain…so all of the exporters in the front end, will get direct benefits of running a supply chain through the inflation but if you have no natural resources and you are buying your imports, then it doesn’t matter,. The answer is yes, for a short period of time.
5. Dan Niles with CNBC’s Maria Bartiromo – Tuesday, February 15
Dan Niles is the Co-CIO of Alpha One Capital Partners. He used to be a highly regarded technology analyst. We find Mr. Niles always informative and worth listening to. This clip is no exception. We recommend watching this clip. A couple of excerpts are below:
- Right now, we are getting a little bit more defensive. …employment is getting better and housing is getting better, two things that have been poor. The big thing though you have seen a wall of money coming in US stocks, as Emerging markets have been raising rates…money from Treasuries which has been selling off is coming into the US equity markets too, you are really pushing a lot of these names without great fundamentals to back them up, so we are actually backing up a little bit, getting a bit more defensive;
- QE2 is winding down this June, then we are going to find out how strong this patient is, the US economy..
- It is getting really hard to pull metal out of the ground, China may be slowing down but it is probably not gonna contract, so those are good supply demand dynamics, ….those stocks have been pushed up a lot and in a risk reversal trade which I see coming they are going to get beat up the hardest ….
- if you look at Brazil, China, and India, those markets have pulled back 20% off their November highs,….,that gives you potentially how bad it could get in the US if we start to worry about rising rates, inflation,…..
- Tech actually is starting to worry me…because you see in the market a euphoric view on Tech…
- I think it (EM) has corrected so much that I have got my wish list out..I think we are getting closer to the end of that hopefully, and so we are looking to go back in…
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