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.
The King is Dead, God Save the Council
A slight variation of the English salutation to herald the transfer of power. Pharoh Mubarak has been banished and without his Swiss Accounts. In his place, rules the Supreme Army Council headed by Field Marshal Tantawi, the 80-year old who was as hated as Mubarak until yesterday. So Mubarak’s handpicked Military guys now run things while Mubarak’s handpicked Civilian guys seemingly get the boot. These are the guys who were chosen to pack the Parliament which has been dissolved.
So Mubarak’s Military boys get a few months to a year to write the “new” constitution and organize a free and fair election. The young, really smart organizers of the protests now understand they got to get back to work and school. We must congratulate these people. They were superb in their discipline, in their tactics. We wish they would come forward and participate in the constitution writing phase. As long as they are active and allowed to be active, we will feel optimistic.
People who criticize the Obama Administration do not realize the central fact that the USA got exactly what it wanted. Credit for supporting democracy, Credit for supporting the youth of Egypt and their aspirations AND the USA kept its favorite military regime in power. Kudos to President Obama.
No wonder the US Stock Market went on a rally mode by mid-morning. To the Victor goes the spoils. Actually you have to congratulate the US Stock Market. After its first swoon, it recovered and essentially ignored the Egypt brawl. It seems it knew that Egypt would not end up as a negative for America or at least the American economy. That is why there was no flight to safety.
Not that the Stock Market needed this victory. It seems that there is a capital flight from all asset classes into the US Stock Market. It’s rise has been relentless to quote Doug Kass. Every morning dip can be safely bought and sold by day-end.
Why would this change and when would this change? These are questions for minds much brighter than ours. One such bright mind belongs to Doug Kass and we direct you to the article Doug Kass: 4 Reasons Rally Comes to Screeching Halt on CNBC.com.
What Comes Next?
Everyone seemed exhausted by Friday evening. We expect a period of relative calm and a period in which a group of civilians are formed to be the face of the Government and to engage in routine administrative tasks. Then we expect the real struggle to begin – a struggle between the colonels-majors against the Generals, a struggle between the haves & have-nots, a struggle between Islamic Groups who take the side of the have-nots like Hezbollah in Lebanon and the secular groups who would be on the side of professionals and the rich. We also expect the treaty with Israel to be a weapon of choice in these struggles.
For a more detailed discussion, we refer you to our article The New Egypt – More Questions Than Answers?
The Struggle for the ECB – Angela Merkel & Axel Weber
This was the big story of Friday and should have been. The Egypt story is poetic and potentially done for awhile. The struggle for the control of the ECB could have far greater consequences for the Financial Markets. Axel Weber, the heir apparent to Jean-Claude Trichet for the seat atop the ECB, resigned on Friday to go into the private sector. Angela Merkel the German Chancellor, was furious. Does this jeopardize Germany’s control of the ECB? Was this uncertainty the cause of the Euro drop and the Dollar rally.
Buying Signals Work, don’t they?
On Friday January 21, the New York Times broke the story that policymakers were “working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.” That morning, Rick Santelli wondered in his pre-market conversation how MUB, the Muni Bond ETF, would open.
As we reported then, MUB opened up and closed up 1% that day. That prompted us to ask whether Munis have found a short term bottom in our weekly article on January 22 . The question was based on the old signal that if they go up on bad news, then they should be bought. The MUB is up almost 4% since that Friday.
On this Friday, we got some positive news on the Muni front. Apparently a bill has been introduced in the House to extend the Build America Bond program. Recall that the sell-off in Munis began when the Build America program was allowed to expire. The MUB rallied another 1% on Friday with most of the rally coming 9:30 am to 11:00 am.
What does one do if the Munis rally on this news next week? Take that as a signal that the Muni bear market has ended or treat it as an opportunity to sell in the rally. That is for the experts on Financial TV to decide. For example, one view comes from Jim Chanos on CNBC (see clip 2 below).
It Falls Flat
Well not quite. But the Treasury Yield curve flattened this week. The bulk of the flattening took place on Friday. And it did so from both ends. The 30-Year Bond yield fell from 4.74% to 4.69% this week while the 5-year yield rose from 2.27% to 2.35%.
Why? We would love to know that. Would someone enlighten us! Did Rick Santelli say why on CNBC on Friday? We can’t say because we stopped watching CNBC late morning.
CNBC Falls Flat
We like CNBC Anchors. They do a decent job covering financial markets and they do it in a fun, entertaining sort of way. But on days like Friday, it becomes dreadfully obvious that these fun & nice New Jersey folks don’t much beyond Englewood Cliffs or the corner of Broad & Wall. We realized on Friday that they don’t even read the Dow Jones wire or news headlines.
On Friday morning, Melissa Francis & Trish Regan kept speaking about Omar Suleiman being the new in-charge guy for over 30-40 minutes AFTER news-wire reported that the Army Council had taken control and that Suleiman was out. Then David Faber repeated this factual error. What’s worse is that CNBC’s expert guest, a Ph.D. from Princeton, talked as if Suleiman was the new head.
Forget CNN & Fox. The difference between MSNBC and CNBC was awfully evident all afternoon. Even an ex-CNBC Anchor like Dylan Ratigan proved to be so far above the capabilities of CNBC
Anchors that it wasn’t funny. Years of talking to stock mutual fund managers and asking what stock viewers should buy may have caught up to them.
We again suggest lessons of the Fast Money show to CNBC Management. Get a team of professionals with different skills and background who can come in to pinch hit when events take over. Or launch a program to train your anchors in more global issues.
- Dr. George Friedman on Bill O’Reilly’s Factor on Friday, February 11
- Jim Rickards on CNBC Squawk Box on Friday, February 11
- Secretary of the Treasury Timothy Geithner – on Friday, February 11
- James Chanos on CNBC Squawk Box on Thursday, February 10
- Rich Volpe on CNBC Fast Money on Wednesday, February 9
- Jay Pelosky on CNBC Squawk on the Street on Friday, February 11
1. George Friedman on Bill O’Reilly’s Factor – Friday, February 11
We have great respect for Stratfor, the geo-strategic website, and for its founder, Dr. George Friedman. Few organizations have the breadth and depth of sources that Stratfor has.
Most people have waxed poetically about the freedom movement in Egypt. In this clip, Dr. Friedman presents another case. Watch this entire clip. Then you will realize why we gave it our pole position of the week.
As we write this article, the transcript of the February 11 Friedman segment has not been posted on the Factor website. We will amend this article to include a link to the video and the transcript when it becomes available. In the meantime, we include some excerpts from our notes:
- O’Reilly – So Stratfor says, this could have been a coup, a bloodless coup?
- Friedman – The Military was the one who wanted Mubarak out. He was 82 years old. He wanted the son to take his place. He wouldn’t leave. There was a show down for weeks between the Military and Mubarak ….when these demonstrators started, I won’t speculate who started them and why, the protests gave the military the strength to have the showdown with Mubarak. Mubarak refused to leave last night. This morning they woke up and they forced him out of office. They put him on ice and saved the regime….Everybody wanted Mubarak to resign. But Mubarak, his son and his business associates who had piled up huge amounts of money were afraid that if he left power, they would lose that money…
- Friedman – This was not as many have presented, a massive uprising of the people. At most, there were some 200,000 people in the streets, that’s not really all that much in Cairo.
- Friedman – This is what the past few days were all about. It was all about the money. Mubarak wanted guarantees that the money would be protected. Nobody could give him those guarantees. He would not leave, they forced him out, froze the money.
- Friedman – He has got plenty. He is not going to worry about where he is going to live. It is his partners, his son’s friends, people he has known for years, these are the guys who piled up the money.
2. Cairo, Clashes & Currencies – Jim Rickards on CNBC Squawk Box (04:50 minute clip) – Friday, February 11
Jim Rickards of Tangent Capital presents thoughts and ideas that are different from most of the guests we hear on CNBC. His are views that are totally global macro. For example, on Friday, November 19 , he postulated that QE2 was essentially a financial war against China and on Wednesday, January 19 , he said that “we won the first round of the currency wars“.
In this clip, Mr. Rickards articulates views on Egypt that will make you think. That is the highest praise we can bestow. So in our discussion, we shall not include basic market comments from Richard Bernstein, another favorite guest of ours and instead focus exclusively on Egypt per Jim Rickards.
- There are forces at play …for example Mohamed El-Erian was talking about Turkey. There is no doubt that Turkey is the closest analog to the Egyptian Military. But the Turkey is heading in the wrong direction. They have a more Islamist Government and it is systematically stripping the Turkish military of its power, of its role as the guardian of the nation. So the Egyptian Military is looking at that and saying we don’t want that outcome. If we have elections, this doesn’t mean we are the guardians, we may actually be diminished. So that sort of cuts against the democracy movement.
- The other thing is it is not just two forces, pro-democracy and dictatorship. We all favor democracy, because that is easy. There are a lot of other people jumping in. I think there are a lot of serious problems going on in Sinai, in Gaza, the Sinai border was open for awhile, you have Hezbollah moving in, Hamas moving in. We heard about prisoners released in Cairo, a lot of those prisoners were Hezbollah operatives.
- Obviously the price of oil is the biggest driver. If you get a Hamas-Hezbollah sponsored uprising in Sinai, that is immediately adjacent to the Suez canal, watch the price of Oil. (Carl asks – that would be much worse than Hezbollah in Lebanon?) Absolutely. The plan is, these orders are coming from Iran, the plan is to turn Sinai into an extension of Gaza. Al Qaida has been in Sinai for over 10 years. They are very active there. What’s going on is that you are getting Hezbollah operatives that are released by Cairo moving down from Gaza, you are getting support from Iran. President Obama has pretty much lost King Abdullah (of Saudi Arabia) at this point.
- (In response to an utterly dumb question from CNBC’s Michelle Caruso-Cabrera) – I don’t think we are overthinking this, Michelle. Ayman Al-Zawahiri has been thinking about this every day for the last 30 years. This is what he has been waiting for. So I don’t think we are overthinking it.
- You can make a pro-democracy happy outcome case. And we can see that case. But you can make a case for something worse than military dictatorship – chaos, as I say terror in Sinai, sabotage along the Suez Canal. Those are sort of equally likely in my view. So how do discount that? Well, Mohamed El-Erian said it is a non-linear outcome. He is right. It is like an earthquake. Forces are building up in both directions. We don’t know which way it is going to break.
- (In response to a comment from Michelle that Egypt did not present a systemic risk according to El-Erian) – There is systemic risk in Egypt….80 million people is the heart of Islam. Islam is a one billion people system if you want to think of it in terms of a social network. They are a leader to that. It is a huge risk through out the area.(emphasis ours)
We had not heard about the penetration of Sinai by Al-Qaida or the concept of turning the Sinai into an extension of Gaza. Most people seem to have forgotten that Ayman Al-Zawahiri is the intellectual strategist of Al Qaida and his Egyptian branch of Al Qaida is the brain trust while Osama Bin Laden is the spiritual (or anti-spiritual is the better word) voice. Mr. Zawahiri was driven out of Egypt by Mubarak and his anti-terror organization. If there is a breach in the unified wall of entire terror organization in Egypt, there is probably no better man than Al-Zawahiri to exploit it.
We thank CNBC Squawk Box for inviting Jim Rickards. We learn something new every time we listen to him speak.
3. Treasury Secretary Tim Geithner with CNBC’s Steve Liesman – Friday, February 11
This was an important event. Secretary Geithner announced a new plan for mortgage finance reform. The conversation is in 3 clips:
- Geithner Speaks Out – 10:00 am
- Gearing Up a Plan for GSEs – 8:41 am
- Geithner on GSE Reform – 8:40 am
- Liesman – Let’s begin with what is the overall concept of the plan here. Where do you want to bring housing finance in this country?
- Geithner – We want to rebuild a private market and carry the major burden of providing finance for houses. That requires we wind down the GSC’s. Wind down Fannie and Freddie. We put in place a stronger market, better underwriting standards, better capital for mortgages. Better protection for consumers. Oversight of servicers.
- Liesman – What timeframe are you looking at and– what will happen to the costs of housing?
- Geithner – Well, the important thing is we need to build a market where homeowners put more equity in their home. Hold more equity in their home. The government pulls back. When we provide– support its more targeted and transparent. And, again, we want the private market to play the dominant role. And this is going to take time, ’cause, as you know, the housing market’s very fragile still. And we still don’t have in place the rules of the game to allow the private market to flourish. So this is going to take– time. And we’re going to do it very, very carefully, ’cause we’re not going to take any risk of impeding the process of repair that’s underway in the housing market.
- Geithner – Over time, over the long run, the cost of a mortgage will rise modestly for the average American homeowner. But, again, we think it’s very important for the government to continue to play a role, targeted role– a more targeted role, a transparent role, in making sure that Americans that need help to find a home, to rent a home or own a home get that help.
- Geithner on Raising the Debt Ceiling – Of course. It’s absolutely essential they’ll do it. And of course they’ll do it. They’ve always done it in the past. There’ll be a little political fear around that. But it’s not something you play tough politics with. And it can’t be used as a bargaining chip.
- Geithner on the Economy – you know, the economy is getting stronger. And you see all the signs point to gradual acceleration in economic growth. And with that you’re going to see more people back to work. We’re already having more than a million private sector jobs created in– during this recovery, which is more and quicker than we had the last two recoveries.
- Geithner on Jobs – I think all evidence suggests that the labor market is gradually improving. More people are coming back to work. More people are being asked to work longer hours. And I think that’s really encouraging. But, again, our basically responsibility now is to make sure we’re doing things that help reinforce that process.
- The Obama administration finally released it’s white paper on how to eventually wind down Fannie Mae and Freddie Mac. Really no surprises. They offer three scenarios and don’t throw their weight behind any one in particular.
Option 1: Privatize the mortgage market entirely, and limit the government’s role to FHA, VA and USDA for “narrowly targeted groups of borrowers.” Under this option, “FHA’s downpayment could be raised to 5% and insurance costs raised.”
Option 2: Privatize as in option 1 with FHA, VA, USDA, but add a government guarantee “to scale up during times of crisis.”
Option 3: Privatize as before but add “catastrophic reinsurance behind significant private capital.”– these could be -group of private mortgage guarantor companies that would provide guarantees for securities backed by mortgages that meet strict underwriting guidelines. A government reinsurer would then provide reinsurance to the holders of these securities. The government would charge a premium for that.
4. James Chanos on CNBC Squawk Box – Thursday, February 10
The Chanos interview is in two clips:
- Whitney Muni Bond Forecast An Important Call:Chanos
- Hedge Fund Manager Chanos says shorting Exxon, Royal Dutch Shell
- “I think her general sense was correct,” he said. “You weren’t getting compensated for the risk as an investor and that’s an important call and that’s something people need to hear from time to time.”
- Chanos compared the municipal debt situation to the mortgage industry, when subprime loans given to high-risk borrowers were hit with waves of defaults that ultimately brought down the financial services industry and required a government bailout.
- “Municipal bonds are basically special funding entities where we were setting up a stadium or a hospital or a water plant, whatever, and it’s done under the rubric of tax-exempt law,” he said. “They’re set up specifically that if the project doesn’t work it doesn’t imperil everything else. You think people are reading the financials of that water plant? I doubt it. They’re depending on ratings agencies just like they did in the good old days of mortgage financing.”
- While the government bailed out the banks, it may not be so forgiving when it comes to local governments, Chanos added.
- “Even Warren Buffett said to be long the muni bond industry in effect you have to bet on a federal bailout, and I’m not so sure that with the politics in Washington now that that’s the smartest bet in the world given you’ll only be earning 3 or 4 percent,” he said.
That is why SEC & FCC need to make disclosure of personal asset allocation mandatory for both expert guests and financial anchors. But, we realize that we could meet Godot before we see our wish come true.
5. Street Fight: Stocks vs Bonds – Rich Volpe on CNBC Fast Money – Wednesday, February 9
Anchor Melissa Lee introduced Rich Volpe as the Head of USD Rates Trading at RBS Capital Markets.
- Lee – Bonds broke a 7-day losing streak. So is this a one-off sort of day or is this the start of another run?
- Volpe – I don’t think it is a one-off – Stellar results in the auction today, 5 basis points through the 1 pm average and I think the market is short term oversold, put-call ratio showing an oversold condition, lets look, we have traded off for 130 basis points since the start of QE, what the chairman wanted to do, push the cash flow into risk assets, so equities up 25% over that time, high yield about 150 basis points so we have seen that move, we have had a big run here, in turn the bond market is oversold, the back end , the long bond tomorrow, these yields 4.75%, longer dated principal strips at 5%, this is where we probably see some insurance companies, mutual funds put money to work, out of stocks allocated into fixed income
- Finerman – Richard, this is Karen, is this more technical driven bounce as opposed to something fundamentally going on,
- Volpe – I think this is more technical, I think the market has gotten ahead of itself, the last downtick, 20 basis points or so, if you look at an uptick on bond futures, there was an uptick in open interest, there were new short positions in the market and poor location at this point.
- Kelly – Hey Rich, how do you reconcile rising food prices, commodities, rising energy prices and low bond yields really, 1.8 break even rates inflation two years out, to me it says one of the markets is wrong..
- Volpe – I agree, I think you can argue that the curve is extremely steep at 390 basis points, that’s more about Treasury extending the maturity of their debt, 10-year inflation expectations at 2.4%, I think what we are looking at here is a growth story, and capital redemptions in bond funds to go into risk assets, it is less about inflation right now.
- Lee – Good to speak with you, Rich.
- Lee – Some thing that stood out, that dovetails with what David Rosenberg was pointing out yesterday in his notes, that is this notion of competition once yields go up; Rich said pension funds, insurance companies they will reallocate, get back to work in the bond market, may be that’s a problem for stocks. What do you think?
- Adami – I think that is an excellent point, The Bond market is definitely overdone on the downside now. So you could see a week or so long pop in the Bond market. It could take the 30 handles off the S&P.
- Mr. Schatz at minute 03:45 of the clip – Believe it or not, the most unloved investment is Treasury Bonds. I think, they are due, whether it is today, tomorrow or next week, Treasury Bonds offer really good, risk reward for a trade in here.
6. Emerging Market Consumer Plays – Jay Pelosky with CNBC’s Tim Seymour (02:59 minute clip) – Friday, February 11
Jay Pelosky is the former Managing Director of Morgan Stanley Asset Management. Tim Seymour, the host of this segment, announced that according to Jay Pelosky, the S&P 500 is the best way to tap the emerging market consumer and that the S&P 500 should beat EM stocks this year, for the next 3 years and the next 5 years.
- Seymour – Jay, why are US Stocks a better way to tap emerging market demand than going straight to the local markets?
- Pelosky – Tim, there is really a case for US equities and a case against Emerging Market equities. First the US Equity case – 1) they are mispriced and that they are priced for a weak domestic environment yet they are major beneficiaries of global demand in emerging economies. 2) US Equities are protected against downside risk by the Fed and 3) US equities are big beneficiaries of a weak dollar against emerging market currencies.
- Seymour – I get that and companies like Intel, Qualcomm, P&G most of their work overseas these days. From a valuation perspective, isn’t that priced into these names as well? And I look at Emerging. A 7% pullback is probably not the extent of it. I think we are going come back a little more. We all know this out of EM into DM trade is alive and well. So why wouldn’t you say that valuations are your ultimate barometer and where do you think we are here?
- Pelosky – The way I look at it is that US equities are priced at 13x and 12x next. If you look at historically, that is very cheap valuation. In addition, the emerging markets, they have had a great run – 15% per annum returns for the last decade while the S&P has been flat. So I think the game in emerging markets has effectively been played. And emerging markets face the real headwind of rising inflation, rising interest rates and we all know that is bad for equities.
- Seymour – The bottom line is when I look at emerging markets it is less about where to play them, India has inflation problems, I think you look at market and you have got extraordinary opportunities. The bottom line here is that you come back to valuation, EM banks look very interesting here, the Brazilian Banks, Turkish banks. I agree with you, the global companies are well positioned but 5 years is a long time to stay away.
So may be suggest that Tim choose a co-anchor who can ask questions of the guest and allow Tim to parry. Also Tim seems to take orders very well from a woman anchor. So pick a woman co-anchor Tim. That would help your show and segments.
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