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 Tepper Corollary for Treasuries – Did Bernanke’s comments on Thursday & market action on Friday Provide the Proof?
We believe we were the first to coin the term Tepper Corollary. This corollary suggested buying any stock market dip resulting from bad economic data because Bernanke would simply do more QE2. Not only this corollary prove be true, there is now a related corollary for the Bond market.
After a tepid Payroll Number was released on Friday, January 7, the 30-Year Treasury Bond underperformed. On that day, we asked:
- 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?
The entire Treasury curve sold off during the week because the economic data came in stronger than expected. Then it sold off on Friday because the data came in weaker than expected.
Why? Look at what Chairman Bernanke said in his speech on Thursday. He would stay dovish as long as employment stays weak. So we have a Tepper Corollary for Treasuries:
- If the economic data comes in strong, then Treasuries should be sold because of growth, and
- If the economic data, especially the employment data, comes in weak, then long-maturity Treasuries should be sold because Bernanke would do QE2++++ in a “Waiting for Godot” type theater in which Godot is either inflation or increase in jobs.
This should teach Dr. Marc Faber a lesson. He was foolhardy enough to state that he had received a buy signal on US Treasuries on Monday, January 24 . He also was contemptuous of Dr. Bernanke in his comments. Doesn’t Dr. Faber know he should never fight the Fed, especially a Fed Chairman who is also the President of US Financial Policy?
The sell-off in US Treasuries was vicious this week. Even the short end of the curve got shot. The 30-yr yield rose 34 basis points from 4.54% to 4.74%; 10-yr yield rose 31 basis points from 3.33% to 3.64%; 7-year yield rose 34 basis points from 2.67% to 3.01%; 5-year yield rose 35 basis points from 1.92% to 2.27%; 3-year yield rose 28 basis points from 0.95% to 1.23%.
As CNBC’s Rick Santelli said on Friday, the models used by people who play in the Treasury market are based on momentum. In other words, they live to devour the weak and the injured.
We feel deeply sorry for the people who followed Marc Faber’s advise that we highlighted last week. But we take this opportunity to remind again that unswerving stop loss discipline is what separates the investing men from the boys. As the saying in the Old West went – “There are rash gunfighters and there are old gunfighters. But there are no rash, old gunfighters”.
A veteran (we dare not call him old) gunfighter of the bond markets is Jeff Kronthal of the Merrill fame. He thinks forward rates are too high and in clip 3 below, Mr. Kronthal describes a costless-collar strategy for fading the market’s fears about future high rates.
In the same clip, CNBC’s Gary Kaminsky shares the track record of Richard Kinder (of Kinder Morgan) in picking the top of interest rate cycles and argues that the upcoming IPO of Kinder Morgan suggests that interest rates are going to stabilize soon or fall again. We discuss this in clip 3 below. If Gary Kaminsky keeps sharing insights like these and if the Faberinsky duo keeps inviting guests like Jeff Kronthal, their Strategy Session show could begin to get to the potential we believe the show has.
Bernanke to EM Central Banks – “Blow Up”
Chairman Bernanke was asked on Thursday whether his policies are contributing to inflation in EM and unrest like the one in Egypt. In the words of CNBC’s Steve Liesman , Bernanke essentially said:
- “we didn’t cause it; its not our problem; You guys have the tools to deal with it.”
Stocks Break Out
The US Stock Market convincingly broke out this week. The Dow broke above 12,000 and the S&P broke above 1,300. This is a rolling bull market which essentially keeps going up. In this market, morning weakness tends to get bought and a rally takes place in the afternoon. The VIX dropped 20% this week.
While the US stock market is going up, money is being pulled out of EM equities. According to street research, the outflow from EM Equities was of the order of $7 billion this week. the 3rd largest weekly outflow ever. This followed the outflow of $3 billion last week.
If this continues, then the call by Jim O’Neill about 2011 being the Year of the USA might prove prescient.
Not So Terrific Trichet
The Euro has been on a roll during the past few weeks because of optimism about the willingness of the ECB to hike rates when appropriate. That halo faded a bit this week. The Euro fell after Trichet’s press conference on Thursday. But the optimism about Europe being able to resolve its problems remains strong.
MSNBC surprises us
We hardly watch MSNBC. After watching financial TV, mainly CNBC, there isn’t much time left. The TV evening is spent with Bill O’Reilly and Jon Stewart, two mirror-images in our opinion.
This past Saturday, we watched CNN, FOX & MSNBC coverage of Egypt. Again and again, we found ourselves drawn to MSNBC. We felt the coverage was decent and the quality of guests was much better than what we found on CNN & Fox. Specifically, the most useful guest we heard was Marc Ginsberg, ex-Ambassador to Morocco.
During the week, we often switched from CNBC to MSNBC and even to old friend Dylan Ratigan, the first anchor of CNBC Fast Money, who now hosts on MSNBC. He asked a superb question of one expert guest “what is Mubarak thinking as watches the events on live TV?”
The MSNBC surprise is why we may criticize but we always keep our minds open and clear. A closed mind and cemented opinions are the stepping stones to stupidity.
- Leon Cooperman on CNBC Squawk Box on Tuesday, February 1
- Bruce Berkowitz on CNBC Strategy Session on Wednesday, February 2
- Jeff Kronthal on CNBC Strategy Session on Thursday, February 3
- Mary Ann Bartels on CNBC Fast Money on Wednesday, February 5
- Chris Mathews on Morning Joe at MSNBC on Friday, February 4
1. Hunt for Alpha at Omega – Leon Cooperman on CNBC Squawk Box – Tuesday, February 1
Mr. Cooperman is the billionaire founder manager of Omega Advisors and the ex-Chief of Goldman Sachs Asset Management. He is a smart investor and a clear, sometimes acerbic, speaker. Watch the clip or read a summary of his views at Best House in Bad Neighborhood? US Stocks on CNBC.com. A couple of excerpts are below:
- Optimism about the US economy can be based on three assumptions—
- that the US is not another “Japan,”
- that the European Central Bank is helping Europe’s financial institutions the same way the Federal Reserve is aiding those in the US and
- that President Obama is moving toward the center.
- that the US is not another “Japan,”
- He said that in pensions, generally less than 50 percent are in equities, as opposed to 65 percent five years ago. Comparing the same time frame, he noted a similar trend in investments by individuals: Five years ago, a quarter of their portfolio was in stocks; today it’s down to 20 percent.
“Stocks at worst are the best house in a bad neighborhood,” said Cooperman. He said that if the US’s fiscal issues are dealt with correctly, “Stocks will be best house in a good neighborhood.”
2. Bruce Berkowitz on CNBC Strategy Session – Wednesday, February 2
Bruce Berkowitz is the famed founder and manager of the Fairholme Capital Management. Like many great investors, he makes investing sound simple. His comments are in 4 clips:
- Berkowitz’s China Buys
- Positive Long-Term Growth for AIG
- Fairholme Capital Management’s Top Holdings
- It’s (China) a unique time, it’s a unique place, with just a fast growing middle class. We want to be part of it…We’ve invested in two life insurance companies [AIA Group LTD and China Pacific Life],
- At Fairholme we are up to about $22 billion assets and we have to be long term investors now … we need to find companies that we can have a very long time span with and let time be our friend. I think AIG is gonna be one of those companies given what we’ve just been through,,People are under the mistaken belief that AIG still owes the government a lot of money, $60 billion plus, but they don’t
- Is it possible that some pieces of assets, reasonable people could argue, should be lower, yes, but it is reasonable that there’s a lot of property at St. Joe that was bought in the 1930’s that may be worth a little bit more than the property was worth in the 1930’s, I think the answer is yes
- I’m seeing a huge chunk of Florida, on the Gulf, with a new international airport and a recovering economy, and population growth and a tax-free state, should do reasonably well over-time,” Berkowitz said, adding, “you make your money during the most difficult times, you just don’t know it at the time
- We need to figure out the best highest inartistic value of the company for the owners of the company—if that means bringing in other developers, so be it
3. Ahead of the Money – Jeff Kronthal on CNBC Strategy Session – Thursday, February 3
This is a terrific segment for three different reasons.
First the basic views of Mr. Jeff Kronthal, the Co-CIO of the Fixed Income Hedge Fund KLS Diversified Asset Management, or better known as one whose advise could have saved Merrill Lynch if they had listened to him.
We featured his interview on CNBC Strategy Session on Friday, November 5 (clip 1 of our Videoclips of October 30 – November 5 , 2010 article). His advise was timely and correct. His next interview was on Friday, December 10 and he reiterated his bullish call on the 30-Year Treasury Bond. That call has proved wrong so far (see clip B1 of our Videoclips of December 4 – December 10 article).
The discussion with Jeff Kronthal begins at minute 05:52 of the clip.
- Faber – What’s your outlook (about interest rates)?
- Kronthal – We have had a lot of back up in rates on good economic news, bigger inflation numbers, we have a lot of strong stuff built into the markets coming from commodity markets; we still have a very steep yield curve, we talked about it the last time I was here,…therefore the forwards are implying much higher rates..I think for awhile we are in a range, a range to slightly higher rates in the short term, especially in the belly of the curve, it is hard not to think the forwards wouldn’t be realized a little, the belly of the curve carries about 7-8 basis a month, so it implies over the next 6 months that the 5-year is going to go up another 40 bps; I think you can see it go up another 25-30 bps
- Faber – That’s a bit of different viewpoint than you shared with us, lets call it 3-6 months ago! (very commendable, David. Wish Melissa Lee would learn from you and try to remember what her guests said during their last appearance – see clip 4 below).
- Kronthal – yeah, I would agree and we have been surprised a little by the strength of some of the numbers, surprised by the consumer willing to bring down the savings rate, a little surprised by kinda Republicans and the President agreeing to decreasing payroll taxes…..ultimately though the market has got a little complacent about risk, you certainly see it with the CDS spreads in the Sovereigns, you have seen it with where the stock market is, you have seen it in Gold, So I think if there is a surprise, it is a surprise to lower rates And do I think that happens over the next month or two, probably not. But if I look out 4 months, I wouldn’t be surprised if we are below what the forwards imply.
- Kaminsky – You mentioned the steepening yield curve, are we at the steepest level we will see in this cycle or would you expect that to expand as well, will we see the move, obviously you are seeing it in the long end, what about the short term rates?
- Kronthal – I think the Fed’s gonna be on hold for awhile, I think the market certainly implies that, in terms of looking at Fed Funds Futures. Bernanke has been very clear about that, the things they are focused on, the unemployment rate, as well as core inflation haven’t moved. It is commodity inflation, food prices and other things..those are not long great for the economy, they are not great for the consumer, he can’t keep bringing his savings rate down.
The rest of the clip is about views about credit risk, securitization and CMBS. A good discussion and we recommend listening to it.
If you read Mr. Kronthal’s comments above, you see that he thinks the forwards are pricing in much higher level of rates than we are likely to see. So, how does one put on a trade to benefit from this view?
That is the second reason we like this interview. Listen to the next clip in which Mr. Kronthal lays out the trade. The clip (03:04 minutes long) is titled Traders Too Worried About Higher Rates?
- Kronthal – The market, based on the yield curve and where some options are trading, is worried about higher rates going forward, the implied forwards are significantly higher, when you look 2 years from now, the implied 3-year Treasury rate is over 3% and the current 3-year is a little over 1%. So over the next couple of years, the market is implying that 3-year treasury rates are going up a couple of hundred basis points. Same thing in the swap markets; for example one year from now, 5-year swap rates are somewhere 320 when they are 235 right now, so an increase of 85 basis points over the next year.
- Faber – So what’s your trade given what you believe will be a more moderated move up in rates?
- Kronthal – I think there are very very attractive things. The market is also overpaying for protection against higher rates. The market is really worried about much higher rates going forward, from inflation, from Fed moving, from how strong the economy has been. So we looked at, for example, a costless collar. We actually get long through options by selling a put out-of-the-money and buying a call out-of-the-money but against forward rates in the 5-year swap.
- Kronthal on the Trade – What you can do there is – the spot 5-year swap rate is 235 right now, 1-year forward is 320; Buy a 270 call and Sell a 395 put – the call that you buy is 50 below the forward rate but 35 over today’s rate and the put that you sell is 75 over the forward rate but 160 over the spot rate. And you can do that for free. I really see a much higher likelihood that we are going to be at 275 for spot rate than a 395. Rates can go up,…., but over the longer term I still think David we have some significant problems with some of the structural things in the economy. So I really like that trade as a costless collar.
The third reason we like this clip is a cross-asset-class discussion about interest rates by Gary Kaminsky, co-anchor of Strategy Session at the beginning of the clip Ahead of the Money.
- Faber – Our deal of the day is Kinder Morgan, filing to go public today. Gary, you say this transaction is about lot more than just another IPO, also perhaps….the direction of interest rates! Why?
- Kaminsky – I think you know that I love this company and I love Richard Kinder……
- Faber – one transaction he did was a very large LBO in the 2006 time frame, towards the end of the giant LBO wave, it was one of the biggest of all time, it has worked out extraordinarily well.
- Kaminsky – Reportedly the most successful in terms of returns. (At this time, Gary shows a chart of 10-year yield vs. Capital Raises by Kinder Morgan MLP). Richard Kinder has a very uncanny ability to do capital raises which are accretive and value-added for the shareholders…..I think, the bottom line here there is no way he (Richard Kinder) thinks that there is a significant rise in interest rates. Because Kinder Morgan, the publicly traded KMI, will go down in value as interest rates go up.
- Faber – If they believed rates were going to go higher, you believe that they would not be doing the offering at this time?
This is the sort of in-depth discussion we expected when Strategy Session was launched. Better late than never and better at least once in a awhile than never. Kudos to Faber & Kaminsky or the Fabrinsky duo as we call them.
4. Correction Coming? – Mary Ann Bartels on CNBC Fast Money – Wednesday, February 2
Mary Ann Bartels is a well-known Technician at BofA- Merrill Lynch. Ms. Bartels was mostly correct in her calls in the first seven months of 2010. Then she made a big mistake on August 11, 2010. She expected a very short term rally in late August but warned her clients against playing it. Her call was that a major bottom would be made in October 2010 (see clip 3 of our article Videoclips of August 8 – August 14, 2010).
A CNBC Viewer who listened to her say on August 11, “So what we have told clients is to go away on vacation and have fun” missed the rally that began on August 27, 2010.
With that caveat (why didn’t Melissa Lee, anchor of Fast Money warn her viewers about this caveat), we include some excerpts from a summary of her views at Are Markets Overbought and About to Pull Back? at CNBC.com.
- “We’re getting a breakout in the Dow and S&P but we’re not getting a confirmed breakout in the Transports. In fact Wednesday was a pretty rough day for the Transports.” She thinks it’s a sign of trouble – that markets are overbought
- she’s looking for a correction – a pullback somewhere between 4-10%. And she expects it will last 4-6 weeks.
- She thinks at the worst we’ll see is a sell-off down to 1200 in the S&P. In fact she thinks pullbacks should be bought.”We’re in the third year of a presidential cycle and that’s typically the best year with the market historically up 14%,” she says. “The S&P can still hit 1400 – use the pullback top get back into the market.”
- Bartels says her line in the sand is line 1170. Not until the S&P breaks that level, would she change her broader bullish outlook.
5. Chris Mathews on MSNBC’s Morning Joe (12:17 minutes clip) – February 4, 2010
When we have discussed the Chris Mathews shows on our Blog, we have been somewhat harsh. We have been so because, in our opinion, the shows deserved it and frankly, we have not been as harsh as we should have been.
We are appalled that the shows anchored by Chris Morris seem exclusively reserved for European-American and African-American guests. We do not recall ever seeing a Hispanic-American or Latin-American guest on his shows despite that being the second largest community in the USA. As we have written before, a blond woman reporter from England seems to be his idea of diversity. And as we have written before, this is very similar to CNBC’s behavior of importing a blond Australian woman and a British man as anchors. So this could be an NBC policy!
But Chris Mathews remains eminently watchable. We say this even though we tend to disagree with just about everything he says and his basic stance on most issues.
But we do respect his core. And we would like to salute Mr. Mathews for his explicit expression of his core values on MSNBC’s Morning Joe show.
We recommend readers watch this entire clip. A few excerpts are below:
- Character, our National Character. We do have a character. Americans think of ourselves as the good guys and being good friends and loyal. And these are values that mean a lot to us as people. You don’t walk down the street and watch your friend get gunned down and not do something about it.
- Was he (Mubarak) our friend for 30 years? Are we denying that? I remember Joe, when he came into one of those afternoon events they have in Foreign Affairs Committee in 1981 after Sadat had been assassinated…Along came Mubarak, this strong personality..and he held everything together.. he was strong…we have been with him for 30 years and now we say it is time for the gate…
- I feel ashamed about this; I feel ashamed as an American the way we are doing this..I know we are for democracy..but the way we have handled it is not the way a friend handles it the matter…we are not handling it as Americans should handle a matter like this; I don’t feel right about this
- And Barack Obama, as much as I supported him in many ways, there is a transactional quality to the guy that is chilling. I believe in relationships, I think we all do, relationship politics is what we were brought up on in this country, you treat your friends in a certain way, you are loyal to them and when they are wrong, you reason with them, you try to stick with them; the great old line about I don’t need you when I am right, you got to help out people when they are in trouble..and all I see is transactions here, who are we gonna get the next deal with…
Remember Pastor Jeremiah Wright? He was a very important figure in Mr. Obama’s life. But the instant he became an inconvenience, Candidate Obama discarded him the way President Obama discarded Mr. Mubarak this week.
Unfortunately for President Obama and for all of us, the Middle East has long memories. Saudi Arabia, UAE have already come out against the US pressure against Mr. Mubarak. They know they could be next. Do you think they plan to count on President Obama’s support?
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