Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. 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.
What drove the stock market – Bernanke or Greece?
The stock market rebounded early in the week as some technicians had predicted a week ago (see clip 3 of our last week’s article). The S&P rallied close to the 1300 level that was forecast by the gurus we featured last week and then began backing off. The first catalyst was Chairman’s Bernanke’s Q&A in which he did not even hint at any further easing. So investors were left with his lowered growth forecasts for 2011 & 2012 without any further easing with the added burden of a 2% CPI. So the rally of Wednesday morning reversed.
The next morning, the IEA stunned the markets by announcing a release of 60 million barrels of oil from strategic reserves. This was the first of a series of a coordinated global actions to bring down the price of oil, the IEA hinted (see clips 6 & 7 below). After all, there is nothing more bullish for consumers than lower energy prices. But the energy and commodity stocks got shot and so the Dow fell by 235 points by early afternoon on Thursday.
Then the markets suddenly spiked vertically because of a story in Reuters that Greece had agreed to a 5 year austerity plan with the EU. The rally was so powerful that the NDX and Russell 2000 closed up on the day. Both the Hong Kong and Indian stock markets rallied big Thursday night. Lower inflation is the elixir that EM craves.
By next morning, the Greece story was revealed to be a hope at best. The spread between Italian Bonds & Bunds widened and the stock markets went down on Friday.
So all in all, Greece and Europe should drive the near term direction for the stock markets. But Bernanke setting down his helicopter might prove to be a longer term headwind for the stock market.
Treasuries, High Yield Bonds & Munis
By Friday, the yield on the 2-year Treasury dropped to 33 basis points, a level not seen since the Eisenhower Administration according to Rick Santelli. The 3-year yield dropped to 57bps and the 5-year yield dropped to 1.30%, low but higher than the 1.05% yield on November 5, 2010 (week of the Fed announcement of QE2). The 10-year yield dropped to 2.87%, a low, low yield but higher than the 2.51% yield on November 5, 2010.
On Friday, the entire on-the-run Treasury curve rallied with the exception of the 30-Year Bond which closed lower on the day. The 30-10 year yield spread rose from 124 bps on Tuesday to 130 bps by Friday. At every major low in yields in the past, the 30-10 year spread was around 50 bps. So does today’s elevated 30-10 year yield spread suggest the Bond Market’s expectation of another easing of some sort? Or is it due to the breakdown of deficit negotiations between Vice President Biden and the Republicans? Or does it suggest that a major low in yields is yet to come?
Are investors running away from credit risk in the Bond markets? The record outflow of $3.4 billion from the High Yield bond market certainly points to it (see clip 5 below).
On the other hand, investors seem to be running into Munis. This is a reversal of the flight out of Munis caused at least partially by the doomsday scenarios painted by Meredith Whitney in December 2010. But, frankly, we are not convinced the flight or the reentry are due to credit fears. We are leaning towards the simple explanation that Individual Investors simply began running away from interest rate risk in December 2010. This flight created the sell-off in Munis. Now that the interest rates have dropped to very low levels, individual investors seem running back to Munis in search for yield.
We are not convinced that states have turned the corner. We feel that the upturn in the revenues of states could be simply due to higher capital gains courtesy of the big rally in stocks. So if the stock markets turn down and stay down, state revenues could turn down significantly next year. So 2012 might see a slowdown in the economy with a worsening of the fiscal conditions of states.
In other words, Meredith Whitney might be way early in her warnings and her prophesies might be too dire, but she might turn out to be essentially right.
- Robert Heller, Lee Hoskins & William Ford on CNBC Closing bell on Wednesday, June 22
- Carter Worth on CNBC Fast Money on Thursday, June 23
- David Rosenberg on CNBC Closing Bell on Tuesday, June 21
- Gary Shilling on CNBC Fast Money on Wednesday, June 22
- Kevin Lockhart of Jefferies on CNBC Strategy Session on Friday, June 24
- David Greenberg on CNBC Fast Money on Thursday, June 23
- Daniel Fisher on CNBC Fast Money on Friday, June 24
0. Bernanke Press Conference & Bernanke Q&A – Wednesday, June 22
The best way to understand what Chairman Bernanke said is to watch his press conference and especially the Q&A. Unless of course you agree with what Ken Fisher told Maria Bartiromo later that afternoon –whenever I feel the urge to pay attention to Mr. Bernanke, I watch reruns of Beverly Hillbillies instead.
For a more restrained discussion of Fed policy, listen to three previous members of the Federal Reserve in the clip below.
1. Misguided Fed Policy? – Robert Heller, Lee Hoskins & William Ford on CNBC Closing Bell – Wednesday, June 22
The three Guests have been members of the Federal Reserve. So this was the perfect group to discuss the policies of the Bernanke Fed.
Hoskins – I think the Fed is doing great damage by running negative real interest rates so long. That’s a misallocation of capital. So the Fed needs to clear the decks and begin to get rid of that extended language and normalize interest rates. And that means moving them up until we have positive real interest rates.….The Fed made it real clear today that they don’t control employment and don’t control real GDP. So they should stick with trying to control the one thing they can and that’s inflation.
Bartiromo – How do they do that? Given the fact we are still talking about a fragile economy today the Fed lowering its expectations for GDP?
Hoskins – the Fed doesn’t control real growth, they don’t control employment. The only thing over time the Fed can control is inflation. If we try to saddle the Fed with a bunch of other responsibilities, we’re going to hurt the one thing that the Fed can control over time. If they control inflation, then the business community and individuals will make decisions that will expand the economy. But the uncertainty surrounding negative real interest rates and what it does to capital market and the dollar seem to be a real negative to this policy.
Bartiromo – Robert, jump in here. You’re also critical of the Fed policy and say QE-2 is a mistake.
Heller – that’s right. QE-2 pumped $1.5 trillion into the banking system. They are holding it in excess reserves. It also financed the enormous federal deficit, thereby enabling the federal government to run these enormous deficits and therefore I think it was a mistake overall.
Bartiromo – tell me something. here we are in a fragile economy. what’s your assessment of things, Robert? you’re saying QE-2 was a mistake. were we not at a moment in time when things were weakening quite substantially? what would have been the better solution?
Heller – it was right at the moment of the crisis, after Lehman failed, yes, the country and the banking system needed a lot of liquidity. the Fed provided that. but QE-2 was piling on top. The QE-2 really was financing the continuation of the federal deficit. It would have been better to cut the federal deficit at that time and let the private sector return to strength.
Bartiromo – William, what about you? you’re critical of the Fed zero interest policy. It’s doing more harm than good, you say. what about the slow economy? down grading of GDP today, same question for you. what is the Fed to do?
Ford – let’s get it straight as Lee Hoskins mentioned…nothing the Fed has done has helped promote positive GDP growth. It has not fixed the housing crisis by lowering rates to historic low levels. It has not promoted business investment, borrowing and spending. It’s killed the Dollar without helping exports a lot and that’s causing inflation of import prices to go up. Most importantly, they are hurting America’s elderly people by having 14 trillion of personal savings accounts of all kinds subject to interest rates that are 5% below where they normally are two years after a recession is over and that costing elderly people about $300 Billion; it is reducing GDP because they don’t have the money they need to spend.
Hoskins – I don’t think the fed should be focusing on such short term fluctuations in real GDP or employment. they need to set a course that everyone understands what they’re on. It would have helped if the Fed had chosen to target inflation and make it explicit, and a time frame for achieving that goal. i think that would help, policy right now.
Bartiromo – I wonder what was behind the Chairman’s assessments of this re-acceleration that he’s expecting in the second half. Robert, he did say he’s expecting a re-acceleration. But given the fact that QE2 goes away, housing is in the dumps; not only have prices moved lower but it is harder to get a mortgage in some quarters. What do you think is behind that re-acceleration and do you agree with it?
Heller – there’s a bit of regeneration of the strength in silicon valley. a lot of it is really based on Twitter and Facebook. And that isn’t real strength in the overall economy, teenagers talking to each other more. i think there’s a little froth developing here as well. overall, I think the economy will have a hard time, faces headwinds and agree with my two colleagues what they said before. the Fed should be running positive real interest rates.
2. Market on verge of Breakdown? – Carter Worth on CNBC Fast Money – Thursday, June 23
Carter Worth, a well known technician, is a favorite of CNBC Fast Money. He correctly called a rebound we saw in the first two days of this week. Here he makes the case that the stock market is slowly recovering:
- …On Friday, June 10, we were at 1270, Friday June 17. last Friday, 1270. Tomorrow is Friday the 24th, say we go down tomorrow to 1270. We are basically stabilizing; we are yet to make new lows in quite some time. The premise is we are stabilizing where history shows support comes into play. If you were to draw a trend line, we are literally on the trend line that has been in effect since the March 2009 lows. So this is an important juncture.
We must point out that as he was speaking, the stock of Oracle, the technology heavyweight, was being pounded. And the next day, the technology stocks were sold and sold hard.
3. Another Recession Ahead? – David Rosenberg on CNBC Closing Bell – Tuesday, June 21
As usual, Mr. Rosenberg is not shy about expressing his opinions. He disagrees with Ben Bernanke who expects a re-acceleration of the economy in the second half of 2011. A summary of his comments can be found at US Economy on Slippery Slope to Recession at CNBC.com. A few excerpts are below:
- The U.S. economy is on a slippery slope organically without the ongoing benefits, if you want to call it that, of government intervention and expansion of the Federal Reserve balance sheet.
- We have to be honest with ourselves, this has been an absolutely horrible recovery,…it’s just so evident to me two years into this expansion that whenever the fiscal and monetary spigots are turned off we go into a soft patch. This happened last year.
- firstly, there’s no more fiscal stimulus, there’s nothing going to come out of congress, if we can get through August 2nd with the debt ceiling raised, quid pro quo, with spending in the second half of the year. there won’t be anything in the way of new fiscal stimulus.
- i can’t say that the market is priced for recession. there’s not many other people calling for it and well acknowledged we are in a soft patch. I don’t remember a cycle in the first two years, you have two soft patches. that’s completely abnormal.
- if that’s the case, we will see a sizable sell-off once we see the market accept or come to terms with a real slowdown or another recession.
- we’re focused on internal hedge fund strategies, relative trade. without making a big direction on the market, it’s key to be long, high quality sector, defensive areas of the market, short the low quality stuff and small caps. i think hedge funds work well and income strategies because income will come down more than the market thinks. whether it’s bonds or hybrid, I am starting to see more clients putting money into hybrid, really income equity is a very good strategy to be in right now. i still think credit is a good place to be. the corporate balance sheet,
- I think gold and precious metals are still a good place to be as a hedge against recurring beltings of instability.
4. Gary Shilling on CNBC Fast Money – Wednesday, June 22
Comments by Gary Shilling begin at minute 04:50 of this long clip.
- Melissa Lee – let’s bring in Gary Shilling for reaction. Gary, I take it that you think Ben Bernanke is absolutely wrong when it come to a pick-up in the economy in the second half.
- Gary Shilling – I do. I just got back from taking care of a bunch of my beehives. got stung probably 20, 30 times, but I don’t think Bernanke is getting stung right now because yeah, he said growth will pick up, but the Fed is supposed to say that.…. I think they are going to be talking about Deflation the latter part of the year.
- Lee – If that is the case, if you think they’re going to be talking deflation, that means you think QE3 is on the table.
- Shilling – Well no, I don’t think it will be a QE3 because they’re alternating between fiscal and monetary ease. Fiscal was off the table last year when the Tea party and Republicans looked like they were going to take over, So they shifted to Monetary. They tried QE2. It didn’t really work. Matter of fact, it hurt the guys in the lower tier they hoped to help by pushing up grocery prices, energy prices and the commodity bubble.The next step I think is going to be renewed fiscal stimulus… and if the economy is weak and we’ve got a recession, we might, nobody in congress, even the tea party crowd want to go to the election doing nothing for the constituents in the face of rising unemployment, just sitting there saying, no, we’re not going to help you.
- Adami – — what does it mean for the market though, the broader market here?
- Shilling – I rather suspect we’re going to see further weakness. we may be at the beginning of a considerable sell off in stocks. there’s been hope earnings would rise, but if the economy is sloppy, i doubt that will be the case.We got problems abroad. Europe really has got a critical problem; By the way, Bernanke said U.S. banks don’t have a lot of exposure to Greece, but they have a lot of exposure to France, Germany and those banks have exposure to Greece, Ireland etc. And another thing, I think we’re in a hard landing in China. It is really developing, money supply is growing 15%, end of last year was 30%; sales are off 10%, the housing bubble area is collapsing. housing prices up 21% last year, down 10% so far. you’re shaking your head. you don’t agree.
- Seymour – first of all, the deflationary elements you’re talking about, great for emerging markets. Germany is probably too high. almost 5% a year…the world is not a terrible place. If you listen to Fedex, other than a soft patch,we are talking about a second half where inflation will be better and we haven’t seen in some of the most important economies in the world hit the skids. United states growing at 2% is not in trouble, especially when the rest of the world is in pretty good shape.
- Shilling – Just take a look at China, China is awfully important to what’s going on particularly assuming they were going to buy all the commodities in the world… and if you look at commodities, commodities have been declining since February. Most people didn’t realize until silver went off the cliff in May.
- Lee – If deflation is a prospect, does QE3 in your view come back on the table?
- Terranova – I don’t think so we’re going to get to that point.
- Lee – you think he is like a chicken little saying the sky’s falling.
- Terranova – those are words you just put into my mouth. everyone is entitled to their own opinion. I don’t see the evidence right now. the economic numbers we are seeing coming out of China. To suggest China is in the midst of a hard landing. that just doesn’t make sense.
- Adami – …the selloff today, the next two days are going to be critical. I think they are going to tell the tale for the next two months.
That comment of Guy Adami might prove prescient. We saw what happened in the two days after Wednesday.
The disagreement between Shilling and Seymour reveals the big fault line running under the global economy, global stock markets and commodity markets. If China lands hard, then global growth turns into a global recession. Europe is in trouble, the US is slowing faster than anyone realized 2 months ago. Add a hard landing in China and you have Deflation, that deep freeze that nobody knows how to thaw. But if China maintains its growth path, then the global markets can pause and then recover.
The Fast Money crowd had fun at the expense of Gary Shilling and his unsolicited comments about cleaning bee hives and getting stung. Well, Mr. Shilling asked for that. But we draw the line at Terranova’s rather disdainful comment about everybody being entitled to their own opinion. Well, we have listened both Gary Shilling and Joe Terranova for the past few years. And, Gary Shilling has been far more accurate and prescient in his predictions than Joe Terranova.
Since we now have Mr. Terranova’s permission to express our own opinion, we think the “chicken little” comment about Gary Shilling by Melissa Lee shows an utter lack of class. Again in our opinion, no other CNBC anchor would have stooped down to this low a level. Kudos to Mr. Terranova for his restrained admonition to Melissa Lee about putting words in his mouth. That was how a Gentleman behaves.
5. Investors Bail on High Yield – Kevin Lockhart of Jefferies on CNBC Strategy Session – Friday, June 24
Many consider the High Yield Bond Market as a leading indicator for the equity markets. Gary Kaminsky and David Faber of CNBC Strategy Session are among them. They spoke with Kevin Lockhart who runs Leveraged Finance Origination at Jefferies.
- Faber – If you want a “tell” for the future performance of the equity market, high yield has often been the place. We’ve noted the recent outflow from equity mutual funds of late but perhaps a more significant indicator of the health of markets, both equity and credit, can be found in this statistic – for the week ended yesterday, investors withdrew $3.4 billion from high yield mutual funds and ETFs. That is a record besting the $2.6 billion withdrawn in August of 2003. What’s it all mean?
- Lockhart – 3.4 billion on top of an outflow from last week. What we’re seeing is investors are being cautious. They’re concerned about the economy in the U.S. and while we haven’t seen an increase in defaults. So therefore, they are looking forward and concerned about what’s going on in the economy.
- Faber – High Yield often mirrors Equity to a certain extent, so is this part of the so called Risk Off trade?
- Lockhart – What’s actually been interesting in the last month is that at the beginning of June, high yield was trading down with equities. What’s happened in the second half of the month, high yield has traded down further than equities. We don’t often see that. you’re right and I think right now, you’re seeing a concern again with words like are we going to have a double dip etc. People are being very cautious. So even right now, I would say perhaps it is even more than the equity markets.
- Kaminsky – I‘m not certain whether it’s a mirror image or a fact, as I believe, that high yield market actually leads the equity markets. If we take a look at the chart, we go back to January 2010 right up until QE2, August of 120, the Junk Market Vs. the Equity Market, what you’ll see is that the high yield markets, this is not the right chart, but if we go back and look at what happened in terms of leading, the junk market typically leads the equity markets. It did so on the upside last summer and actually preceded the equity moves by two months and so, if this is is a sustainable outflow of funds out of the high yield markets, you got to expect the same is going to happen with the equity markets.
- Faber – Kevin, what does it mean for issuance? we’ve talked so much over this last year about the ability of Corporate America to really repair their balance sheets. Does this start to put a crimp in the ability to raise money at attractive rates?
- Lockhart – firstly, the maturity walls…are not nearly as large as what they were, what we’ve seen recently is a little more opportunistic financing until the last couple of weeks, so right now, there will be probably a little bit of a halt on the opportunistic financing, but we’re still doing transactions. we are known for doing deals tough markets. there’s been there’s been LBO deals announced. we’re seeing deals that need to get done get done, admittedly at higher rates than what would have been the case three to four weeks ago. But right now, we are not seeing a lot of opportunistic financings.
- Kaminsky – I feel like it was maybe a couple of weeks back. maybe a month and a half ago when we were talking about record net influence. do you recall any time in your career when it’s moved so quickly?
- Lockhart – great question. I have been doing this for over 20 years and what I have noticed in 2011 is the shortening of cycles up and down within the markets, which you know, as we talk to issuers, we basically say when you’re ready to go, you got to go. it’s hard to time the market because it’s become quite volatile quite frankly. I would agree with you. I haven’t seen such short cycles in the years I have been doing this.
- Faber – Very interesting. when you make the call and say got to go, because you never know the next week’s going to be the same market. right.
- Kaminsky – this is another example of something we talked about yesterday, which is a reaction to what happened over the last decade and investor behavior is a result of it. They are going to much quicker on the trigger and so as soon as they started to get concerned about this risk on, risk off trade, you see the flows coming out. the idea of being an investor for the long-term doesn’t exist.
6. What’s Really Behind Oil’s Move? – David Greenberg on CNBC Fast Money – Thursday, June 23
This is an interesting commentary on the IEA’s decision to release 60 million barrels of oil from the SPR. The conversation begins with a question from Melissa Lee and then Joe Terranova, Tim Seymour of Fast Money join in.
- Melissa Lee – They are targeting Brent and it is a very blunt instrument it seems as opposed to margin requirements or position limits. But essentially it is the only tool that anybody has to control Brent!
- David Greenberg – Exactly. Brent being a cash market, it is very easy for people that are trading Brent to get lines of credit from against their trades. So the raise in margins never really affected them that much. The market gaped down the way they did, the way the market opened and at what time, it really forced the strong longs to having to question whether they can hold on to their positions. The market didn’t really trade down first 2-3 dollars, it gaped lower
- Lee – Can leaders around the world be successful in keeping the price of oil down if there is an underlying demand for the product; this release is happening over a month, what happens after a month?
- Greenberg – the real question was the demand what everybody was saying it was?…..a lot of the Brent market was moved on Spec Traders, they had hit their limits on WTI but since there are no limits in Brent, they were able to move the market up from a trader’s point of view. This timing was perfect, there is nothing like hitting a weak market with a bomb they did it perfectly, we had a weak market trading down and the market just collapsed under this
- Joe Terranova – Do you believe the efforts of today to release Oil will do anything in terms of providing relief to consumers in gasoline and diesel?
- Greenberg – I think what this does is get some of the longs out of the market
- Lee – there is a sort of ominous headline from the IEA this morning saying they would come back into the market later on and release more reserves if price climbs back up – is that enough to keep the Spec Traders out is that enough of a scare tactic to actually work?
- Greenberg – I think it was brilliant. They came out with a few different statements; they came out with that this was a one way trade because as traders we always say well if they are releasing it they are going buy it back – so what they said was that they had more than enough over their reserves and so they don’t need to buy it back in and leaving the door open – there is nothing the traders hate more than Government comes in and starts changing the rules of the game in midstream …economic news, world factors that we can all handle but when you have governments that all of a sudden start stepping in and you never know when, I think the traders are going to be trading a little bit smaller and looking over their shoulder
- Tim Seymour– this is a close below the other lows of May 6, March 16 so breaking 110 on Brent to me is very significant and it could go to 100
- Greenberg – I think what is happening tonight is that a lot of trading houses and the exchanges are starting to go over some of their large trader positions and if you have another even a small leg down you are going to see some liquidations start happening; many of the traders thought this was just a one time sell off and looking for a bounce the next day or so – if that bounce does not happen I can see Brent definitely going down to 102-100 mark and see a move down to 85-87 on the WTI
7. Oil’s Long Term Outlook – Daniel Fisher on CNBC Fast Money – Friday, June 24
Daniel Fisher is a energy trader with MBF Trading. Scott “Judge” Wachner opens the discussion with the question:
- Wachner – Oil is now about $89. So the IEA’s release of 60 million barrels of Oil moved the markets yesterday but what effect it will have on the long term?
- Fisher – What I am seeing from yesterday’s and today’s action is that this isn’t going to be enough in the long term to fix the tightness of the market. Spreads are moving from backwardation to Contango in the Brent market and it doesn’t look like they are stopping any time soon.
- Wachner – So where do you think Oil is going then?
- Fisher – Listen, if we are going to $150 like you see all the research from three weeks ago from the banks and the Consultants?
- Wachner – We are not going to 150 now!
- Fisher – No. But the market’s too tight for us to sit down at these levels, it’s unsustainable; at some point the market adjusts to the 60 million barrels that are coming in, I think you will see a strong, strong rebound to the upside. The way to play it is just be short towards the near term contracts and you can buy the long term and take advantage of that.
- Najarian – ….are you looking at this $90 level as a critical level or where are you looking for support in oil if you were to look to it to go back to the up side.
- Fisher – I think everyone is looking at the $90 down to $85 level. I am not here to pick a bottom; I would rather take advantage of the curve in terms of owning the long term and being short the near term; so you don’t have to get cute in terms of picking a bottom.
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