Interesting Videoclips of the Week (July 10 – July 15)

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.

Bernanke or Pavlov?

Despite the scoffing of many gurus, the stock market spoke clearly this week. On Wednesday, Ben Bernanke suggested that they were considering QE3 if needed. This was all the stock market needed to build on a nascent early morning rally. It was a pure Risk-On day with Gold, Silver & metal stocks flying. SLV was actually up 6.5% on Wednesday.

On Thursday, in the classic tradition of Fed Chairman testifying to the Congress (we recall Greenspan doing the same second-day reversal in the 1990s), Bernanke changed his tune and took back some of the promise of QE3. Instantly, the stock market began selling off. A morning rally of 80+ points went negative and closed down 54 points.

Should the market learn to spell “Pavlov’s Dog”?

Honor and Principle in Washington DC

In such terms is the battle in Washington DC described by the participants. The serious issues are described well in the New York Times article Behind Battle Over Debt, a War Over Government. We have very little to add to the emotional and partisan debate raging on Television.

So far, the markets are not too worried.  But we did detect the Bond market paying a bit of attention to the announcements from Washington DC.  When the possibility of a deal decreased, long duration Treasuries rallied and when the possibility of a deal increased, long duration Treasuries sold off. The best evidence of this came on Thursday afternoon when the Bond market sold off badly despite a strong 30-year auction.

This would counter intuitive to many and is against the opinions of most gurus on TV. But it does make sense if you buy the rationale below:

  • The Bond Market at current levels (2.9% on the 10-Year) is pricing in a severe fiscal drag on the economy. At this point, neither side believes a “big deal” on deficits is likely. So any deal is likely to be small and the cuts will probably be back-end loaded. Such a deal would be negative for Treasuries.
  • If no deal is reached, then there will severe economic pain in August and early fall. This can be only positive for Treasuries.
  • Without a debt ceiling increase, the issuance of new Treasuries will be stopped or severely curtailed. So existing Treasuries will be “in shortage”, a bullish development.
We concur with this rationale, at least at this stage.

Honor & Principle in the Steppes of Ukraine & Central Asia

In an episode of Step by Step, Cody was asked what is the greatest invention ever? His answer – the mute button on the remote. We get the Cod-Man’s argument but our answer is different. Our vote goes to YouTube.

We have You-Tube on all day. It brings us great music, videos and memories. One such memory is very  relevant to the current battle for honor & principle in Washington DC.

Long ago in Mumbai, we had read the Marathi translation of the classic novel Taras Balba by Nikolai Gogol, the 19th century Russian novelist. This week, during our routine navigation through You-Tube, we discovered the 1962 film Taras Balba starring Yul Brynner & Tony Curtis. Thanks to the gracious mercy of Google-YouTube, we could watch this entire film free.

Part 6 of this film featured a conflict between a stalwart of the old Cossack tradition and the new ideas of the elder son of Taras Balba. All over the world, settling conflicts mano-a-mano is a sacred tradition. But usually these involved personal skill and strength. But the ways of the Cossack were different. They let God and their steeds decide. Watch the clip below to see a stunning demonstration of this Cossack tradition.

The conflict begins at minute 4:40 of the clip below with older Cossack calling the elder son of Taras Balba a coward. Once spoken, it can only be settled by “the will of God”. The actual contest begins at minute 05:26 ends at minute 09:19. We strongly urge all to watch this contest.

(“Let God’s will be done” – Andrei, son of Taras Balba)

The Steppes of Central Asia run from the Ukraine to Tajik-i-Stan. The traditions in the Ukraine may have changed but the traditions in Tajik-i-Stan and Afghan-i-Stan have not changed much. The ethnic rivalries still continue as Bob Woodward of the Washington Post tells NBC’s Chris Mathews in clip 3 below.

Featured Videoclips

  1. Rick Hall, Novellus CEO, on CNBC Mad Money on Tuesday, July 12
  2. Jeff DeGraaf on CNBC Fast Money on Tuesday, July 12
  3. Bob Woodward on The Chris Mathews Show on Sunday, July 10

1. Novellus CEO Speaks to Cramer – Rick Hill on CNBC Mad Money – Tuesday, July 12

Semiconductors are one of the earliest components of the supply chain and Novellus System is one of the earlier components of the Semiconductor supply chain. So what Novellus says matters a great deal to our judgement about the state of the economy.

Novellus stock was pounded on July 12 because of their guidance. Rick Hill, Chairman & CEO of Novellus, made an appearance on Cramer’s Mad Money that evening.

  • Cramer – …you rarely say things like cautious and future uncertainty and then you talked about how six customers gave you this tone. I mean, what happened between now and March 31st when we’ve been talking that got so bad?
  • Hillwell, the only way I can summarize it is what I’ve seen over the last month is an increasing feeling of potential economic doom on the part of corporate leaders almost anywhere that I’ve been visiting. And when you look at what is happening economically, from the standpoint of Banks and the Debt in Greece, you look at our budget situation in the United States, rising inflation in China, I think that’s giving many corporate leaders pause that they don’t want to be the last one to be holding all the inventory.
  • Cramerso Rick, you’re telling me basically that these news headlines that are front-page stuff that we trade on and listen to at CNBC are actually creating an environment where someone says you know what? I better not make as many chips because I read the papers too?
  • Hill – I think it’s causing them to say wait a minute, I’m going to a lot more cautious with my capital investment if I don’t think the economy is going to continue to improve.
  • Cramer – ….there may not be demand for anything out there?
  • Hillwell, there is always going to be some demand, Jim, this is a temporary pause. It’s not a permanent pause. Because the fact is if the consumer goes to the store and the consumer buys, the shelves empty out, there is growth in semiconductors. there is growth in capital equipment. I think smartphones are still strong. Okay, They’re just not as exuberant as the initial forecasts were in the beginning of the year. 
  • Cramer – you also have a huge business in China. Actually, it’s gigantic for you guys. Are they feeling the same gloom? And don’t they have demand for PCs and smartphones and tablets off the chart there?
  • Hill – I think from a standpoint of China, China is the one bright spot, but I did detect in my last visit, which was two weeks ago to China. There is concern. There is a little cutback trying to control inflation. There is reduction in the ability to buy houses. Listen, if you’re not buying houses, you’re not putting televisions in them. You’re not driving electronics and I think there is just a caution stance people are taking.
This is one of the clearest enunciations of a slower global economy that we have heard. And it comes not from a talking head, not from a equity fee-collector (otherwise known as a long only stock manager or stock mutual fund manager), but from the CEO of one of the earliest components of the economy. He is not just talking about the U.S. economy but also China.

2. We are Sellers of Overbought Conditions – Jeff DeGraaf on CNBC Fast Money (minute 02:20 of the 05:27 minute clip) – Tuesday, July 12

Note: This is not CNBC’s title for this clip. They titled it S&P’s 20-Day Highs Expanding. Read the summary below or watch the clip and judge which one is the more appropriate title.

These days, we hear talk about the stock market being resilient to all the problems in Europe and elsewhere. The talk is valid because the stock market has been relatively resilient so far. But we recall that the stock market was also considered to be resilient in 2007 and in 2008. But those were years in which Corporate Credit led the stock market at least by a few months. When the severity of the corporate credit crisis became evident, the resiliency of the stock market melted and we all remember what happened then.

We include this clip because a respected technician provides evidence that, now in 2011, corporate credit is leading the stock market again. Jeff DeGraaf is a respected technical analyst. His comments begin at minute 02:20 of the clip.

  • DeGraaf – our trend work is neutral here but in the last week, we had a very unusual circumstance where momentum, we measure that by the % of names in S&P making 20-day highs, got to a level that we have seen only 6 times in the last 20 years and when you look at forward returns after that surge, called an overbought condition but which tends to be a bullish overbought condition, you look at returns post that surge, they actually end up being very very bullish, something like 10% out the next 65 days. So I like the momentum the way it is set up in the market. It is the next chart that bothers me more.
  • Melissa Lee – And which is?
  • DeGraaf – That is Credit. It might be a congenital defect of mine from my Lehman days, but I always look at credit within the context of what is happening in the market. And this is Corporate CDX Spreads Inverted vs. the S&P. (Chart at minute 03:00 of the clip). And what you will note  is that Credit really has really not been keeping up with S&P here. So while I like the momentum of the market when I just look at the market in isolation, I like that momentum. It is Credit, the way Credit is acting. This is U.S. Credit, if you take a look at European Credit, it is even worse obviously. But the way Credit is acting leaves us a little cold and we think the momentum, still bullish, probably needs to tempered a little bit. Puts us in that 1350 camp, still within this neutral trend. We are sellers of overbought conditions
Remember Jeff Gundlach said that he was keeping cash in his portfolio because he expected lower prices for credit. Jeff DeGraaf seems to be in some agreement about the direction of credit.

Also remember Jeff Gundlach said that he expects an Echo of 2008? A steep fall in Credit followed by the sell off in S&P 500 would be an echo of 2008, won’t it?

At the very least, remember DeGraaf’s final declaration of this clip – We are Sellers of Overbought Conditions. This is from a man who, to the extent we recall, has believed overbought conditions to be bullish.

3. The Deep Secret in All of This – Bob Woodward on The Chris Mathews Show – Sunday July 10

Bob Woodward is the celebrated reporter at the Washington Post. He appeared on The Chris Mathews Show last Sunday. At the end of the show, every guest is asked to tell Chris Mathews something he doesn’t know. In this show, Bob Woodward told Chris a fact that almost every one who is following the U.S. involvement knows, but that no one talks about on-air.

  • Woodward (minute 04:04 back from the end) – On national security, the Afghan war where Obama has promised a drawdown – the ticket out is training the Afghan Army – there have been lots of improvements in the Afghan Army – there is a real problem, this is the deep secret in all of this, the recruiting of the Pashtun majority is so low, it is less than …it is in the single digits, so you cannot have a country that is majority Pashtun with an army that is gonna save you and preserve you and take the place of US and NATO,  that is 7-8%…. Any one who knows this, just says this is the ghost in the machine…
Technically speaking, Bob Woodward is wrong in describing the Pashtun as the majority. They are not. According to a study by the Asia Foundation, the Pashtun are only 42% of the population and the second largest ethnic group (31%) are the Tajik, as in Tajik from neighboring Tajik-i-Stan (land of the Tajik). The map below paints a clearer picture. The light green area in the south is Pashtun and the shaded dark grey area in the north-east is Tajik.

(US Army Ethnolinguistic map of Afghanistan – src Wikipedia)

But Woodward is correct in calling this the ghost in the machine. Because the Taleban is virtually 100% Pashtun and the Pashtun areas lie along the line of control with Pakistan, which has a very large Pashtun community on its side of the line of control.

There can be no political or military success or even a semblance of success in Afghanistan without Pashtun participation. This was the reason the US gave the Afghan Presidency to a Pashtun, Hamid Karzai, in 2001. But despite Karzai & his clan and despite all the efforts of the US, the Pashtun have simply refused to join the Afghan Army. 

The divide is not just ethnic. The Pashtun speak Pushto while the others speak Dari. So the Afghan “National” Army, overwhelmingly non-Pashtun, cannot speak with the Pashtun population or understand them.

Now you understand why Robert Blackvill, ex-Ambassador to India, called for a Plan B that features a partition of Afghanistan into the Pashtun area and a Tajik or Northern Area creating in his words an irredentist Pashtun-i-Stan on both sides of the line of control.

Now you understand why recently the Russians and Americans showed up independently in Dushanbe, the capital of Tajik-i-Stan, in the last few weeks.

So when you hear “experts” on TV talking about training the Afghan Army, remember the map above and the deep secret Bob Woodward described. You may be able to do so as early as Monday, July 18, when  Scarborough’s Morning Joe show on MSNBC runs an “all-star” panel on Afghanistan.

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