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.
A T&C Story!
At least that was Friday, if not the entire vertical 13% rally from the false breakdown on Tuesday, October 2. Some Pandits voiced their opinion on Thursday that the rally looked tired. Then on Friday morning, Treasury Secretary Tim Geithner told CNBC’s Steve Liesman that “the IMF has very, very substantial uncommitted resources…”.
The market needed nothing more. The T&C pair of Tim Geithner and Christine Lagarde is in charge. Geithner knows what to do and Lagarde knows how to speak with Europeans like a European. What else does a risk aficionado need?
We all know that there are several steps involved in this process and any misstep could create a fall. But for now, Geithner’s “very very substantial uncommitted resources” assurance is not just a bazooka but actually a howitzer.
Recesion Is Over before It Began?
It is amazing how a 13% rally and some stabilizing data can shoo away clouds of gloom. The best evidence is the steady rise in 30-year Treasury yields all week and the steady fall in the Dollar. Add rate cuts in EM to this mix and you saw huge rallies in the Australian Dollar, the New Zealand Dollar and the Euro. So what recession is the new chant!
Macro vs. Technical Levels
For the past several weeks, we have focused on technical levels in the SPX. That is unusual for us because our bent is macro. But when facing a storm, it is important to note one’s bearings and identify supports. That is done in the stock market by focusing on technical levels. Otherwise, one tends to be driven by emotions and sell at the bottom when panic is rampant. In fact, that is how bottoms are made.
So where are we today? On Friday, the stock market broke the 1220-1221 top of the trading range. And it did so on a Friday, which is more important than a midweek break. But this is so far a minor, unconfirmed break. Just as the breakdown of 1100 was a false breakdown, a one-day phenomenon, the upside break could also prove false. It will depend on Europe, the earnings that come through this month and global data. Another factor is the strong seasonal period that begins in October.
The rally over the past 13 days has been explosive and vertical. It was clearly driven by massive short covering. But no brokerage compliance officer asks you whether your profits came from a short covering rally or a real one. Every rally begins with short covering and then investment either comes in or not.
The rally that began mid-morning on September 21, 2001 (after 9/11) was a massive short covering rally in retrospect and it lasted well into the first half of 2002. The 2007 rally from mid-August to October 31, 2008 led to a far more serious decline into March 2009. On the other hand, the rally in March and April 2009 created a two year rally into April 2011.
The critical determinant of this rally will be the Macro, whether the US economy and the global economy enters a severe slowdown that feels like a recession. We are believers in the reliability of Rosenberg, Achuthan & Shilling. If they prove right again, then the sell off in Treasuries will prove to be a buying opportunity.
High Yield Bonds, Treasuries & Asset Allocation
Richard Bernstein wrote a superb asset allocation report in February 2008 in which he postulated that 30-year Treasuries are the ONLY defense against stock market risk. This has been proved again and again since then, most recently in August-September 2011. This is why Mr. Bernstein told CNBC Squawk Box recently that his new multi-asset fund has bought 30-Year Treasury Zeros to defend against stocks selling off.
This is lost on most FinTV anchors and of course on most fixed income strategists. The one who comes to mind is Zane Brown of Lord Abbott. He has been visible on CNBC Shows recommending High Yield Bonds. This strategist, a favorite of Journalistic CNBC shows, has rarely recommended Treasuries. We say Journalistic because the professionally led CNBC shows like Fast Money, Mad Money, Strategy Session have never invited Mr. Brown.
This week, Jeffrey Gundlach, called by some as the best Fixed Income Manager today, said he is “marrying” Government Bonds with specific High Yield bonds. The High Yield Bonds provide great yields and the Government Bonds provide downside protection and minimize portfolio volatility (see clip 2 below). This is the same approach used by Richard Bernstein in “marrying” stocks and 30-Year Treasury Zeros.
Will CNBC Anchors convey this smart message to their viewers, a message that protects investors in good times and bad? Or will they continue to invite sales-strategists that often lead their viewers astray?
The list is rather short this week.
- Tim Geithner with CNBC’s Steve Liesman on Friday, October 14
- Jeffrey Gundlach on CNBC Strategy Session on Thursday, October 13
- Dick Bove on Bloomberg’s Surveillance Midday on Thursday, October 13
- Josef Ackermann on CNBC Strategy Session on Friday, October 14
1. Secretary of Treasury Timothy Geithner with CNBC’s Steve Liesman – Friday, October 14
The transcript of this conversation can be read at CNBC.com. A couple of key excerpts are below (emphasis ours):
- Liesman: So Europe has so far proven itself incapable of taking the
big steps to calm its markets and to get its financial crisis under
control. Is there any reason for optimism right now that the G20 can
play a role in helping Europe get its act together?
- Geithner: Well, Europe’s clearly moving. If you look at what they’ve
been saying– they’re talking about a much more comprehensive package,
much more forceful package of measures, a backstop for the sovereign
governments that are under the most pressure, preemptive
recapitalization of banks. Those are the kind of things that we need
to– they need to do. Course the hard part’s still ahead, which is
design a strategy that meets those basic objectives.
- Geithner: Oh, I think there’s no alternative for Europe. And– you’ve
heard the president of France and the chancellor of Germany– state
very, very clearly that next week and in advance of the summit in Cannes
of the G20 leaders that they’re gonna move to put in place a more
- Liesman: Is there a financial role for the United States in assisting Europe either directly or through the IMF?
- Geithner: Through the IMF, of course– we’re already playing a very
major role. And we’re happy to see the IMF continue to play that role in
support of a more forceful, comprehensive strategy where Europe’s own
resources, very ample resources are deployed at a much more substantial
- Geithner: Lots of ways to do this, and of course we’ll look at
anything that makes sense. The IMF has very, very substantial
uncommitted resources because of the actions we took in ’09 and 2010 in
the crisis to substantially expand the IMF’s financial capacity. So they
have very substantial resources that are uncommitted.
- Liesman: Wouldn’t that though put the United States tax payer
dollars at risk to help save Europe? Is that the right use of taxpayer
- Geithner: Yeah, absolutely and– but– the IMF– you know, the U.S.
has been a was a founding member of the IMF, one of the early architects
to the IMF– never lost a penny on any of our exposure to the IMF. And
that’s because of course IMF resources come with very strong conditions
and are deployed prudently to help in crises like they’ve been. But
you’re seeing IMF do extraordinary productive things over time. That’s
made the U.S. economy stronger, not weaker over time and in that
tradition, which is a bipartisan tradition, we’ll continue to look for
ways we can help Europe.
If you watch the clip, you will notice that Mr. Geithner was confident and relaxed. It seems evident to us that this policy has bipartisan backing from the White House and the Congress. No one wants the US economy to be torpedoed in an election year due to a European mess.
Later in the interview, Mr. Geithner talks about China and the BRICS.
2. Mortgage Market Contagion Ahead? – Jeffrey Gundlach on CNBC Strategy Session – Thursday, October 13
Jeffrey Gundlach needs no introduction to the readers of these articles. Neither do the Strategy Session anchors David Faber & Gary Kaminsky.
- Kaminsky – JP Morgan Credit more risky in the afternoon than in the morning?
- Gundlach – as a general proposition, there is tremendous nervousness about the Banking system for obvious reasons – the fundamental twin towers of risk that overhang the banking sector which are
- rotting away assets on the balance sheet and
- linkages to Europe
- are undeniable..and you have to expect significant volatility in that CDS and when it tightens in, you are supposed to be selling out and trading back in on fear….with weaker earnings reports there is a little bit of concern and appropriately the CDS should be widening out.
- Faber – is there value in MBS and those declines, do they do anything with where those assets are marked on the Bank balance sheets?
- Gundlach – You would need a much more substantial decline [in mortages] to generate substantial chatter about needing to remark bank portfolios – when it comes to value in MBS, you know I think there is value but it is important to have a mix of assets. A lot of people have thought that mortgage credit was a clever idea this year as it was last year and secretly people are losing money in mortgage credit – doing a good job in the non-guaranteed mortgage market this year, your returns are flat – if you are up even 1%, you are doing quite a good job.
- Gundlach – the real trick in the secret to finding value in MBS is you have to have hedges to hedge the credit risk…which means that to be able to unlock the long term value any of us see in the non-guaranteed market and still have a short term low volatility experience, you have to marry it together with Government Bonds and Ginnie Maes. You know the Double Line fund is up almost 9% this year, not because of non-guaranteed mortgages, it is because we have married them together with Ginnie Maes. The Ginnie Maes we own believe it or not, are up like 15-16% this year –
- Gundlach – Since Corporate Junk bonds have declined to a nice low level of valuation a week ago, I think it is too early to buy Junk Bonds, in a kind of wholesale way allocating money but at least they start to get interesting when linked together with Government bonds – because they have opposite price action…
- Kaminsky – Jeffrey, the stock market is not up 9% this year, I know you are a bond guy but you did make a comment earlier about this – you think what we saw last week in global stock markets was a bear market rally?
- Gundlach – That’s right. I think we had a huge rethinking of the world in the decline that took us down to 1070-1080 on the S&P. And we have been flopping around like a fish out of water in a frenetic way – that’s usually symptomatic of nervousness and problems – We have had this linear vertical bear market rally in stocks and like I said earlier bear market rallies are better than the real thing.. they are made of pain against the shorts and I just don’t think the S&P above 1200 is something that I would want to own. In fact, in our Multi-Asset fund at Double Line, we started shorting some of the high end retailers yesterday because we think we are at a price point there against a scenario of economic weakness globally that bodes poorly especially for high end retailers.
- Gundlach – so I think we are at a price point where risk is a more interesting short than it is about instigating positions.. that goes for stocks, for junk bonds – as low as Treasury yields are and lets face it, they are not an investment, but they make sense as a hedge because it allows you to unlock the value – Junk bonds at 9.5% to no losses and even with a few defaults are interesting but they are probably gonna have a lot of volatility so if you own some long term Treasuries with that, you get a decent offset that you can create some interesting yields with not having too much risk against the tough backdrop of the twin towers of risk…
Next time, some strategist advises viewers to buy Junk Bonds in a standalone manner, will CNBC Anchors question that strategist with the above comments of Jeff Gundlach? We doubt it.
3. JP Morgan Earnings – Dick Bove on Bloomberg’s Surveillance Midday – Thursday October 13
In this clip, analyst Dick Bove discusses the fright investors took after listening to the earnings conference call with Jamie Dimon of JP Morgan. A few excerpts from this 09:12 minute clip.
- Keene – Did JP Morgan miss today?
- Bove – Yeah, they definitely missed. The use of what is called Debt Val
ue Adjustment allowed them to look much better than they actually were. Plus the company lowered its tax rate and that tax cut benefit gave them another billion dollars in earnings. So I think they definitely missed. But I think much more important than that, – Jamie Dimon frightened people significantly in his conference call this morning. What he said was he is not going to lower loan loss reserves any longer. Now what that signals to people who watch the banking industry is if he fears we are going to go into another recession , perhaps because of Europe or something is gonna pop up in housing. When he does not want to lower loan reserves, he is saying that he fears something is going to go wrong in the future and that I think frightened a lot of people.
- Keene – a chart of JP Morgan to Bank of America – it is like Greece and Germany – what struck me it looks remarkably like the Greece-Germany spread.
- Bove – Bank of America made a couple of acquisitions that really harmed the company dramatically – Countrywide was an absolute disaster to Bank of America. And inside of Merrill Lynch there is a company called First Franklin which they got with a whole bunch of other acquisitions through National City and the loan losses coming out of Mortgages through those two operations have devastated Bank of America’s results.
- Keene – Can widows and orphans buy Bank of America?
- Bove – well, widows and orphans better not buy too much of the stock market at the moment and not in Banks. But if you are a speculator and if you are an investor who is willing to take risks, I would definitely buy Bank of America and I would take a look at Bank of America debt because the yields are extraordinarily attractive.
4. Ackermann one-on-one – Josef Ackermann with CNBC’s Maria Bartiromo – Friday, October 14
Josef Ackermann is the Chairman of the Managing Board of Deutsche Bank. He has been a vocal opponent of recapitalizing European Banks. He expresses a view that is different than what Secretary Geithner and President Lagarde are articulating. His comments are sober and need to be understood for a fuller understanding of how Germans feel.
- Bartiromo – … let’s first talk about what Fitch did. Then I want to get your thoughts on what’s happening in the Euro zone. A lot of confusion coming out and investors really need to put some clarity to this. So Fitch putting the bank on credit watch negative. What does this mean for you?
- Ackermann – well, I don’t think it has any immediate impact and we have seen that before. We are well-capitalized.… we have 180 billion Euros of liquidity reserves. We have a good profitability. So it will have no impact and people have already digested that… so no immediate impact whatsoever..we have reduced our Sovereign risks dramatically. We are below 3 billion and most of it is marked down already. We have taken 400 million hit this year on our Greek exposure….We just issued a major transaction successfully….Obviously people believe in the strength of the bank.
- Ackermann – …..but given the talk about capitalization, even a mandatory recapitalization, we have first to ask the question, what is needed to regain confidence in Europe? And after having talked to hundreds of investors in many parts of the world the last two weeks, I always got three messages —
- You have to ring-fence countries on the periphery so you can manage or absorb spillover effects.
- You have to find a higher debt stability for Greece and of course
- You have to ring-fence the core banks.…
- Ackermann -…. injecting capital into the banking system is certainly not sufficient because people will still have a lot of question marks about the debt sustainability of Greece or contagion into other countries, especially the two big countries, Italy and Spain. That’s why after having violated the principle of the Sovereign Risk being Risk-Free in the Greek case some weeks ago, we now have to defend and clearly elaborate on the fact that this has been a unique situation.…..So Greece has to be seen in a different context. and then I would say that the capitalization issue has to be seen from a completely different perspective.
- Bartiromo – …. I want you to continue talking about this because it seems that people would like to see the leaders in the Euro zone sort of bite the bullet, if you will, and acknowledge that we will see a default in Greece…..You have said that you oppose a Europe-wide capital injection into the financial sectors. so you’re just saying that it’s not just a capital issue, putting more money at the problem is not going to help.
- Ackermann – yeah. Imagine someone has an Italian bond portfolio of several dozens of billions and you
are not trusting the stability of the Sovereign Risk in Italy. Then 5 billion to 10 billion of fresh capital doesn’t make a huge difference. In order to restore the confidence in this banking system, that’s why we always have to start at the very top, namely the sovereign risk. and the sovereign risk has to be made risk-free again. That’s the crucial element.
- Ackermann – …. on top of that, you would have a massive competitive disadvantage. Because as Jamie Dimon said or may have said, Basel III is Anti-American. I would say such a dramatic increase in capital plus taxes plus levies would be profoundly Anti-European. We would lose our competitive level playing field with the Asian Banks and U.S. Banks. That cannot be in the interest of Europe.
- Ackermann – ….the last point, if you have six or nine months to adjust to relative high level on a completely different definition of capital, we would all start de-leveraging which in a very fragile environment that we are getting close to zero growth in Europe, be sure to do everything that banks can do to fulfill their primary mandate, mainly to lend money and not to reduce lending, to sell assets, to reduce risk rated assets in order to comply with the much higher capital ratios. It’s all together clearly not in the interest of the economy in Europe.
- Ackermann – in my view, many people, including academics, are clearly underestimating the spillover effect, the secondary effects of an uncontrolled and not in an ordinary way default or restructuring of Greece would have dramatic consequences. That’s why we need first a ring-fencing of the other countries on the periphery. And that means we have to expand the stability facility which we have. and this is easier said than done. Markets are overly optimistic about that.
- But we have to understand that the sentiment in many countries is not very much in favor of transferring even more funds into a European Bailout fund.
- Secondly, there are constitutional hurdles. There’s no bailout clause in the treaty.
- And even many countries are saying, we cannot transfer more funds without parliamentary approval, without knowing exactly whether there is a success at the end of this transfer. and all these questions will take time. So in that sense, we are in the midst of a very, very delicate political struggle and just a quick fix is very unlikely.
- Bartiromo – Josef, how do you think this plays out over the long term? I recognize it’s always going to be dictated by the actions that we’re talking about right now, from the leadership there. But when you look out over the next year, three years, how will the financial services sector look different? Are you expecting lots of mergers, consolidation as a result of those weaker players that will be forced to get together with the larger, more strong banks in terms of their capital?
- Ackermann – We need a United Europe in order to have the size to compete with the United States and with China and other major countries. And we need bigger banks in order to compete with the U.S. Banks, the Chinese Banks and many other banks in Emerging Economies. In that sense, there will be more consolidation after a while. But we have to take away first all these uncertainties, the regulatory uncertainties, the fiscal uncertainties, the sovereign risk uncertainties. That’s why we now need very bold moves in Europe. I‘m confident we’re getting closer to a comprehensive package of what we have to do and a mid-term plan which we are then realizing and implementing in the next few years.
- Ackermann – So overall, I’m much more confident, actually, that we can solve the problem in Ireland. They are doing a very good job. Resolve the problem in Portugal. It’s well under way. Spain as well. We still have some open issues. But i think the Government is working on that. And in Italy, we clearly have a fantastic platform, but that the GDP is 120%, which is too high. They have to bring that down. On the other hand, household to debt is only 36%. So it’s a wealthy, rich country which can do a much better job in order to regain confidence. Greece is a separate case. Greece, we have to do everything to keep it within the Euro zone. We have to help them reduce Debt to GDP over time. and then at the very end when all the other countries are either ring-fenced or stabilized, I think it will be absolutely necessary to do some sort of a restructuring o
f the Greek Debt, which we are doing with the private sector involvement. We are keeping them much longer securities, up to 30 years, at much lower rates which cost us over 20% net present value loss. I think these are all the right steps.….We’re talking about growth impulses. We cannot just reduce GDP and keep the debt burden stable. Then, of course, Debt to GDP gets weaker and weaker. We have also to see that we can stimulate and spur growth in these countries, That’s true for Europe as a whole. we are now entering a stagnation for a certain period, which is not very good.
Send your feedback to firstname.lastname@example.org OR @MacroViewpoints on Twitter.