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.
- “I actually think we are going into the 2nd Quarter with the economy on the down escalator in terms of momentum…people are going to be surprised how soft the economy is going to be for the next several months…”
Another perception that met reality was the conviction that the Fed is done with QE measures. This view quickly achieved a quasi-religious fervor this week with traded places anchors Brian Sullivan (CNBC, ex-BTV) and Trish Regan (BTV, ex-CNBC) leading the emotional, high-decibel charge. CNBC’s Steve Liesman probably sealed the local ‘extremum’ of this thought with his tweet on Wednesday morning:
- Hope Twitter friends follow the CNBC Fed Survey earlier this month. We reported probability of QE3 declined to 33% to 48%.
We tweeted back our “is this a local minimum for QE-expectations?” question to our Comrade Steve. But Professor Liesman did not deign to respond. One expert who did respond to the End-QE movement was the Bond King, Bill Gross. In what we think is his most quotable and most useful interview in a long time, Bill Gross said (see clip 1 below):
- they [Fed] have to keep going if they expect equity markets to lie at this level
- economic recovery which in of itself has come through Fed and other Central Banks’ check writing
- is there a put, a Bernanke put? is there a Draghi put? There definitely is.
But Bill Gross characterized US Treasuries among “bad bonds that go to the central banks to die“. He seems set to repeat his 2011 mistake:
- “The 10-years, the 30-years, basically no one would buy at these types of levels and
so we are operating in a subset of markets where 10 -year yield at
2.25% and a 30-year yield at 3.35 is a subsidized level and who would
buy them unless the Fed buys them..not too many buyers I don’t think.”
Well, there was no shortage of buyers on Friday morning when Rosenberg’s reality met FinTV perceptions. As CNBC’s main man Rick Santelli told Becky Quick on Friday morning:
- I think the wild card is actually how much closer to 2% we get the ten-year, which is now at 2.08%.
On Friday, the 30-Year T-Bond closed up more than 2% in price to yield 3.21%, a drop of 22 basis points from Tuesday’s post-Fed-minutes close of 3.43%.
Now why would Mr. Gross say no one would buy 30-year yield at 3.35%? Didn’t he hear the Steve Liesman – Rich Bernstein exchange from CNBC’s Reunited & It Feels So Good special on March 22.
Liesman – where do you want to be Richard, if David is right?
Bernstein – I want to be in 30-year Zero coupon bonds.
The 30-year yield closed at 3.37% on March 22. Don’t you now wish you had bought 30-Year Strips on that day, Mr. Gross? Please don’t repeat last year’s mistake, Bill. A slowing economy, a fiscal cliff looming at year’s end, post-LTRO Europe turning into pre-LTRO Europe, who wouldn’t want to buy the 30-Year Bond?
Finally, this week and Friday’s number proved once again that Bernanke is the King. He rules markets. And he understands this economy better than his colleagues, especially Fisher, Lacker et al. As the Bond King said this week (see clip 1 below):
- Bernanke, obviously is the King, Yellen, is the Queen, may be Bill Dudley is the Castle and others are basically knights. So I think you have a story when one of these major pieces, one of the three, concedes and says check mate….Until that happens, this word-smithing in terms of a couple few is relatively unimportant.
Isn’t this the most quotable Gross interview ever?
PS: Egan-Jones downgraded the US from AA+ to AA with a negative watch on Thursday, after the close. Do the markets even remember that after Friday’s non-farm report?
2. Will the 2nd Perception meet its Reality as well?
This second perception is the near certainty of the Great Rotation of money from bonds to stocks. How many “experts” and “gurus” have proclaimed this as inevitable? Let us count, Leon Cooperman, Larry Fink, Robert Kapito, Jeremy Siegel and this week, Abby Joseph Cohen (see clip 3 below). These are just the few we chose to feature.
Michael Hartnett of BAC-Merrill Lynch is a rare strategist who prefers to see the evidence. He writes this week:
- “no evidence of The Great Rotation. Flows to IG bonds stay strong, but investors redeem from financials, Brazil and China equity funds.”
He points out:
- “Since 1925, the
S&P 500 has recorded two consecutive quarters of double-digit
returns 11 times. In 9 out of prior 11 occasions, equities went on to
record a third consecutive quarter of gain with a median return of 5.0%.”
But he adds:
- “…we remain more negative on equities in Q2 than history would suggest.”
Why? One reason is “Peaking Profits”. Jim Reynolds of Loop Capital was even more cautious about corporate bonds when speaking with CNBC’s Brian Sullivan. He is also worried about the lack of liquidity when investors go to sell corporate bonds (see clip 5 below).
We will all see what Q1 earnings reports show us beginning next week.
3. Is Delusion meeting Reality again?
The delusion is that ECB’s LTRO has stabilized Europe. The somnambulant among investors were shaken awake when Spanish Prime Minister Rajoy said Spain, Europe’s fourth-largest economy, is in “extreme difficulty“. The action in the European markets suggests that reality is just awful. Will the US stock market simply yawn at Europe’s mess as Jim Cramer suggested to Mad Money viewers this week or will we realize the markets are “basically reliving what happened last year” as David Rosenberg said on March 22.
4. Best CNBC Squawk Box show Ever!
On Wednesday, April 4, CNBC Squawk Box did a special on Richard Rainwater, the legendary investor. They brought star investors like Eddie Lampert, Barry Strenlicht, John Scully and others to speak about their experiences with Mr. Rainwater. CNBC’s Carl Quintannia called it the best Squawk Box ever. We are inclined to agree as pure viewers. We encourage readers to view the clips which are listed at Rainwater search results on CNBC.com.
Unfortunately, this show and the clips offer little to investors in terms of what to do today. That is why we chose not to feature the clips. The only transcript provided by CNBC is of comments by Eddie Lampert.
- Bill Gross on CNBC Squawk Box on Wednesday, April 4
- Rick Santelli on the Santelli Exchange on Wednesday, April 4
- Abby Joseph Cohen on BTV’s Inside Track on Tuesday, April 3
- Marc Faber on BTV’s In The Loop on Monday, April 2
- Jim Bianco & Jim Reynolds on CNBC’s Street Signs on Thursday, April 5
- CQ – Do you agree with the way the Fed minutes are being read? That it makes any further injections of liquidity less likely?
- Gross – I don’t……it is much to do about nothing… we should look at the Fed as a chess game, some of the pieces are more important than the others..Bernanke, obviously is the King, Yellen, is the Queen, may be Bill Dudley is the Castle and others are basically knights. So I think you have a story when one of these major pieces, one of the three, concedes and says check mate.We haven’t seen that. Until that happens, this word-smithing in terms of a couple few is relatively unimportant. [Note to CNBC, BTV, FBN – forget about interviewing Fisher, Lacker et al… their views just don’t count.]
- CQ – Here is your tweet from this morning – Central banks are where bad bonds go to die. Without QE, the financial markets & then the economy will falter. You want to expand on that?
- Gross – yes. central banks are where bad bonds go to die and good stocks are born, I suppose. Bad bonds, what are those? In terms of the ECB, they would be peripheral bonds that they have been in the hundreds of billions and in the United States, are they the Treasuries ? well, to a certain extent, yes. The 10-years, the 30-years, basically no one would buy at these types of levels and so we are operating in a subset of markets where 10 -year yield at 2.25% and a 30-year yield at 3.35 is a subsidized level and who would buy them unless the Fed buys them?…. not too many buyers I don’t think.
- Hobbs – You have bought mortgages, you hold about 38% of mortgages in your fund, they have gone up in anticipation of Fed buying mortgage-backed securities. Let’s cut to the chase. Do you continue to buy there, do you believe therefore that the threats of the Fed buying exists. Does it exist past 2012 into 2013?
- Gross – I think that’s sort of the cherry on top of the sundae. I think what an agency-mortgage does for a buyer and the yields are 3-3.5%, it’s not great but its better than Treasuries, what it does provide a buyer is a higher yield independent to some extent on interest rates not changing,,,, is it a bet on QE3? not necessarily, it is a bet on Fed basically staying where it is until 2014 and if it does, buyer picks up 100-150 basis points in yield.
- Hobbs – Isn’t it a great reassurance that if they did QE3, there is no way they can raise general interest rates that’s a guarantee, that’s cast iron.
- Gross – That’s true. That’s cherry on top of a sundae. Basically it would reaffirm that the Fed’s not tightening. Look to the point at the end of June and perhaps and, I don’t believe this is the case, but perhaps the Fed, you know, won’t re-initiate a Twist or a QE3. Basically, when that’s happened, Simon, when QE1 ended and QE2 ended basically the stock market has gone down by 1,500 points over the next month or two and is the Fed trapped in providing liquidity, cheap liquidity to pump up stock markets and risk markets? I think they are. I don’t want to argue with Rick Santelli, he is not on the line right now. But it’s a necessary policy of where central banks led us.
- CQ – Bill, when it comes to stocks, a very smart market observer wrote it’s not about bears versus bulls but more fundamentalistas and liquidistas. what side would you be on?
- Gross – if I got your question right, I think it is about liquidity. you know, the central banks have poured in $2 trillion worth of money and written $2 trillion worth of checks. You can call them QEs, or LTROs , there has been a lot of checkwriting over 3 to 6 months and that’s come with the affirmation and with the hope that equity markets and risk markets would rise and so I think it is dependent on QE continuation, on QE3 or whatever it’s going to be called. Twist or, you know, some derivation of Twist – they have to keep going if they expect equity markets to lie at this level.
- CQ – would you put a number or a percentage around how much of the markets rise has pivoted around promises of liquidity versus promises of economic recovery?
- Gross – I think a good 10% to 15%. We can see that as QE1 and QE2 ended, 1,500 points down within a month or two. Those are only two data points but I think a good 5% to 10% of the market has come through check writing from the Fed and the rest of economic recovery which in of itself has come through Fed and other central banks check writing.
- Hobbs – Bill, let me be quite clear and double back on what you said before. Are you suggesting there’s a Fed put under the stock market? In other words, because the wealth effect is now so important to America with the recovery that they will move towards QE3 if the market falls? Can I buy the stock market? Is it safe because of the Fed?
- Gross – I think there is a Fed put, Simon. There’s an ECB put and a question put to Draghi about two weeks ago – what was the first thing he thought of in the morning? He said where the stock market was. Bernanke has not been quoted in those terms but that’s a fundamental consideration for central bankers. Is it the proper consideration? Probably not. But at this point the markets are dependent upon economies or economies are dependent upon markets? And is there a put, a Bernanke put? is there a Draghi put? There definitely is.
the economy and it makes the markets far more volatile. In other words, more QE is an utterly worthless use of the Fed’s balance sheet that we the people hold up with our tax dollars. Below are Mr. Santelli’s own words:
- We had the bond king on not too long ago, Bill Gross, and he did reference my name. The context was after QE-1, QE-2 died, we saw stocks lose 1500 points. The notion was he doesn’t want to talk about whether the programs of our Fed, world’s Fed, are good or bad. They’re needed. That’s great.
- and about the same time he said that he had a tweet that was out there, so many people follow Mr. Gross. Here was the tweet about seven clock eastern. Central banks are where bad bonds go to die. Without QE the financial markets and then the economy would falter.
- I’m not picking on Mr. Gross. But here’s the point. I’ve always said that the frog isn’t really alive and what we are doing is throwing electricity in. When the legs move, we say it’s economic horse power but we’re being a bit disingenuous.
- another point, especially to that tweet. you know, if the toxic areas we are storing this paper are a way to nationalize some in the economy and banking industry and interest rates then the New Normal, Gross and his firm put forth is a great phrase, the New Normal isn’t really being allowed to grow. How long can we have the subsidy? How can we get rid of it? This is huge. A really bad or good jobs report on Friday, it makes the outcome in the market ten times more volatile, because it’s going to bring in the liquidity factor from the Fed every time, especially if it’s a weak number.
On investing in the U.S.:
“It’s clear that many people have forgotten that the U.S. is still by far the world’s largest economy. Even with its outstanding growth over the last decade, the size of the Chinese economy is only about 40% of the United States. So clearly what happens in the United States has a significant impact on the rest of the world. Right now the U.S. economy is growing. Not as rapidly as we would like but it seems to be good, solid, steady growth.“
On investing in China:
- “We do think there is deceleration underway in China. On a long-term basis, we think growth there will be good. But when we look at the other industrial economies, clearly the U.S. at this point seems to have a cyclical advantage and in some ways a structural advantage.”
“U.S workers are the most productive in the world, more productive than those in other industrial economies and of course, the developing economies. Our economy is doing better. I’d also point out that our financial system in the United States seems to be much further on the road to recovery than is the comparable system in other parts of the world.“
On U.S. stocks outperforming Europe and China:
- “This is something that’s also been driven by valuation. At the end of 2011, what was priced into the U.S. equity market was five years of profit declines – never really a probable scenario, but investors were so nervous about so many things, that’s the way our market was priced.“
“Even after these rallies, the market offers good value but not as good as it was previously. But our feeling is the next recession is some significant distance off into the future. What we know is, bear markets can be sustained not by the most vigorous of growth but by growth that investors believe will hang on there for quite a while.”
On forecasts for this coming earnings season:
“Clearly, comparisons are becoming more difficult for U.S. corporations. Profits have been growing at a very robust pace for more than two years. Margins have been at a peak. And we do think that those numbers will not be quite as vigorous.”
“What really matters, though, is whether investors are saying to themselves now, we’re looking not j
ust at this quarter but to the remainder of 2012 and into 2013. Investors seem to be much more comfortable about the intermediate term in the United States than they were even just a few weeks ago.”
“That is the sign of a continuing bull market. It doesn’t mean that the gains from here or the gains we’ve seen thus far should be extrapolated, but it does suggest that equities will continue to see some positive move. And one of the things, of course, to consider is the relative nature of stocks and bonds.”
“With interest rates as low as they are, there are many investors — especially those who have a long time horizon — saying returns from equities, even if they’re not as vigorous as they’ve been in the past few months, will probably be better than the returns from bonds.”
On the global economy:
- “Our view is that the global economy has indeed shifted and will continue to shift. We see good, long-term growth from the advanced emerging economy. Not just China but Brazil, India, and some others.”
“But we also have to recognize that the United States has suffered a significant cyclical beating, but from an innovative standpoint, the United States remains the place in the world with more patents than anyone other, more investment in R&D than any other and the United States has really been the innovative engine for the rest of the world. There’s a little rule of thumb used in Silicon Valley, and that is the basic research is done in the United States, the development is then done in Korea but the production is done in China. One of the things our innovation panel has been focused on is how do we continue to keep the United States extremely innovative?“
- “There are several components. One is good education for everyone, and also with a focus on STEM — science, technology, engineering, and math. Number two, that we continue to support good, basic research. The basic research being done now may not be seen in terms of fruition for decades. Keep in mind that the Internet and GPS were developed by the U.S. government decades ago, and then companies like Apple and Google are taking advantage of it now.”
Mr. Faber then appeared with BTV’s Betty Liu to provide a more detailed description of his views.
Faber on whether he’s finding more shorts in the equity market:
“In a money-printing environment I’m reluctant to short. But say whereas I recommended investors to increase their positions last October, November, December, now I think that if people are overweight in equities they should reduce positions somewhat…maybe cash. The U.S. dollar is desirable at the present time. And we have to say one thing. The market consists of thousands of stocks and the market consists of many different stock markets globally. The S&P has done exceptionally well relative to, say, emerging economy stock markets, most of which are still lower than they were in 2011. So, if you look at the advance-decline line of all the share markets in the world, then it is definitely being deteriorating. And I happen to believe that money printing will continue and I would probably buy financial shares and I believe that the Japanese market may outperform all the other markets against all expectations in 2012.”
On saying that earnings will deteriorate and profit margins will shrink:
“First, I think there are some cost pressures creeping in terms of rising raw material costs, especially energy, and the problem with, say, a QE3 would be that you are doing it in an environment of very elevated oil prices. So, maybe the energy prices would go up more and squeeze the margins of some corporations. And certainly squeeze the consumer. And my sense is that the economy has bottomed out but is far from robust because the typical household is being squeezed by higher cost of living increases. There are various measurements. You can measure the CPI. It is rising by less than 3%. Everywhere I look I see households essentially paying between 5% to 10% more for goods and services than a year ago.”
On whether Q2 will be as strong as Q1 for investors:
“I think that if you look back at a year ago we made a peak of 1370 on S&P on May 4 and then dropped sharply to 1074 on October 4. Then we recaptured the lows in November and December. Since then, the first quarter has been very powerful and has surprised investors because of its strong performance. And I think now the expectations are very high. The market is no longer oversold the way it was in December. And everybody thinks that the race is on, go along with equities, the hedge funds have positioned themselves on the long side and optimism is high. I would be very careful at this stage.“
On why investors should have caution:
“Basically I think that earnings may begin to disappoint. That corporate profit margins could deteriorate. And I think we still have a lot of issues. Don’t forget we have QE1, QE2 and Operation Twist. I think in order to really hold asset prices across the board much more QE3 would have to be gigantic. I’m not ruling out that stocks can continue to go up but I doubt they will go up at the same rate as the first quarter. And if you look at the technical under underpinnings of the market, they have deteriorated. The list of new highs is deteriorating. The short positions are way down. And we have an overbought condition in the market if we measure the number of stocks above the 50-day and 200-day moving average. So, generally I would say maybe April is traditionally still a month of seasonable strength but somewhere in the next six months I think you can buy the whole market much cheaper.”
On QE3 having to be “enormous”:
“It would have to be very significant to boost all asset prices including homes, stocks, bonds and commodities…Much larger [than QE1 and QE2].”
On why he’s not recommending to buy more gold:
“As you know, I have been very positive about gold and I still accumulate gold every month. But I think that we had an intermediate peak at $1921 on September 6 of last year. Then we dropped sharply to $1,522 an ounce on December 29, 2011. Since then we’ve had a feeble recovery. I think that the correction period is not yet over. I’m not selling my gold because I don’t trust governments and I don’t trust the Federal Reserve, nor would I trust the ECB or other money traders in the world. They are all going to print money. I still recommend to hold gold.”
On bad returns for gold in Q1:
- “Yes, that’s correct. But the returns have been very good since 1999 and year over year I think gold is still up 12%…I think that gold is in a correction period and we had an intermediate peak on September 6, 2011. And I always advise don’t put all your money into gold because it doesn’t have any cash flow. So you are really dependent on the price appreciation. That is different from owning, say, equities that have a dividend yield of 5%, which I can find in Asia.”
5. 10-Year Treasury Yield ceiling of 2.50% – Jim Bianco & Jim Reynolds on CNBC Street Signs – Thursday, April 5
When he saw the bond market crater after the Fed minutes on Tuesday, Brian Sullivan decided that the Fed was done adding liquidity. First he tried to persuade Rick Santelli to say that on Tuesday afternoon. Then he asked Rick Santelli again on Thursday whether the Fed has given up further QE. He made Rick Santelli answer the question on Thursday at 2 pm just before this clip at 2:05 pm.
- Sully – Did we get a shift from the Fed or not?
- Santelli – I think we did, a short term shift. But I think like the tide that occurs pretty much on a cyclical nature, should things deteriorate quickly, I think it will be back on the table….But I do think it gives us a glimpse of one of the few times that the market is really trying to test the waters of trading and assuming that some of these programs are done and I think the clock is ticking with that notion, I think the political landscape after November could change, it could impact a lot of these programs.
But Brian Sullivan was on an anti-Treasuries mission, the mission that seems to drive virtually every CNBC anchor. Not satisfied with Rick’s answer, Brian Sullivan turned to Jim Reynolds, CEO of Loop Capital, and Jim Bianco, President of Bianco Research.
- Sully – What do you see happening with interest rates? Where do you see the bond market headed?
- Reynolds – we have seen, so far this year, a great appetite and great acceptance of bond yields by the investors…. the view on the economy right now from the investment community is probably a gradual getting better…. 2-3% growth in the GDP…those are manageable numbers…so they are very comfortable owning fixed income...
- Sully – Jim, if you ask 800 million of Facebook users where are interest rates headed, probably 799,999,999 will say they are going up. You say they’re wrong, why?
- Bianco – they’ve been wrong on that because a lot of people have been saying 90% plus say rates are going up. what they’re missing is who is the buyer of Treasuries? Three people buy Treasuries
- Bank of Japan,
- Bank of China and
- The Federal Reserve.
- Sully – not mom and pop. and that’s the basis of your thesis.
- Bianco – right. mom and pop have been buying corporate bonds, high yield bonds,
they don’t buy Treasuries. That’s the domain of those three players and maybe some large banks and dealers that would do a carry trade. they’re not going to exit that trade any time soon. so you’re not at a risk of rates shooting higher. the Fed — maybe the Fed stops QE-3, maybe doesn’t. maybe the Bank of Japan changes policy, maybe it doesn’t. but that’s not going to happen right away.
- Sully – let’s say you’re right, the government, Bank of China, continue to buy U.S. Treasury Bonds. Are you saying we should see a sub 2.5% 10-year bond yield through the rest of this year?
- Bianco – I think if they continue to play, yeah. sure. We are 2.17% now on the 10-year. You could get to 2.50% but not much more than that. If you wanted well above 2.50%, I think one of those players would have to back off. So yeah, 2.50% might be the ceiling on the bond for the rest of the year.
- Sully – Jim Reynolds, corporate bonds, huge amount of issuance again. is there a corporate bond bubble? is credit too easy on the corporate bond side?
- Reynolds – I think that’s a very good question. what we saw in the first quarter was a huge appetite for corporate debt. i think it was a part of the risk-off trade that we began to see as we came out of the fourth quarter last year. what we’re to see now though are the buyers starting to extract a little more premium to absorb the new issues. it’s quite a bit different than it was a month ago.
- Sully – so risk is growing a bit in the corporate bond market?
- Reynolds – it’s definitely growing a bit and holding a few deals up right now. investors are asking for a little more. let me share something with you that i think is a concern that’s going to crop up, coming up. and we haven’t seen it yet. that’s the secondary trading market in corporate bonds. there’s been and you’ve heard me talk before about Dodd-Frank and the Volcker rule. what we’re seeing now are inventories at the major investment banks at the lowest level I’ve seen in maybe my 30 years of business. and there’s no activity in the corporate bond market. So there’s going to have to be some provision for these buyers to be able to sell them. if they don’t feel they can sell them and there’s no buyers for them …
The last point is very interesting and could create some trouble in the corporate bond market. Sully, do us all a favor and tell all your CNBC anchor colleagues about this potential trouble. Because they tend to very glib in asking their viewers to buy corporate bonds instead of Treasuries because of the higher yield. They don’t know that sometimes in the bond market, when salespeople call the trading desks and say “Sell”, the traders ask “to whom?” Liquidity is a massively important and a constantly ignored factor in investing.
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