Interesting Videoclips of the Week (July 23 – July 27, 2012)


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.

1. Central Bankers as Closet Technicians?

The S&P was threatening to break below the 50-day moving average when the “actual Chairman” of the Fed, Jon Hilsenrath, wrote an article committing the Fed to additional stimulus at next week’s Fed meeting or during September’s Fed meeting. This title for WSJ reporter Hilsenrath is the handiwork of Steve Roach previously a Morgan Stanley guru (see clip 1 below). The Dow promptly cut its losses by 50-60 points.

What Bernanke or Bernanke’s chosen handyman can do, Super Mario Draghi can do better.  On Thursday morning, Mario Draghi emphatically declared that “ECB is ready to do whatever it takes to preserve the Euro” and that “it will be enough“, believe him. This was very different from the normally sober Draghi and the US stock market exploded. The Dow rallied by over 200 points on Thursday and the rally continued on Friday thanks to a statement by Merkollande that they remain “ready to do everything to protect the Euro“.

Then in the early afternoon on Friday, a rumotory appeared about a meeting between Draghi and Weidman, the head of Bundesbank. The Dow went up vertically by 100 points in about 10 minutes and Treasuries fell off a cliff. The markets were responding to a new expectation of a big program to be announced at the ECB meeting next week. Later in the afternoon, a rally in Treasuries recovered about 1/3 of the day’s losses but stocks closed nearly at their highs.

It is still not clear whether Draghi and Weidman spoke in a normal pre-ECB-meeting type of a conversation or whether this “meeting” was something different and a sign of a new decision. The market is clear in its expectations. To quote Michael Hartnett of BAC-Merrill Lynch:

  • “Bottom-line: the probability of an unlimited, unsterilized sovereign bond purchase program by the ECB to reduce bond yields just increased.”

This makes next week a double-binary week with both Bernanke and Draghi at bat. After that comes the Non-Farm Payroll report on Friday.

2. US Economy, US Markets

Frankly, nothing else matters next week, not fundamentals, not technicals, not even sunspots. Only the actions of the new D&B. So we shall be brief in our weekly review.

The U.S. economy did its bit to support the rally on Friday morning. US Q2 GDP came in at 1.5%, a full 10 basis points higher than the 1.4% expectation. The beat was enough to lead the stock market higher. If this were not enough, the Weekly Leading Index of ECRI rose to 122.8 from 121.8 and its annualized growth rate rose to a eight-week high. Some refused to see the bright vision reflected in the stock market rally, particularly Nouriel Roubini who tweeted:

  • “GDP grew at pathetically mediocre rate of 1.5% in Q2; final sales even worse at 1.2%. Q3 now looks worse than Q2. US is at stall speed.”

Friday was one of the worst days in the Treasury market. After a series of lackluster auctions, Treasuries sold off fast and hard on Friday, At one point the 30-year Treasury Bond was down by 3-13 and the 10-year yield reached 1.58% a full 20 basis points higher than Tuesday’s post-Apple-numbers low yield of 1.38%. The 30-Year and 10-Year rallied in the afternoon to close at 2.61% and 1.53%.

The US stock market rally was superb. According to a CNBC-Robert-Hum tweet,

  • “Very broad rally today. 5-1 advancing-declining line, all 10 S&P sectors up more than 1%, 95% of S&P 500 higher, all Dow 30 up.”

Todd Gordon of CNBC Money in Motion said that the short covering rally morphed into something else on Friday and predicted S&P will get to 1410. This is close to the target of Lawrence McMillan of Option Strategist:

  • “In summary, the technical indicators did not suffer any severe damage during the market’s 3-day decline. Therefore we continue to look for higher prices ahead. A return to the top of the uptrending $SPX channel would take prices to about 1400 or slightly higher in the short term.”

Kudos to Mr. McMillan for highlighting a buy signal on Wednesday:

  • “The recent sharp, 3-day decline in stocks produced very divergent readings in the breadth oscillators that we follow. Such divergences are rare – occurring about twice per year. When they do occur, though, they are generally a good buy signal for both the short- and intermediate-term.”


3. Fund Flows

We revisit our old favorite – the weekly Flow Show of Michael Hartnett of BAC-Merrill Lynch. This week’s report is titled The ECB in Draghi and states:

  • Biggest weekly outflows in 2012 for equities (heavy selling of SPY, IWM, QQQ and GLD). Bond inflows still booming, potentially heading for bubble, especially high-yield. Bearish Positioning, Profit & Policy expectations = upside equity trading risk.
  • The big picture for equities is still that a wide trading range = a classic deleveraging pattern post credit boom-bubble-bust. When floors are threatened, the central banks act. In July Europe, China equities threatening floors, Italy/Spain bond/equity/macro collapse flipping into core Europe, threat of global recession. Significant event risk next week: Aug 1st Fed + ISM, Aug 2nd ECB & BoE, Aug 3rd Payrolls.  
  • Sustained rally in unpopular equities in H2 requires at minimum ECB/Fed QE success + signs of China growth reviving. No multiple re-rating is likely without sensible global fiscal policy consolidation. Bull market/bubbles to continue in growth, yield, quality and weakening sales growth/potential policy failure argues risk aversion set to make comeback Sept/Oct. 


4.
Born Again? Finding
Religion?

So many expressions can be used for the complete turnabout by Sanford ‘Sandy’ Weill this week. Mr. Weill, the architect of the monster behemoth banking supermarket Citigroup, said that he favors a complete split up of the banks into separate commercial banks and investment banks (see clip 4 below). This sent shock waves across the political-financial sectors  and sent lobbyists, experts and analysts into damage control mode.

CNBC first asked Sheila Bair, the former FDIC Chairman, and then Meredith Whitney for their opinion. Sheila Bair pronounced herself “flabbergasted” and added:

  • But obviously I agree with him… As I’ve said repeatedly on your show and others, that I think these banks are too big to manage centrally. They’re too big to regulate and they don’t produce good shareholder value either. There’s a lot of value to be had if they were broken up.

Meredith Whitney seemed to disagree:

  • “It’s nice to say the big banks should be broken up (but) it’s very expensive to do so,” Whitney said. “That’s why you’re seeing the big banks trade at such steep discounts.”

Ms. Whitney added that big banks are already starting to separate commercial and investment banking operations“. Her comments are posted in the CNBC article titled Don’t Force Banks into Draconian Breakups. Her most important point was:

  • “One absolute thing the fall of Glass-Steagall did was destroy pricing,…Pricing on mortgages to credit cards was eviscerated with
    the idea the banks could make money on the other side through
    securitizing their products.”

BTV brought in Mike Mayo to discuss the topic. Mr. Mayo has had a troubled relationship with Citi and Mr. Weill, as he told BTV’s viewers. That explains his animated and strongly worded comments:

  • “I mean the person who created the animal now wants to kill the animal. What a shock…One other point that Sandy Weill made was that he said that the world has changed so therefore we need to break up the big banks. I vehemently 100% disagree with Sandy Weill. The world has not changed. The same ill-conceived misplaced incentives that were in place a decade ago, literally when Sandy Weill was CEO of Citigroup, are still in place today”

The most interesting point in this debate did come from Mr. Mayo in his conversation with BTV’s Betty Liu and Adam Johnson. We heard him say that the big banks would love to trade Dodd-Frank for Glass-Steagall, that they would gladly accept Glass-Steagall if they could get out of Dodd-Frank.

For some strange reason, this statement was not included in the videoclip of the Mayo interview posted on Bloomberg.com. This BTV habit of truncating the interviews of their guests bothers us. In contrast, CNBC posts entire interviews in its videoclips. Kudos & Thanks to CNBC, we say.

5. EM Risk Factor

South China Sea is one of the most serious flashpoints in the world. When economies slow down, when authorities fear domestic discontent, a foreign policy adventure usually seems appealing to authoritarian regimes. This is what we have feared about China. This week, a report by the Council of Foreign Relations listed the reasons for China’s forceful public advocacy of its claims in the South China Sea:

  1. Chinese leadership recognizes Beijing’s won rising naval strength;
  2. China’s government is responding to growing nationalism;
  3. China’s resource companies want to expedite exploration of the sea;
  4. or some combination of these and other factors.

This week, Foreign Policy Magazine published an article titled China’s Military Moment. The headline under the title reads A window of opportunity is closing in the South China Sea. Will Beijing strike?:


                                                  (credit and source – Foreign Policy Magazine)

This is a serious article and we encourage all to read it. The Foreign Policy Magazine also published a list of 5 Flashpoints in the South China Sea.

The situation is getting more difficult as the ASEAN is getting divided into an anti-China lobby of Philippines, Vietnam, Brunei and a comparatively pro-China lobby of Cambodia, Laos and even Thailand. This was discussed in detail in the July 24 report of Council of Foreign Relations titled South China Sea: From Bad to Worse?:

  • Tensions in the South China Sea have risen to their highest level in at least two years in the wake of the disastrous breakup of the Association of Southeast Asian Nations (ASEAN) foreign ministers meeting in Phnom Penh. Secretary-General Surin Pitsuwan, an eternal optimist, admitted that the summit was an “unprecedented” failure in ASEAN’s history, and Indonesia’s foreign minister rushed to mediate tensions between ASEAN members lest they explode again. At nearly the same time, a Chinese naval frigate ran aground in a disputed area of the sea, raising regional suspicions that Beijing was trying to bolster its claim to the entire South China Sea.
  • Tensions over the South China Sea, which is strategically vital and believed to contain rich deposits of petroleum, go back decades, but over the past two years they have escalated dramatically. China, which in theory claims nearly the entire sea, has in recent years publicly advocated its claims more forcefully.
  • The priority on all sides should be to avoid military conflict… ASEAN and China both have good reasons to avoid a shooting war in the South China Sea. Even as China spars with Vietnam, the Philippines, and other countries, it is becoming the largest trading partner and one of the biggest direct investors of most Southeast Asian states since an ASEAN-China free trade area came into effect.
  • For the United States, avoiding conflict in the sea would help prevent the overstretch of the military, which does not want to take on the role of policing the South China Sea, while also giving Washington time to help upgrade forces and to foster greater unity among ASEAN members on the South China Sea issue.

A shooting war in the South China Sea is probably the worst outcome for Asia, for EM and for global growth. China will probably have the most to lose diplomatically. Such a Chinese military adventure will roil the US Presidential Election and create an environment for a serious rupture in Sino-US relations. We get this, our readers get this, the Chinese Civil leadership probably gets it. But does the PLA, China’s Military, get it?

So far, this issue is not even being considered by financial investors. R
ead, for example, what John Taylor of FX Concepts told BTV’s Sara Eisen on Friday (see clip 2 below):

  • “I’m expressing that by liking Asian currencies and Australia. Obviously, they’re exporting and selling stuff to China, buying stuff from China. So there’s a lot of inter Asian pacific trading going on. And so that’s very good. That’s the best part of the world.”

We sincerely hope Mr. Taylor proves correct. But just in case, add a shooting war in the South China Sea to a potential attack on Iran’s nuclear installations by Israel. In that scenario, how much money would Bernanke-Draghi have to print to get a stock market rally?  

6. Unfortunately ‘future’ became the present within five weeks!

Section 6 of our Videoclips article on June 16, 2012 was titled Myanmar’s Ethnic & Religious Conflict – a look into the future? We wrote then:

  • Bangladesh has been a basket case for decades with a large population. Over the past 3 decades, refugees from Bangladesh have migrated to Indian Bengal, to India’s remote states that border Myanmar and to Myanmar itself. The Bangladeshi migrants, almost all Muslim, have neither assimilated nor have been accepted by the locals. Bangladesh now refuses to take back these migrants.
  • These issues were dormant when money was flowing in freely and Asia had a credit bubble. Now as conditions worsen and economic opportunities become scarce, the prospects of violence becomes real. The last decade featured a conflict between America and the Middle Eastern Muslims. This decade could well see a conflict between Muslims in Asia and other religions that were born in Asia. The violence of that conflict would be beyond comprehension.

This past week, India’s north western Assam state exploded in ethnic and religious violence between native Bodo Christian & Hindu tribals of Assam and Muslim immigrants from Bangladesh. As of now, 44 people have been killed and over 200,000 people have been displaced by the fighting.

  • Is it possible for an entire population to go simultaneously berserk?

, asked Mr. Samrat in his New York Times titled Violence in Assam Has Deep Roots. This was a rhetorical question because he himself pointed out that in 1983 more than 3,000 men, women and children were massacred overnight by mobs and in 2008, riots between Bodos and Muslims left an estimated 200,000 refugees.


                              (Burning huts on the banks of the river Gourang – Reuters-NYT)

This sounds horrible and it is. Such riots in India have almost always been the result of electoral policies that foster vote banks. A Reuters article pointed out that illegal Muslim immigrants were allowed to stay and quickly regularized by the ruling Congress Party which depends on Muslims as a reliable vote bank. Such selfish political gamesmanship builds deep seated resentment between communities that sometimes explodes into a violent explosion of unimaginable cruelty.

This is really a human issue and not a market issue. Indian markets understand this phenomenon and such riots do not even cause a ripple in the stock, bond or currency markets. But things might be different in the future. Buddhists and Hindus are waking up from a stupor that is several centuries old while Muslims still consider themselves descendants of victorious invaders.

India and Asia enjoyed a credit bubble during the past several years. Now they are living through a credit bust. We are afraid Asia faces long and violent years ahead.

Featured Videoclips:

  1. Steve Roach on BTV’s In the Loop on Wednesday, July 25
  2. John Taylor on BTV’s Money Moves on Friday, July 27
  3. Sheila Bair on CNBC’s Fast Money Half Time on Wednesday, July 25
  4. Sanford Weill on CNBC’s Squawk Box on Wednesday, July 25
  5. Gary Kaminsky on CNBC’s Squawk on the Street on Tuesday, July 24



1. QE3 is Crack – Steve Roach on BTV’s In the Loop
– Wednesday, July 25

We have heard Sandy Weill, Phil Purcell, John Reed say things they would never have said while they were at the Wall Street Firms they managed. Here you have Steve Roach say things he would never have been allowed to say in his job. Frankly, this is how most Wall Streeters talk after they have left their firms. The detailed summary below is thanks to Bloomberg TV PR.

Roach on whether more Fed stimulus is a good idea:

  • “The Fed is flailing and has been flailing for the better part of the last three years. We had QE1, which worked, and that’s it.  We’ve had QE2, Twist 1, Twist 2 and now maybe QE3.  The economy is in the doldrums. The biggest piece of the economy is the American consumer. 70% is in a balance sheet recession…The Fed knows this, but they are dangling this raw meat in front of the markets and the markets are salivating as they always do in that frenetic way that they try to believe in the Fed. But it has not worked and it will not work. “

On how likely it is that the Fed will iss
ue more stimulus:

  • “Absolutely. They have no choice. They have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilzenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

On whether the Fed will move on stimulus next week:

  • “Absolutely. They will not disappoint the markets. The markets are now setting themselves up and discounting the next QE2. The Fed has just woken up to ‘oh my gosh, the economy is weak again.’ Well hello! The economy has been weak for the consumer for 18 quarters. The growth rate of consumption over the last four and a half years has averaged below 1%. 70% of the economy growing below 1% and the Fed is just figuring this out? Come on.”

  • “The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilzenrath is the weed that grows…the guy has a perfect track record…They’ll do some type of QE3. Twist 2 was a huge disappointment. It was a feeble flailing at the windmill and the economy is a lot weaker than when they reached the Twist 2 decision. They’ll have to do another round of quantitative easing. I don’t know exactly what securities will be involved. You could speculate it could be mortgage-backs to try to help the housing market. There is some criticism they have been too focused on Treasuries. We’ll have to wait and see, but I think it will definitely be another round of quantitative easing as opposed to the twisting again like we did last summer.”

On whether QE3 will work:

  • “No, it’s crack! That’s what it is. It’s not going to work. QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that. And it will not work in the future. Don’t believe the Fed PR that they put out while we have research that shows that it worked. Of course they do.”

On whether he expects futures to be higher than they are right now:

  • “The markets have responded positively to the leaks that came out late yesterday afternoon, but the response is small. I think the markets have gotten used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be. In terms of delivering an actionable vigorous response in the real economy.”

Mr. Roach is convinced that Bernanke will move on stimulus next week. John Taylor of FX Concepts thinks Bernanke will just tease us next week.

2. “Bernanke will tease us next week” – John Taylor with BTV’s Sara Eisen – Friday, July 27

John Taylor is the founder and CEO of FX Concepts, the world’s largest currency hedge fund. The excellent summary below is thanks to Bloomberg Television PR.

Taylor on whether he’s optimistic on the U.S. economy:

  • “No. It sounds like the game that everybody plays in equity earnings. We knocked the number down so we can beat it a little bit. A couple of weeks ago, we were at 1.9%. Everyone said ‘oh gee whiz, 1.9 isn’t so exciting.’ And then we knocked it down to 1.4%. And now we come in at 1.5% and we beat it. It’s not that good.”


On whether the U.S. economy will get worse in Q3:

  • “Yeah. I mean this is what we call stall speed where you can’t tell what’s going to happen and stall speed implies maybe you’re going to stall.”

On whether stall speed implies recession:

  • “Maybe. You don’t really know what’s going to happen from here. We are not adding jobs. And it’s not a good place to be.”

On whether the Fed will add more stimulus next week:

  • “Yeah. I think something’s going to happen Tuesday/Wednesday. Obviously reported on Wednesday. And most likely, it’s going to be Bernanke teasing us a little bit saying that QE is coming.”

On whether he expects QE in September:

  • “Yeah…we just had some [weaker economic fundamentals] today. Even though everybody thinks are ok, they are not ok.”


On whether he still likes the U.S. dollar:

  • “I do because Europe’s going to do more quantitative easing or LTROs or SMPs or something. You’re looking at which is printing more money and the one that prints more money, their currency goes down. I wou
    ld argue right now that the ECB is going to print more money than the Fed.”

On the euro rallying:

  • “Mario Draghi says I’m going to print a lot more money in order to make the euro strong? No, in order to make the euro weak. In order to save the euro…It’s a short-term thing. I really believe it’s a short squeeze. And today, we have not only Draghi, we have Merkel and Holland coming out saying we will do everything we need to save the euro…It’s a sign that these guys are desperate. And I can’t say that I think those are good signs.

On where Europe is in the fight to end its crisis:

  • “Considering that Friday afternoon and it’s time to go to the baseball game or whatever, it’s like the second or third inning although it’s in the Olympics so maybe you have to talk in those terms…It’s in the beginning. You’ve got a long way to go. The fact of the matter is we’re still dealing with the liquidity issues–not the solvency issues and not the structural issues that are even beyond solvency that we have to have in order to create a Europe that will function without having summit conferences every month or so.”
  • “I think they certainly are [getting closer] and their hearts are in the right place but you’ve got 17 different countries that has to vote on it and 27 countries have to vote on it in some  cases. They’re an awful lot of bumps in this road before we get home.”

On whether he’s adding to his euro shorts right now:

  • “No because I’m a little nervous that something might happen. It’s a pull your hair out market. I am short too many euros already so thank you very much I don’t want to get shorter.”


On what Germany is doing wrong:

  • “They have to realize that every time they sell a Mercedes to somewhere in southern Europe they’re only borrowing German money to do it and they are never going to pay for that Mercedes. Either Germany has got to write off the Mercedes because they won’t ever pay for it, or Germany shouldn’t sell that Mercedes. But they don’t want to admit that. But that’s a fact of life.”
  • They’re either going to write the check or go through a very, very severe recession because nobody’s going to buy Mercedes because they haven’t got any money. Because Germany’s not writing the check. So you can’t get out of that fact.”


On whether Spain should leave the euro:

  • “Yeah. Everybody’s in the same spot. There lots of ways of measuring the deterioration of a currency and going all the way back to 1974, when Spain became a market based economy, you can see that currency depreciate on a regular basis the same amount every year. It just goes down and so they have to devalue. It’s the only way they’re going to get their act together again.”
  • “They should restructure the euro so it allows devaluation or they should tie all the countries up. Mississippi exists in the same state in the same country as California. How do they do that? Well, it’s because California ships Mississippi money every year. So Germany can ship money to Spain every year. They don’t want to do that. You have to look at reality.”


On whether he’s worried about a hard landing in China:

  • “No. I think they have too many dials to twist in China. They can manage it…I’m not sure [we’ve seen the bottom in China] because I think they’re trying to dial very slowly. And so I think that the turnaround’s going to be slow, but I don’t think there’s going to be a crash. It’s going to be quiet. Easy.”
  • “I’m expressing that by liking Asian currencies and Australia. Obviously, they’re exporting and selling stuff to China, buying stuff from China. So there’s a lot of inter Asian pacific trading going on. And so that’s very good. That’s the best part of the world.”


On the yen:

  • “It’s a strange currency. Their interest rates are at zero. The U.S. interest rates are at zero. Europeans are getting close to zero. So those currencies can be compared as even. So you have to say which one is printing the most number of currency and the answer is the yen printing the least. So therefore there are fewer yen around so it should be worth more…The Bank of Japan really isn’t — they’re not walking the walk. They’re just talking. They’re not printing the money. The U.S. and Europe are way out printing Japan so Japan’s got to come out and drop yen bills from helicopters or something rather to make the yen weak.”

3. JP Morgan Chase, Citi & BofA Should Break Up – Shiela Bair on CNBC Fast Money Half-Time – Wednesday, July 25

The entire transcript of this interview is posted on CNBC.com. We include key excerpts below. We also must commend CNBC’s Scott Wapner for an excellent interview. A great deal of credit goes to his excellent questions. Listen to this entire clip and read the entire transcript.

  • WAPNER: WHAT DO YOU THINK IT MEANS TO THE CONVERSATION THAT SANDY WEILL
    HAS NOW JOINED IT? IT’S ONE THING FOR YOU TO SAY SO, IT IS ONE THING FOR
    A POLITICIAN ON CAPITOL HILL TO SAY SO. BUT AS YOU SAID, SANDY WEILL IS
    IN MANY CASES THE FATHER OF THE FINANCIAL SUPERMARKET. SO WHEN HE JOINS
    THE CONVERSATION, IS IT A GAME CHANGER?
  • BAIR:  FLABBERGASTED. IT’S A LITTLE IRONIC, I MUST SAY, GIVEN THE FACT HE AND HIS INSTITUTION WERE IN THE LEAD IN PUSHING FOR THE REPEAL OF GLASS-STEAGALL AND THEN, OF COURSE, CITIGROUP IS A POSTER CHILD FOR TOO BIG TO FAIL IN THE BAILOUTS DURING THE 2008 CRISIS. SO IT IS TRULY IRONIC. BUT OBVIOUSLY I AGREE WITH HIM. I THINIK, AS I’VE SAID REPEATEDLY ON YOUR SHOW AND OTHERS, THAT I THINK THESE BANKS ARE TOO BIG TO MANAGE CENTRALLY. THEY’RE TOO BIG TO REGULATE AND THEY DON’T PRODUCE GOOD SHAREHOLDER VALUE EITHER. THERE’S A LOT OF VALUE TO BE HAD IF THEY WERE BROKEN UP.
  • BAIR: I THINK THERE’S A LOT OF MOMENTUM BUILDING AND RECOGNITION. THIS JUST MAKES SENSE FROM PRETTY MUCH EVERYBODY’S PERSPECTIVE. SO I DO, LIKE I SAID, I THINK IT’S A LITTLE LATE. I WISH HE’D HAD THESE VIEWS BACK IN THE LATE ’90s. BUT OBVIOUSLY I AGREE WITH HIM. AND I THINK IT WILL MAKE PEOPLE PAY MORE ATTENTION THAT THIS REALLY IS A REALISTIC OPTION AND IT IS THE BEST WAY TO GO, AGAIN, FROM THE MARKET’S PERSPECTIVE AS WELL AS FROM THE GOVERNMENT’S PERSPECTIVE.
  • BAIR: THE MEGA BANKS, THEIR SHARE PRICES TRADE AT VERY STEEP DISCOUNTS TO THEIR TANGIBLE BOOK VALUE. THEY DIDN’T REALLY DELIVER GOOD SHAREHOLDER VALUE EVEN PRIOR TO THE CRISIS. THEY REALLY ARE — YOU JUST GET A LOT OF MANAGEMENT INEFFICIENCIES BY TRYING TO CENTRALLY MANAGE INSTITUTIONS THAT ARE INTO THIS MANY DIFFERENT BUSINESS LINES. SO I DO BELIEVE THAT A SUBSTANTIAL SHAREHOLDER VALUE COULD BE UNLOCKED IF THEY WERE BROKEN UP. .. THERE ARE REAL QUESTIONS ABOUT EVEN THE BETTER-MANAGED MEGA BANKS. WHETHER THEY CAN ADEQUATELY BE ON TOP OF ALL THE RISK THAT THEY ARE TAKING IN THESE VERY LARGE COMPLEX INSTITUTIONS.
  • WAPNER: WHICH BANKS SHOULD BREAK UP? WHO ARE WE TALKING ABOUT?
  • BAIR: WELL, THE TOP THREE IN THE U.S. OBVIOUSLY ARE JPMORGAN CHASE, CITI AND B OF A. I THINK REALLY WITH ME IT’S MORE COMPLEXITY THAN SIZE. BUT THEY ARE IN VERY, VERY – A LOT OF DIFFERENT BUSINESS LINES. AND MANY OF THEM ARE VERY VOLATILE AND HIGH-RISK.

4. Split up Banks into Commercial and Investment Banks – Sanford Weill on CNBC Squawk Box – Wednesday, July 25

This is one of the rare occasions when a show really breaks news. Sanford ‘Sandy’ Weill, the man who almost singlehandedly created today’s mammoth Citi, stunned virtually every one by saying that Commercial Banks and Investment Banks should be split up, in other words, bring back Glass-Steagall.

This is worth hearing from him directly. You can see that Becky Quick and Andrew Ross Sorkin were stunned to hear Mr. Weill say this. The transcript of Mr. Weill’s comments is posted on CNBC.com. Key excerpts are below:

  • What I think we should probably do is go and split up investment banking from banking and have banks be deposit takers, have banks make commercial and real estate loans. And have banks do something that will not risk tax payer dollars. And that is not going to be something that will not be too big to fail. If banks want to hedge what they are doing in their investments, let them do it in a way that is marked to market so that they are never going to be hit. Let’s have a creative investment banking system like we have always had, so that the financial industry can once again attract the best and the brightest like they are doing in Silicon Valley like they are doing in engineering.
  • What I am suggesting that they be broken up so that the taxpayer will never be at risk so that the depositors won’t be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading and that is subject to Volcker…They can make some mistakes and they will have everything that clears with each single night so that they can be marked to market. And they would have the same kind of leverage.
  • I think we can have size and scale but it doesn’t need to be connected to a deposit taking institution….I would like to see the banks become simply deposit taking institution that makes loans to individuals that makes loans to small business that makes loans to businesses, that has to operate within a leverage ratio of twelve or fifteen times the equity that it has, that has to have everything on its balance sheet,. There’s no such definition or word that’s off balance sheet.
  • Take the investment banks out of that, they can invest their money how they like. Completely– Completely. They would be entities on their own like they were 25 years.

5. Dividend Trap – Gary Kaminsky on CNBC SOTS – Tuesday, July 24

Almost every one who comes on CNBC, including Jim Cramer, has been a vocal advocate of buying stocks with high dividend yields as a substitute for low yielding bonds. This has always seemed too pat to us. Gary Kaminksy, CNBC’s Editor, agrees and passionately so. This is the Gary Kaminsky we have liked over the years. Somehow he lost this edge when he became an anchor. Glad to have you back, Gary!

Gary Kaminsky warns investors that the moment Fed announces a rate hike, these safe-sounding. high dividend stocks will be hammered. The reason, he explains, is that everyone is already invested in these stocks and they all are convinced that they will be able to get out before other investors do. He said:

  • “…the idea you’ll be able to get out of them and everybody says the same thing, Carl, I’ll be able to get out of them whenever the Fed says they’re going to raise rates. I‘m telling you today those stocks will be down 20%, 25% on the first hint of interest rates going up because are too many people that own them and everybody that’s looking for income is already in these names.”

Gary Kaminsky does something else in this clip that is highly unusual. He actually takes names, Barry Knapp and Jeremy Siegel, who are telling investors to blithely own high dividend stocks without mentioning the principal risk involved.

But this is not the only risk involved. If the US suffers a significant slowdown then all stocks will fall and history shows that dividends do not protect stocks from falling to lows, much lower than risk tolerance of most investors. Then you have the risk of tax-rates going up in 2013. If taxes on dividends rise from 15% to 40%, these high dividend stocks will fall hard. This is the risk that Maria Bartiromo keeps highlighting to CNBC viewers. 


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