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. Problems spreading from Europe to other regions
This important macro point was made this week by a talented and successful micro investor. Dan Niles, a respected technology analyst for years, is the CIO of AlphaOne Capital Partners. He explained to CNBC Fast Money why IBM’s problems might reveal a broader macro trend (see clip 1 below):
- The problem [for IBM] is North America and their growth markets. IBM is a pretty big company. At the end of the month they’re launching their newest product, and that’s when you see the big uptick in demand…. When you say the growth markets are a problem combined with North America, it looks like the problems are spreading from Europe to potentially some of the other regions. We have to wait and see. The other thing you have to remember is this is IBM’s fifth miss in a row at the top line.
- The biggest companies in the world are telling you there’s a growth problem. We all know Europe is much worse than it was a year ago. We’re all debating how hard a landing China should have.
Way back on February 24, 2012, David Rosenberg warned about a Net Export shock and confusing “Decoupling with a Lag“:
- “You have three different shocks coming down the pike. We have not seen the full impact of the European recession. I think it is going to be a very serious recession in Europe.
People are talking about Decoupling again, the US went into a recession
in 08 and it took about a couple of quarters for Europe to feel it and
the rest of the world. Everybody confused Decoupling with Lag. We are going to have a Net Export shock in addition to the Oil shock…and how people respond to the end of the Bush tax cuts is going to be real important”
The net export shock was witnessed by all in this week’s earnings. And the end of the Bush Tax Cuts might be upon us in just a few weeks. And even Ben Bernanke has told us that he cannot protect us from the Fiscal Cliff.
2. Will Bernanke try?
Friday’s stock market decline might be just what Bernanke needs to persuade the FOMC to raise the dimmer switch of QE4ever. Remember what Kevin Warsh told CNBC Squawk Box on Friday, September 14 – “dimmer assuredly is going in one direction“.
So will Bernanke turn up the dimmer on Wednesday, October 24? And how do markets react to what he does or does not do? And does he have the courage to turn up the switch so close to the election? And if he does not, will he have another chance in the December meeting?
Two and half days to place bets.
3. US Stock Market
The US stock market looked terrific all week until Thursday mid day. The S&P had held and bounced from 1425-1430, an important support and the lower band of its rising channel. CLF, our favorite barometer, was up 1.58% on Monday, up 6.83% on Tuesday and up 3.68% on Wednesday. Markets were up on Thursday morning thanks to the wonderful news from the Chinese economy. Then the Google bomb hit just around 1 pm on Thursday and Nasdaq cratered. But the broad market held and CLF closed up.
Friday morning was very different. The selling began in the morning and just kept going all day, barring a 50 point up swing from down 222 to down 175ish in the last hour, to close down 208 on the Dow. What happened? We don’t know. Some blamed the week long earnings disappointments. We wonder whether it was the Euro Summit ending without any announcements on Spain or Greece.
Does it bounce or gap down on Monday morning? Does it get oversold just in time for the Bernanke meeting? Veteran investor Doug Kass tweeted that he covered enough to become market neutral on Friday afternoon while Keith McCullough eschewed his tweeted posture of late afternoon buying on red to advise people to sell what they had not sold near the highs.
Lawrence McMillan of Option Strategist has been both consistent and correct all summer. On Friday, he wrote:
- “In summary, the fact that the market bounced off support this week was very bullish. But $SPX now needs to challenge and exceed the resistance at 1475 in a relatively short time, in order to keep the momentum going. Regardless, a breakout of the 1425-1475 range will likely lead to a further move in the direction of the breakout.”
Jim O’Neill of Goldman Sachs was as bullish as ever on CNBC SOTS on Wednesday with a target of S&P 1500-1550 and conviction that “the macro data in the U.S. especially has taken a further turn for the better“.
China released data on Wednesday night that fulfilled the wishes of China bulls. The majority seems to think that the Chinese economy has bottomed. A minority view was expressed this week on CNBC SOTS by Andrew Mowat of JP Morgan. His base case is “declining top line numbers” in China (see clip 2 below) :
- I don’t think the Chinese economy has actually troughed here. The leading indicator that we look at is industrial profits, which are down 6% nationwide. SOE profits are down 16%. So our expectation is that cap-ex in China will continue to moderate as companies try to reduce profits by increase capacity expansion and cutting costs. So don’t treat these as the bottom of the Chinese growth numbers.
- Truck sales are down 8% year to date. excavator sales are down 35%. The image you get is the fixed capital forms has stalled in terms of growth rate. However, car sales are up 8% year to date, and retail sales which printed today at 14% show a relatively healthy economy. The question, though, is as we go into 2013, with this slowdown in investment activity, will that then impact the labor market and then impact consumption? I think that is going to be the big debate of 2013.
Nouriel Roubini told BTV’s Susan Li:
- “….structural reforms in China are occurring much more slowly compared to what is necessary and in the mean time the acceleration of the investment bust will increase the likelihood of hard landing of China by late next year into 2014.”
Felix Zulauf, the well-respected member of Barron’s Roundtable, highlighted “slowing growth in China as a portent to a global economic crisis that will strike every single region“, according to an article about the Fifth Annual European Investment Conference. The article further wrote about Zulauf’s remarks:
- “Zulauf indicated that “excessive” booms always lead to a bust, and China’s will be no exception. He stated that recent Chinese growth was actually far closer to 3% than official reports of nearly triple that level. In his view, market commentators underestimate the problems in China; consequently, public growth forecasts for Australia, Latin America, and other natural resource countries are too high. He also believes that the Chinese authorities could implement “timid stimulus” after the coming leadership change, but without much effect; in short, a “credit boom in reverse” seems imminent.”
5. US Treasuries
If Felix Zulauf is correct about a “credit boom in reverse”, then the best asset to own might be US Treasuries, long duration US Treasuries. But they acted just awful from Monday to Thursday. The sell off continued on Thursday afternoon, even after the Google-inspired weakness in the stock market. The 30-year yield rose from 2.85% last Friday to 3.01% on Thursday, the 10-year yield rose from 1.67% to 1.83%.
The action was so ugly that CNBC Fast Money devoted a segment on Thursday to their favorite theme of investors rotating out of bonds into stocks. We shall find out soon whether CNBC is still as reliable a contrary indicator for Treasuries as they have been for years.
Bill Gross remains as negative on long duration Treasuries as he has been for some time. When asked whether he prefers the 5-year Treasuries or the 10-year, Bill Gross said the following on Tuesday on CNBC Futures Now;
- “I think you want the shorter term maturities, Jackie. What we are seeing, what we have seen for the past month or two the longer 30-year Treasuries widening in spread to the 10s, widening in spreads to the 5.s. It is fair to say that the Fed is holding in the front end, the 2s, the 3s, the 4s, perhaps 5-year Treasuries….the 30-year bond is the most vulnerable because that has more inflationary content. Yes, the Fed is buying perhaps 80 or 90% of them that are issued by the Treasury but there are significant holders of long term Treasuries, may be the Chinese, ,may be the Japanese, may be the Pimco associated investment companies of the world, to the extent that we see higher inflation going forward and we do at Pimco then the 10yr & 5yr Treasuries as opposed to the 30-year that should be favored.”
When Bill Gross speaks, can Gary Shilling be far behind? He was his typical bullish self on BTV Street Smarts on Thursday:
- “I am looking for 2% on the 30-year yield and 1% on the 10-year. There are 3 things – we are in or setting ourselves for a global recession, that means weaker demand for credit, secondly Treasuries are the safe haven, one of the few in the world, and thirdly you don’t have any inflation to speak of and more & more people are beginning to worry about deflation.”
So the Rosenberg-Shilling vs. Gross-Gundlach fight goes on.
- Dan Niles on CNBC Fast Money Half Time – Wednesday, October 17
- Andrew Mowat on CNBC SOTS on Thursday, October 18
- Jim Rogers on CNBC Closing Bell on Monday, October 15
- Richard Bernstein & David Rosenberg on CNBC SOTS on Wednesday, October 17
- Scarlet Fu of BTV on BTV Market Makers on Monday, October 15
1. “biggest companies in the world are telling you there is a growth problem” – Dan Niles on CNBC Fast Money Half Time – Wednesday, October 17
Dan Niles used to be a highly respected technology analyst. Now he is the Chief Investment Manager of AlphaOne Capital Parners.
- Niles – I think you have to look back and separate out fundamentals from the stock market. Those are two different things. If you look at IBM, everybody is looking like it’s a big shock. You have to remember, this is a fifth quarter in a row that IBM‘s missed their top line revenue. This happens to be the worst miss out of the five, and it’s the biggest miss since q1 of ’09. They haven’t been making the top line for over a year now.
- Wapner – If the bottom line is getting worse should we be more worried than we otherwise might be?
- Niles – yeah, and I think that’s the point. One thing that’s easy to forget is this was the quarter that IBM should have been fairly close to their numbers. They were launching a new main frame during the month of September. What’s really worrisome is they said the third month of the quarter was the most challenging month. and then within that, if IBM said, the problem is Europe. we’d all sit here, you know, that makes sense. The problem is North America and their growth markets. That’s where you have to sit there and go what does it mean for the future and everything else? IBM is a pretty big company. At the end of the month they’re launching their newest product, and that’s when you see the big uptick in demand. When you say the growth markets are a problem combined with North America, it looks like the problems are spreading from Europe to potentially some of the other regions. We have to wait and see. The other thing you have to remember is this is IBM’s fifth miss in a row at the top line. Nobody cares because the Fed is stimulating and the ECB is stimulating, and we all feel good because the stock market is high. that doesn’t mean fundamentals are good.
- Wapner – . how does the concern I sense in your voice translate into investment decisions you would make today?
- Niles – I think people have to sit back today and try to separate out two things, and it was brought up a little earlier. You had very big compa
nies, not just in tech, come out and tell you there’s a lot of problems. whether it’s Fedex or Norfolk Southern, obviously IBM today, Intel preannounced. Let’s not forget, they preannounced a month ago. The biggest companies in the world are telling you there’s a growth problem. We all know Europe is much worse than it was a year ago. We’re all debating how hard a landing China should have. Their stock market is back where it was in 2009. Nobody in the U.S. cares because the stock market is near its high. Stimulus does wonderful things
- Niles – I think what you really need to think about, when they missed the last four quarters, they were able to basically raise the EPS, and they beat the EPS by a substantial amount. This is the first time that, if you’re sort of thinking, oh, it’s got a big dividend and it’s big and it’s sleepily and it’s safe, you actually had to question is it a good thing I’m in a company? their services business growth accelerated for the sixth straight quarter year over year. it’s one of those things where you’re okay buying a company that keeps missing the top line if somehow they manufacture the bottom with share buy-backs and divestitures and acquisitions. When they can’t make the magic happen anymore, you have to wonder why am I paying 13 times for a company that can’t rule the top line at all.
- Wapner – let’s move beyond IBM, Dan. what else do you think from what’s happening in tech? if you’re real worried about IBM, if the warning signs are all over the place about PCs, what about a Microsoft?
- Niles – I don’t like Microsoft. I don’t like Intel.…the PC space is suffering. It’s going to have the first probably unit decline since 2000.…Microsoft and Intel have 90% plus share in the PC space. They have less than 5% share in smartphones and tablets. that’s a really big big problem to have when you have one space, which is PC, declining in units year over year, and the other two spaces, tablets and smart phones, are actually growing.
- Wapner – I’ve got to let you run. Is the road map in jeopardy for IBM? If you held the shares right now, would you be a seller? Would sell IBM today?
- Niles – yes, because everyone has been hiding there because they’re able to make the bottom line despite the top line missing. You may be able to hold it through December and say we’ll see the new product as well, but I‘d be worried because it’s very richly priced relative to its competitors.
2. “I don’t like declining top line numbers” – Andrew Mowat on CNBC SOTS – Thursday, October 18
Andrew Mowat is a highly ranked EM strategist at JP Morgan. Here he speaks with CNBC’s Michelle Caruso Cabrera (“MCC”) and Simon Hobbs.
- MCC – your bottom line on these numbers. some say this number proves we’re troughing on the Chinese economy. Do you agree?
- Mowat – look, I wish I had some money for every time someone’s mentioned stabilization today. I even saw you mentioning it about U.S. data. I don’t think the Chinese economy has actually troughed here. The leading indicator that we look at is industrial profits, which are down 6% nationwide. SOE profits are down 16%. So our expectation is that cap-ex in China will continue to moderate as companies try to reduce profits by increase capacity expansion and cutting costs. So don’t treat these as the bottom of the Chinese growth numbers.
- MCC – we were showing viewers earlier on, If you want to dig down into what’s happening with heavy industrial production there, if you look at electricity consumption by that sector, if you look at rail freight, it is down, suggesting that that area of the economy is still week. If you’re playing commodities because of China, you’ve got to be looking at those numbers specifically. Are we too simplistic in the way we’re looking at china? there’s the industrial production and others who would have us say, you know what, the consumer area of China is getting stronger. That’s going to offset maybe an overall decline.
- Mowat – I think what’s incredibly important in China is to understand there is a lot of data available for you and look at the detail. And I think many bad investment decisions are made by simply looking at the GDP number. If you look at, as you mentioned, electricity sales, but if you look at clinka production used in the making of cement, steel production, those are all flat year to date. Truck sales are down 8% year to date. excavator sales are down 35%. The image you get is the fixed capital forms has stalled in terms of growth rate. However, car sales are up 8% year to date, and retail sales which printed today at 14% show a relatively healthy economy. The question, though, is as we go into 2013, with this slowdown in investment activity, will that then impact the labor market and then impact consumption? I think that is going to be the big debate of 2013.
- Hobbs – but to be clear, Adrian, we can take the tail ris
k off the table of a hard landing. That is not what you’re talking about here even with that slightly more negative analysis in an environment where many people do, including Bank of America, believing we have now troughed.
- Mowat – Hang on a minute here. If you’re making excavator, sales are down 35%, that’s feels quite hard for me. Truck sales down 8%. feels pretty hard. if you’re in retail sales, no, it’s not a hard landing. The question here is the detail. The problem, though, with those consumption numbers is that the store opening is running well in excess of retail sales. So the consumer stocks in China are seeing declining asps, declining same store sales growth. The capacity utilization for the auto industry is falling from 100% down to 75%. So we’ve definitely got a profit hard landing in China, and some industries that are very related to fixed capital formation are seeing a year on year decline. We never really defined what hard landing is, but I don’t really like declining top line numbers.
- MCC – What about this exchange in leadership that’s coming later in November, that’s starting November 8th? Do you really believe that, once there’s new leadership in place, that we could see an improvement in the economy, that they’re going to start paying attention more? that would imply for Keynesian spending on their part, no?
- Mowat – I think it’s unfair on the Chinese authorities to say they’re not paying attention. Current conditions in China is that 72% of the working population has a job in China, that’s one of the highest numbers you’ll find in emerging markets, about 10% higher than in any developed markets, and inflation is low. A sensible policy maker in that environment should be going on holiday rather than worrying about the economy. We seem to impose an idea that China needs to grow at 8%. come on, it’s pretty irrational. they’ve got full employment, they’ve got relatively low inflation. At the moment, what you should think about China is it’s like a large corporation where we know who the new CEO is and the COO is, and everyone below that’s fighting for the prime position. We don’t have any clarity even on the number of people in the standing committee at the Politburo. Will it be 7 or will it be 9 as it currently is ? We are not sure of the influence of Jiang Zemin vs. Hu Jintao. So, I wouldn’t read too much into leadership change.
- Hobbs – Before we lose you as you are, the chief Asian and emerging equity guy for JP Morgan, where do I make money at the moment? what is the hot market? what’s the tip?
- Mowat – the best market at the moment is India. There’s been some really interesting changes in reform. The other markets we like are in the ASEAN region. We like Thailand and the Philippines.
Veteran investor Jim Rogers disagrees with Andrew Mowat both about China and India in the next clip.
3. Shorting US stocks, Shorting Indian stocks, Not buying China, Buying Russia – Jim Rogers on CNBC Closing Bell – Monday, October 15
Jim Rogers, the man Maria called the Indiana Jones of investing, is just as entertainingly interesting as always. Here he speaks about USA, China, Russia and India. Jim Rogers visibly enjoys speaking with Maria Bartiromo and she tends to flirt a bit with him. Makes for pleasant TV, we think.
- Rogers – a lot of people being negative on China, makes me think may be I should be buying China. I was waiting for are a big collapse but maybe I should buy now.…China has been trying to cool off for 3 years, they’ve raised interest rates many times, doing their best to kill inflation and kill property. I wish their central bank were running our central bank. we would all be better off. They may be turning things around now. I wouldn’t loosen up if I were China, but I’m not China.
- Bartiromo – don’t loosen up. Are you investing in China right now?
- Rogers – No, No, No. Whenever China collapses, I buy. I‘ve only bought China three times in the past 10, 15 years. It hasn’t collapsed yet.
- Bartiromo – you’re short handful of equities in the U.S. and you’re not going to touch equities in the U.S., is that right?
- Rogers – no, not with my money. not even with your money. In 2013, 2014 we’re going to be economic problems. We always have, Maria, every four to six years, since the beginning of the Republic. Next year we’re going do have problems again. Either they’re going to raise taxes or they are gonna bungle something. So I wouldn’t want to buy shares in the U.S.
- Bartiromo – did you say you were short Microsoft?
- Rogers – Yes, short Microsoft calls. What does Microsoft got to do for the world? Microsoft was a spectacular company 20 years, 30 years ago, but this is 2013, 2014. What is Microsoft doing for us these days?…Technology has been one of the few places very exploited. even Apple, I’ve shorted an ETF that’s got Apple in it.
- Bartiromo – you say we’ll have economic problems next year. we have economic
problems right now with the fiscal cliff. talk to us about the fiscal cliff. you think this is going to be a worse fallout from the fiscal cliff than we saw in 2008. that’s a big statement.
- Rogers – whenever you raise taxes that’s bad for the economy. Mr. Reagan cut taxes and things were good. Mr. Kennedy cut taxes and things were good. Raising taxes has never made an economy grow. This is simple stuff.
- Bartiromo – in terms of other classes, commodities. We’ve seen iron ore get crushed because of what’s happening in China. Where are the opportunity in commodities right now?
- Rogers– … the reason iron ore is crushed because all these people started reaching in and adding capacity to the iron ore business. I don’t pay much attention to iron ore because it’s not futures. I only get involved with commodities that have futures. Iron ore, they all build mines at the same time, so iron ore went down in price. It’s partly because of China but mainly because of too much capacity.
- Rogers – I am not buying any commodities. If I had to buy any, I would buy agriculture commodities. I‘m just watching because the world economy is going to be bad. I am short stocks, long commodities and I am long currencies.
- Rogers – Russia, I’d rather invest in Russia if I could find a good way to do so. I first went to Russia in 1966. I’ve been totally negative ever since but Mr. Putin seems to be changing his tune. Maybe because he’s worried about history, for whatever reason. I‘m convinced that things are changing in Russia for first time in my life. …. I’m convinced things are changing in Russia.
- Bartiromo – let me get your take on India. I want to know what you think, because when I was in Japan this weekend, there was a lot of talk about this domestic demand – 11 to 12 million people joining the work force every year in India.
- Rogers – I‘m short, short India stocks.…it’s a disaster – massive inflation, massive balance of trade problems. it’s debt to gdp ratio of over 90%. The only people bullish on India are people who haven’t been to India or tried to drive across India. I‘m short India.
4. what difference? – Richard Bernstein & David Rosenberg on CNBC SOTS – Wednesday, October 17
This pair, old colleagues at Merrill Lynch, were a great tandem for investors. Now they have gone their different ways, Rich Bernstein at his own firm and David Rosenberg at Gluskin Sheff. This duo was responsible for one the most important and memorable guest appearances of 2012. That was on Thursday, March 22 on CNBC Squawk Box. Read what they said at that time in clip 1 of Videoclips of March 18 – March 24, 2012.
Unfortunately, this clip pales into insignificance when compared with the March 22 clip. In fact, we throw a flag for journalistic incompetence on Carl Quintannia and CNBC SOTS. Neither Bernstein nor Rosenberg were given the time or the freedom to state or explain their points of view. We still don’t know where they disagree except that Bernstein likes US stocks, especially small cap US stocks vs. international stocks and Rosenberg likes dividend-paying, dividend-growth stocks & corporate bonds.
Shame on Carl Quintannia, we say and take back our recent comments of SOTS being the new Squawk Box.
- Bernstein – I think there some similarity in what Dave and I are talking about. I think we both probably agree that the long-term prospects are in risk off assets. I think we’re both very different along those lines in that respect. I don’t think we think there’s going to be another credit bubble, which I think is actually consensus, although those people wouldn’t say that. They’re still investing in risk on assets, which are all credit related assets….I think where Dave and I might disagree with is in the near term prospects for the United States and for me particularly, the United States vs. rest of the world.
- Rosenberg – I‘ll just say that one of the strongest correlations for the stock market is corporate earnings…. the fact that corporate earnings are now on the down escalator. So the Fed and the expansion of the balance sheet and liquidity probably gives you a much firmer floor in any correction. but the market is telling you right now the upside is capped because earnings are on the down escalator.
- Rosenberg – I wouldn’t be surprised looking at the deepening and spreading recession in Europe, the impact that that is having on trade shows in Asia. I think there will be a long impact on exports here at home. Housing is recovering, that’s good news, but that’s 2% of the economy. And manufacturing ain’t what it used to be, but it’s still 10% of the economy.
- Rosenberg – I think it means is it’s going to be a stock picker’s market. we’re going to be range bound. and I think it’s an environment looking at the correlations where hedge funds that really hedge, …this will be their time to shine.
- Rosenberg – … I still think it’s going to be a great environment for a dividend growth, dividend yield, dividend coverage. That’s the slice of the stock market that I think remains intact. And the one thing I do have conviction in is that the state of corporate balance sheets hasn’t changed. It’s interesting that the U.S. economy has slowed enough and the global economy has slowed enough that now corporate earnings are on a downward track. corporate profits are rolling over. it’s amazing to me that global economic growth, included including the United States, that corporate default rates are barely over 3% to half their historical norm. so … I still think that credit, spread product will continue to be a good place to generate suggested returns for investors.
- Bernstein – … you have to realize that Europe and what you’re seeing the European banks is part of the risk on trade. When people think that the global credit bubble is going to be reflated, you will find risky assets outperform. The European banks would clearly be one of those risky assets. In fact, large U.S. banks are part of that risky asset…
- Bernstein – what is interesting getting back to David’s point about corporate profits is that domestic profits are doing better than global profits. and what you’re finding is a lot of the weakness in s&p 500 profits is in the multinationals. The Russell 2,000 profit cycle has already turned up….. but the point that I’m trying to make here is simply that I think that people are overestimating the risks in the United States and grossly underestimating the risk outside the United States.
CNBC may have failed us but the new financial media comes to our help. For a detailed exposition of David Rosenberg’s rebuttal of Rich Bernstein, go to the Zerohedge article – R(osenberg) & B(ernstein): Two Ex-Merrill Colleagues, Two Opposing Outlooks, One Permabull Rebuttal.
5. Patriotism demands we all eat 1 pound more of chocolate each year – Scarlett Fu of BTV Surveillance – Monday, October 15
We like off the charts sort of stuff and we absolutely love this specific Off the Charts segment of Scarlet Fu. As she tells us,
- A study in the New England Journal of Medicine found that the more chocolate a country consumes, the more Nobel Laureates it produces. According to the study’s calculations, the correlation between Nobel Prize winners and chocolate consumption is 0.79. If you throw out Sweden, which is an outlier (in the graph), the correlation increases to 0.86. The top performer in Nobel price winners per 10 million people and in eating chocolate is Switzerland. Researchers say that the minimally effective chocolate dose is 0.4kg a year , 4.5 lbs. The slop of the regression line says that people would have to eat 1 lb each year to increase the number of Nobel winners in their country. As to why, that is still a mystery. There may not be a cause and effect to how chocolate links to high quality of research, but it exists nonetheless.
We urge all readers to eat another pound of chocolate in the remaining 2.5 months of this year. We have already fulfilled our own quota while writing this article.
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