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. The dog didn’t bark!
Of course, we don’t mean the Chairman. We mean his message. And his message has usually been more a big hound who scares away bears. But his message on this past Wednesday turned out to be no more than a soft woof. His FOMC merely stayed on course with the same package they unveiled on September 14. That didn’t do it.
So far, the drama is playing to the 2007 form – a huge Fed-inspired rally in August & September that fizzled out after a Bernanke disappointment at the October 2007 FOMC meeting. This week, the Dow closed lower by 200 points and the S&P by 20 points, a rare outcome for a Bernanke Fed week.
The similarity with 2007 was highlighted by Tom DeMark’s call for a major top within the next 10 days and his “market is on the precipice of a long extended decline” view (see clip 3 below). Recall that Tom McClellan has called for a top in this rally just after the election.
The earnings disappointments continued this week. The 3rd quarter GDP came in at 2%, a better than expected number. Read what the usually placid Jim Bianco wrote about this 2% number:
- The Q3 results released today were boosted by 0.7% from government spending. The private economy grew at just 1.3%. If government spending was a -0.5% drag on the economy, like it was in 3 of the previous 4 quarters, overall GDP would have printed less than 1%…..Since this was the first release of GDP, the commerce department only has about 66% of the data. The other 33% is to be released in the coming weeks. So, the commerce department estimates/guesses what the missing data will look like…. All of this happens just 11 days before an election. Someone get Jack Welch on the phone!
The economy is not of much help, the earnings seem bearish and the Bernanke medicine has stopped working. So what does a hopeful but ailing market look to? To the Draghi medicine, the potion that triggered the risk rally in the first place.
No less an authority than Larry Fink, Chairman/CEO of the largest asset management firm on earth, assured CNBC viewers that Spain will ask for help next week. Will that cause the spike rally Tom DeMark is looking for (see clip 3 below)? But if Draghi medicine shows its loss of potency, then what? Perhaps the assurance from Bill Gross that a Romney victory will be positive for stocks.
2. The US Stock Market
The stock market turned ugly this week. It tried to rally from its oversold condition on both Thursday and Friday, but the rallies didn’t hold. The worst signal for stocks might be the action in the 30-year Treasury bond. It is the only major asset that closed higher on Friday than its close on the QE4ever day, Thursday, September 14.
The decline of this week concerned Lawrence McMillan of Option Strategist who has been consistently bullish all summer. He wrote on Friday:
- This has changed the $SPX chart from bullish to, at best, neutral. Those who want final confirmation would also require a breakdown below the August lows at 1395. That would confirm an intermediate-term bearish outlook for stocks. Others are satisfied with the current breakdown as evidence of further price erosion to come, especially since most of the other indicators are flashing sell signals as well.
Last week, Mr. McMillan had warned that “a breakout of the 1425-1475 range will likely lead to a further move in the direction of the breakout.” Perhaps a breakout that only lasts a couple of days is not definitive enough. That may be why he merely warned this week:
- In summary, the breakdown below 1430 by $SPX, coupled with $VIX rising above 17, makes the market vulnerable.
Tom Demark was more definitive in his appearances on CNBC Fast Money & BTV Surveillance this week (see clip 3 below):
- we cannot turn positive on the market. Like I said, we’re right now only holding to the S&P cash at a rally. The overall trend of the market is definitely down. We’re going to see a very long extended decline.
That decline is 12-17% minimum, he said but after a sharp upside move in the next 10 days.
3. US Treasuries
Bank of America turned bearish on bonds in two reports titled “The unwind of the bond bull market” and “The Bond Era Ends”. Doug Kass tweeted out his commitment to his short Treasuries position. Dennis Gartman told CNBC Fast Money viewers that he had a small short Treasuries position going into the Fed meeting. Michael Platt, head of the $35B Bluecrest Management, told BTV’s Stephanie Ruhle that he had no use for Treasuries.
We simply cannot resist quoting Jim Bianco’s comments about this universal disdain of Treasuries:
- Let us repeat and update a comment we have been using for years.
- Larry Fink hates bonds. Warren Buffett hates bonds. Guggenheim Partners hates bonds. Jeremy Siegel has hated bonds since the early years of the Clinton administration (1994). Nassim Taleb thinks every human on the planet should be short bonds. Leon Cooperman wouldn’t be caught dead owning bonds. Michael Steinhardt and Dan Fuss have also bad mouthed bonds.
- These predictions all range from several months to several years old. 10-year yields have not cooperated with these sages as rates continue to stay low. Why? Maybe because these predictions are solidly a consensus opinion and consensus opinions rarely play out exactly as expected.
- The table below shows the monthly survey of economists as conducted by Bloomberg. In the history of finance we cannot find a more one-sided opinion about a freely traded double-auction market. Witness:
- 116 months of surveys have been completed since December 2002.
- 112 of 116 (97%) of these surveys predict higher yields.
- 37 of 116 (32%) show more than 80% of economists predicted higher yields, including the last survey (October 2012).
- On three different occasions, 100% of economists predicted higher rates. The last occurrence was May 2012 when the 10-year yield was 2.40%. This means the the 10-year yield has to rise 66 basis points in the next two weeks to make this unanimous opinion correct. Don’t hold your breath.
- On the flip side, only four 4 of 116 (3%) surveys predicted lower rates, shown in red below. The last occurrence was December 2010 when 10-year yields were 150 basis points higher at 3.20%. The 10-year fell from 3.20% in January 2011 to 1.37% earlier this year without any of the surveys during the period predicting bullishness.
- The world has been very bearish on bonds for years and has been very wrong. It is hard to make a case for value in the bond market when the Federal Reserve is pushing rates lower via QE. That said, this bearishness is so well understood that it has been priced into the bond market for a while now (years). We would argue this is why the constant drum-beat of bond bearishness has not been working as the bears have already placed their bets.
- At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls. Good luck to BofA with their bond bear call. They join a very crowded field.
4. Housing Recovery
On October 6, we summarized views of Larry Fink, Kyle Bass, Robert Shiller and Gary Shilling about the recovery in housing. This week, we urge readers to read Tom McClellan’s article Architecture Billings Index says Q3 GDP should be muted. In the paragraph titled ABI Inquiries vs New Home Sales, he writes:
- The Inquiries data saw a spike peak in February 2012, but has remained pretty tepid since then. So the Architecture Billings Index data is not yet saying that a big spike up in new home sales is looming anytime soon. It is worth noticing in this chart that the most recent readings on new home sales are still not even back up to the incentive-fueled levels seen in 2009 and early 2010. So to paraphrase what Mark Twain once said about his own death, rumors of a huge housing recovery may have been greatly exaggerated (emphasis ours).
Dinakar Singh, CEO of TPG-Axon, reiterated his preference for Japan in his conversation with CNBC’s Gary Kaminsky (see clip 4 below):
- When you
look at Japan, a lot of these companies, some global; some defensive,
are after, 10 years of restructuring in good shape….A strong currency has forced
[Japanese] companies to find ways to change in ways that a hedge fund can never get
them to change….your starting point is pretty good
because you have low multiples, a lot of room for profits to
grow…everywhere else in the world, profits margins are coming down,
Japan is actually a place where there is room to get better…
This week, Michael Hartnett of BAC-Merrill Lynch reiterated his case for a rally in Japan in Q4:
- We recently listed the reasons for Japan to rally in Q4:
- According to the FMS, investors are the most UW Japan since March 2009 (historically, this level of bearishness has been followed by an 8% bounce in MSCI Japan over the next 12 weeks).
- It’s the most oversold equity market in the world
- It’s the only major index trading at less than book value (and a 23% discount to the EZ P/B ratio)
- Japanese cyclicals are a major laggard to their global peers (Germany, Korea, Sweden)
- The only missing catalyst was a weaker yen. That’s now happening as investors begin to discount more QE by the Bank of Japan at their next policy meeting on October 30th.
If you haven’t read it already, run to the New York Times article titled Billions in Hidden Riches for Family of Chinese Leader. The amazing article details the personal wealth collected by the family of China’s Prime Minister, Wen Jiabao. China immediately blocked access to this article and blocked even tangentially references to the article and words like $2.7 billion.
Endemic corruption in China and income disparities are one of the four warning signs from China, according to what Nathan Sandler of ICE Canyon told CNBC Fast Money:
- “They have a growth model that is being called into question.
- They have macro and financial imbalances that have only been intensifying and are a direct result of the growth model that is no longer sustainable.
- They have an increasing probability, as a result, of financial crisis, where I think the risks are rising significantly.
- They have endemic corruption and income disparities, which will ultimately be a long-term drag on growth.”
Getting back to Mr. Wen Jiabao, our reaction is similar to Thursday’s tweet from Ian Bremmer of Eurasia group:
- If I were the prime minister of China, I’d like to think I’d be worth a great deal more than $2.7B. Just seems like he isn’t trying.
Most Indians would look at $2.7 billion and laugh like Ian Bremmer. Just the 2G Telecom scandal reportedly created more than $40 billion of corrupt wealth among the politicians involved. And that is just one of several scandals rocking the political scene in India. Things are so bad in India that a New York Times article asked Indians on Thursday “Do You Have Corruption Fatigue?”
7. Pride Cometh Before a Fall or simply Don’t Buy High because You will Sell Low
Larry Fink and Rob Kapito, Chairman & President of BlackRock, took a victory lap on Maria Bartiromo’s CNBC show on Thursday, October 4. Mr. Fink has been exhorting individual investors to be as invested in stocks as they could since June 2011. On October 4, 2012, Mr. Fink happily stated that investors would have been up 23% had they been 100% in equities as he had told them. Rob Kapito was just as self-congratulatory in his comments when Maria Bartiromo gave him a soft lob of a question. This was on October 4, the day before the S&P futures triggered their trend-exhaustion signal in Tom DeMark’s work.
On this Friday, October 26, a visibly subdued and seemingly chastened Larry Fink appeared on CNBC Squawk Box and essentially asked investors to take some profits. He also spoke about the possibility of a recession in Q1 2013. Look at the facial expressions of Larry Fink on October 4 and on October 26. The expressions reveal the wisdom of the old warning Pride Cometh before a Fall.
The Fink-Kapito exhortation is what individual investors have seen so very often – aggressive calls from gurus to buy stocks near the highs followed by cautionary statements after a decline – a classic buy high, sell low pattern that goes back to the tech bubble of 1999-2000. Individual Investors are simply fed up with it. That is why investors have tuned out Larry Fink and Ron Kapito for the past year and half.
We have no doubt that Larry Fink means well and meant well when he began his drive to get people to buy stocks. He is correct about the need to generate returns for retirement. But he was too arrogant and too dismissive of the real concerns investors feel about steep short term losses. In any case, it was good to see him tell investors to take some money off the table.
And yes, we hope someday Maria Bartiromo will learn to ask hard questions when her guests exhibit ebullience near market highs.
- Larry Fink on CNBC Squawk Box on Friday, October 26
- Michael Platt on BTV Market Makers on Wednesday, October 24
- Tom DeMark on CNBC FM & on BTV In the Loop on Monday, October 22 & Thursday, October 25 resp.
- Dinakar Singh on CNBC SOTS on Wednesday, October 24
- Julian Robertson on BTV Surveillance on Friday, October 26
1. Take Some Profits; Recession in Q1; Spain will ask for help next week – Larry Fink on CNBC Squawk Box – Friday, October 26
It was a subdued, somewhat chastened Larry Fink who spoke with CNBC Squawk Box on Friday morning.
- Liesman – let’s talk about the recent market sell off; it’s been pretty sharp and it’s caused a lot of concern. What’s the cause in your opinion, and is the market telling us something about the economy that we don’t already know?
- Fink – well, I think the market is now responding to the pending fiscal cliff. We’re starting to approach the election. We have the uncertainty about who will be the president and how the fiscal cliff will be resolved. And, you know, CEOs today are pensive about what to do next. They’re just sitting back. They’re not hiring as much. They’re probably not spending as much. You know, there’s a deceleration in the economy and we all start feeling it. And in addition, we expected to have a little more resolution in Europe. We’re waiting for Spain to ask for help and accept conditionality and that’s been probably delayed by a couple weeks. So, you’ll have a little more uncertainty than we would have liked to have seen in Europe. I think it will all work itself out. and then you have these issues around the United States. I think these are reasons to pause. I think there are reasons to take some profits in the short term, and we have to look now and see how these things are going to be resolved.
- If it’s resolved in a broad sense, in a quick manner, then the market’s going to resume its rally, and
- if it’s another kick the can down the road, it’s another small attempt to reducing our deficits, then I think we’re going to have a recession in the first quarter and we’re going to have — markets are going to be quite unsettled.
- If it’s resolved in a broad sense, in a quick manner, then the market’s going to resume its rally, and
- Liesman – you know, Larry, let’s pursue that because you said deceleration and there isn’t much economic growth to decelerate. We’ll be lucky this morning if we get a 1.8% growth rate. What is your, say, middle forecast there? Let’s say given what you believe your outcome is going to be for the fiscal cliff, where does the economy go from here?
- Fink – well, if the fiscal cliff, if it is not resolved and it’s going to put CEOs in a greater defensive mode, as I said, we have a potential in the first quarter of going into a recession. Keep in mind with all the — with the payroll reduction — deductions if that’s — if that is not fixed, you’re going to have a consumer seeing their pocketbook really being reduced considerably, and you put that together with what it means for businesses another time of uncertainty, and the consumer I think we’re going to have a really uncertain and most probable small recession in the first quarter.
- Quick – Larry, you brought up the idea that Europe has not seen as much resolution as we would have expected to this point. Where do you think things really stand there because we hear things from Holland saying things like we’ve made it, we’re on our way through this crisis at this point, where do you see it?
- Fink – well, there’s been a lot of progress in Europe. Unquestionably Italy and Spain have done quite a good job in two years in reducing its cost of manufacturing, their labor rates are down. Let’s step back for a second. Europe’s problem occurred because the competitiveness of Southern Europe and France became so different from where Germany was, that spending continued as those economies decelerated and those economies decelerated because of a lack of competitiveness. in the last two years Spain and Italy have actually reduced their wages and their benefits, and as a result their competitiveness has improved partially. but it’s a three to four to five-year process in which you’re going to see the arbitrage of where Germany is and the rest of Europe is in terms of getting more competitive. if you see a more competitive Spain and Italy, they will have growth, and then the resolution around their deficits will be much easier to resolve. so, this is a long process. There’s a lot of healing, but, you know, we’re going to have to be living with this push and pull, push and pull. I do believe Spain will ask next week for help. They’re going to have to accept more conditionalities. One of the things we’re hearing now the conditionalities may be elongated a little more to allow the country to manage their popular expectations.
- Liesman – you got next week on good authority, Larry?
- Fink – oh, I don’t want to say whose authority. I believe it will happen, Steve.
- Liesman – I want to get to the Federal Reserve. They came out with qe-3 or qe-infinity as many are calling it. the market seems to be headed down. last week it was reported that mortgage rates increased. is qe-3 ineffective? do you think the fed shouldn’t be doing it, or do you think the effects of it are still to come?
- Fink – I truly believe what QE-3 is doing is keeping the economy moving forward in a time of uncertainty and the fiscal cliff. So, I don’t think the Federal Reserve — if we had a grand resolution with a fiscal cliff, I think QE-3 would be over quite rapidly because you would see the unlocking of attitudes by CEOs and starting to spend again. You would see an unlocking of the markets and I think the markets would rally and I would say very quickly that qe-3 would be over. So, I look at this as a mechanism to keep the economy floating along in front of all this uncertainty of the fiscal cliff. so, whether mortgage rates are up or down 15 or 20 basis points, that’s not going to be terribly meaningful, but we’re seeing with all the Federal Reserve easing, if you are looking at seeing C&I loans, they are picking up. no one is talking about there is a continuous unlocking of credit. and I think that’s an important component. So, whether the credit is offered up 20 basis points or down 20 basis points, I’m not sure that’s significant. the rates are low and they continue to be low and we’re seeing an unlocking of credit. But I think it’s very related to, you know, the Federal Reserve is really trying to make sure we stay afloat during this uncertainty.
2. No plan for growth in Europe – Michael Platt with BTV’s Stephanie Ruhle – Wednesday, October 24
Michael Platt is the founder BlueCrest Capital Management, a firm that manages $35 billion, according to BTV’s Stephanie Ruhle. The excellent summary below is courtesy of Bloomberg TV PR.
Platt on why the market has performed well this year:
- “It has done very well because central banks have continued to pour money at the problem. Particularly, the ECB has continued to pour money into the markets in a process that can only really be described as buying time. These are constant liquidity fixes for solvency problems in the Eurozone.”
- “Trading tactically, when you hear an announcement of a program that is important and as large in scale as the OMT program, absolutely, you can trade go for risk-on trading and trade that tactically. I think it depends on your time frame. if you’re a hedge fund like we are, on and an individual basis, our traders can trade on a 1, 2, 3, 4, 5 day view no problem. If you’re a pension fund, your ship is considerably larger. You’re driving a super tanker. You cannot trade that tactically. I don’t think he would want to rearrange your entire portfolio if you look at LTRO was a the three-month trade and we don’t know how long the OMT trade will be before the market puts the sovereigns back under pressure.”
On Draghi’s remarks:
- “What it means to me is, if you look at the ESM, it’s a process that provides money to sovereigns who are in need of it, providing backstop and underwriting for their bond markets. I don’t really see much difference between OMT and the ESM. If the ESM acquired a banking license and leveraged itself up to the ceiling and just endlessly bought Italy and Spain, that is really what is going on through the encouragement of private capital to go into Italy and Spain, which is the money the ESM would have borrowed. And they are doing that with the comfort of knowing that the ECB will provide them with a free put. Anytime those markets come under pressure and those sovereigns can’t fund themselves, they can fill in the form, go to the ECB and in comes unlimited buying.”
On his outlook for year end and 2013:
- “There’s no credible plan for growth. Monetary policy and monetary conditions in Europe are exceedingly tight, interest rates are the zero boundary, fiscal policy is incredibly tight. The IMF put out a piece strongly arguing that at this point in time, fiscal multipliers are somewhere between 0.9 and 1.7, which in English means that if an austerity packages 5% of GDP, you might see actual GDP decline up to 9%. Because of automatic stabilizers of payments for unemployed people and because of the reduction would get in the environment for tax receipts, you might not even see budget deficits fall anyway.”
On whether anything has changed for the people in countries like Italy and Spain:
- “Things have definitely changes. Unemployment has gone higher, GDP has gone lower. The quantity of bad debts in countries and banks such as Italy and Spain have increased. The lethal embrace of the banks on the sovereigns has increased. Liquidity has been poured in everywhere. And so in the presence of that money and funding, the immediacy of a crisis — the market wanted to be in crisis. The market wanted to pressurize the sovereign debt market last November and again in July. But every time a check is thrown at the situation to delay it.”
- “We’re in a world where there is too much debt. If you indebt a consumer they stop spending. If you indebt a sovereign, they embark on an austerity program. If you indebt a corporate, they stop investing. Debt kills growth. If we continue to print money endlessly, in the end there will be no debt because we will have monetized it all.”
On the euro:
- “It’s interesting. The reason why it is interesting is because it reminds me of the situation in the yen. You never would have expected the yen to be such a strong currency for the last 25 years. It has been uncontrollably strong, even when a nuclear reactor blew up and Tokyo was potentially poisoned… Look at the euro, we traded down to 1.19 when it first became apparent the Greek situation was quick to become a major problem. We subsequently traded 10 big figures higher in amongst a load of out turns on the political and economic front, which can only be described as worst case. What is it doing 10 big figures higher? When you get into these situations, if you take an area and collapse domestic consumption, you end up with a trade surplus. If that area also has a lot of domestic problems, they tend to sell their external assets and bring money home. It is all demand for the currency.
- “If you look at what has happened since the initial problems in Greece, it is no secret that European banks have problems funding dollar assets. I think that significance sales of dollar assets took place, significant repatriation of foreign money particularly dollars were sold and euros were purchased to shore up the balance sheets in Europe….There’s an enormous balance sheet in Europe compared to the U.S. Money was brought home. I think that the investment people that were holding euros probably sold into that. Net net, the euro has gone higher. I don’t know very many people at this point who were long the euro as an investment. No one is long this thing. It has gone higher. It feels like it is turning into a situation not dissimilar to a situation that occurred with the Japanese yen.”
On U.S. equities:
- “The reality is, what else do you want to do with your money? If you leave it in the bank, you get no percent. You take bank credit risk. Inflation is 1.5 to 2 so you will lose money for sure. If you put it into government debt, the yields are very, very low in the short date. You don’t like the long end of that market either and the yields are incredibly low. Commodities have not been great performers this year, particularly with the energy complex lower. There really is not a lot of alternative. You can find good stories in the equity market. Individual stocks that make sense. The earnings yield is higher, like 6-7%.”
On whether he’d buy European equities or stick to U.S. equities:
- “It is likely that in the end, we will reach a moment in Europe where it is an existential for them to properly print money, to get out of their problems and remove the debt.
- If we take a hypothetical situation where the ECB just printed 5 trillion euros, distributed at GDP weighted, we have a completely unfair redistribution of wealth from holders of debt to the people who are in debt, and we removed that debt, then we would have enormous rally in equities.
- If we reach a point where it is sort of a disorderly breakup of the euro–and that would be followed by printing at the government level to sort out their problems–you get a 10% GDP drop in Europe. That would cause a big dip in equities and you would probably want to buy that.”
- If we take a hypothetical situation where the ECB just printed 5 trillion euros, distributed at GDP weighted, we have a completely unfair redistribution of wealth from holders of debt to the people who are in debt, and we removed that debt, then we would have enormous rally in equities.
- “Banks have been heavily subsidized by the actions of central banks, there’s no question about it. They have had a huge amount of tail risk taken out of the market, which affected their balance sheets and has been taken out. The stocks and bonds of these banks have responded positively. Getting back to the original point on growth, if you keep on running growth at -1% to 2% indefinitely, nothing will save anybody. Eventually, you’ll reach a point where all balance sheets and all government debt is unsustainable. It will not continue forever, but at the moment, we’re going into another European downturn. It is risky.”
Tom DeMark is a well known market timer, as he prefers to call himself. We discussed his comments earlier this year when his semi-predictions failed. Our problem with his comments is that he comes on TV before his market timing indicators turn decisive. We asked then and we ask now, why doesn’t DeMark wait until his indicators actually get triggered and then make a decisive prediction.
This clip is a case in point. He says that the “Next 10 days could signal S&P 2012 high“. And so we ask why didn’t DeMark wait for 10 more days and then decisively announce that the S&P has made its 2012 high? Well, we might be a bit too pedantic here. Because this time, Mr. DeMark was more decisive than in his previous appearances. His most decisive comment was in response to a direct question from Jon Najarian.
- DeMark – we’re in the midst of a decline, and I don’t see this decline abating for some time. I think we probably made the highs for the years definitely in a number of these indices. the only one that has some redemption left would be the S&P cash. Obviously you get sympathy with the S&P futures and some of the derivatives but even the ETFs, ETNs all topped as well.
- Najarian – Tom, what would you have to hear or see right now to change your mind? In other words, what would have to happen in the market here for you to turn from this very bearish outlook that you have, in particular starting in the tech..
- DeMark – … we cannot turn positive on the market. Like I said, we’re right now only holding to the S&P cash at a rally. The overall trend of the market is definitely down. We’re going to see a very long extended decline. We’ve made the highs for the year. But the environment we’re in, which is pretty much the reverse of what we experienced last August, September, we can as pike up, we don’t know the catalyst… but you’ll see a sharp move upside according to our work.
Tom DeMark spoke in more detail with BTV’s Betty Liu on Thursday, October 25.
- DeMark – our fervent belief is that the trend is your friend but when the trend ends, it is no longer your friend…the corollary is the trend is your friend until the trend is about to end… On September 14, we recorded a “13” which forewarned us that the market was about to have a decline…the following week on September 21st, the Nasdaq composite also recorded a “13”, so both Nasdaq indices forewarning us of a pending decline…on October 5th, the S&P futures recorded their “13”, the only missing component has been the S&P cash. The cash index failed to record its “13” at the initial peak in September or the October peak, so we are waiting for the S&P cash to recover and record its “13” on the rally which we believe we are starting right now.
- Liu – once we do that, we will see a decline of what then Tom?
- DeMark – 12-17% minimum [decline]…we think there is a pretty significant peak….we are on the precipice, I think, of a pretty significant decline…but given the environment we are in right now and the “13” sells recorded across the board and the lagging S&P cash, there is a chance for a one more move up…we have 8-10 days to make a market peak, if we are going to make it…
So this time, DeMark makes it clear – a spike rally if it happens in next 2 weeks and then a significant decline, minimum 12-17%.
4. Warning on Dividend Stocks – Dinakar Singh on CNBC SOTS – Wednesday, October 24
Dinakar Singh, the former star manager of Goldman’s Risk Arb group, is the CEO of TPG-Axon capital, a very large hedge fund. Here, he speaks with CNBC’s Gary Kaminksy.
- Kaminsky – you have a warning for people buying a lot of these high dividend stocks and what they may expect in the years out. explain to us.
- Singh – sure. the biggest factor you’ve seen already is there’s been a multi-trillion flow from equities to credit. we know that. rates are low now but if you want to make money you have to buy something, so people are moving into dividends. it’s not a crazy idea, makes some sense but when you look at where yields have come now in on stocks, you have to make sure the dividends are real and going to go up. So is Verizon cheap? it’s okay. it’s high teens earnings, 4% dividend yield. we’re trying to find stocks where there’s a ton of cash flow which they can use to buy back stock and pay dividends but the market hasn’t recognized it yet, Time Warner Cable, Sirius, companies like that where you’re getting more return of capital by a lot than you are in Reits for sure or stocks like Verizon or AT&T.
- Kaminsky – So a greater strategy would be try to identify the stocks and the companies that will be the future dividend payers as opposed to ones you are buying today and buying them on the yield.
- Singh – right, great cash flow, good businesses and imagine turning the cash flow into cash coming back to you.
- Kaminsky – Are you short ATt&T and Verizon or think people buying them here are making a mistake?
- Singh – we are some but they’re okay, but I think if you go one step further there are other companies like other legacy telcos like wind stream etc. where dividends are high but not sustainable. the market is buying the dividend but it’s not just they’re not going to grow., they are going to get shrunk over time. the warning sign are companies like Telefonica in Europe. In Europe, dividends haven’t worked so well because people get the fact a lot of those companies can’t maintain the dividend. So Telefonica had a big yield until they cut it. That’s the warning sign for investors.
- Kaminsky – another long short thesis, you look at what’s happening in terms of central banks and easings. You have a short position in the regional banks in the US and against that you’re long some of the investment banks. explain to us why you think regional banks overvalued & many investment banks undervalued?
- Singh – when you look at what’s happening good news is a lot of the macro headwind is settling down for financials. Capital ratios have doubled pretty much at this point. If anything Basel III might bring those back. So a lot of the regulatory and capital noise is done. Today most financials have a lot of capital. Their problem is earnings. In regional banks, a bit like with dividend stocks if you had to own a financial, if you’re that one person on earth who did you bought regional banks because they’re safe. So now they’re full valuations and their problem is that earnings are going down because their interest margins are getting depressed. Low rates work both ways, they bring down profits at regional banks and some insurance companies. On the other hand, if risk appetite goes up it brings up profits for companies with more capital markets businesses, the Credit Suisses of the world. So for us if you can find some restructuring candidates, some European banks that fit in the category or benefit from more flows, their earnings go up and it makes sense to buy those. But if it’s about interest margin you’re going to get hurt going forward.
- Kaminsky – you mentioned the safety of regional banks people bought them for the safety much like the high dividend stocks. you don’t see the regional banks as having safe dividend streams when you look at what’s happening.
- Singh – I think there are safe banks but earnings are going down or they’re flat, they’re not going to grow from here. when people buy a financial right now, they think they are a bargain. the sense that this sector has been underweight, and by buying them now, you are getting a very good deal. A good deal should mean low valuation which are going to go up rather than the other way around.
- Quintannia – Dinakar, you have said Japan is cheap. How do you answer the conventional wisdom that big demographic issues long term. brewing trade war with China? What looks good about the Japanese market?
- Singh – The issue in Japan is a bit like what you see in almost every country in the world…you have the public sector, the Government sector that has too much debt, but their private sector has done an incredible job of restructuring over the last 10 years, their margins are pretty good, so more than any other place in the world, we find people not focused on stocks…we talked about Verizon before, take NT&T in Japan; they have 4% dividend yield too, their dividend payout ratio is half of Verizon, their balance sheet is in good shape..and for the first time, they are buying back stock on top of dividends, you are getting 8-9% total return with earnings that are growing with a balance sheet that is good. That’s pretty credible. When you look at Japan, a lot of these companies, some global; some defensive, are after, 10 years of restructuring in good shape. I think the comparison in some ways is to Germany . A strong currency has forced companies to find ways to change in ways that a hedge fund can never get them to change. On the government side, the taxes are going to go up or the taxes are going to come down…your starting point is pretty good because you have low multiples, a lot of room for profits to grow…everywhere else in the world, profits margins are coming down, Japan is actually a place where there is room to get better…
- Kaminsky – Jim O”Neill said China may be the best opportunity in the world right now..you agree with that or not?
- Singh – I think it is mixed. it wouldn’t shock me if we never see another double digit year of growth in China again..but I don’t think it is bad thing.. Its just that China being mortal…and the fact that once you get to a certain point, you can’t grow so much…so there us an investor expectations issue betting on a big rebound & stimulus & recovery, you are going to be disappointed but there are also a lot of stories that are cheap because valuations have fallen by half from where they were a couple of years ago…
5. Not hedge funds, disaster funds – Julian Roberston on BTV Surveillance – Friday, October 26
Julian Robertson is a legend in the long-short hedge fund business. He spoke earlier in the week with CNBC’s Maria Bartiromo and on Friday he had a longer, more detailed conversation with BTV’s Tom Keene and Sara Eisen. The excellent summary below is courtesy of Bloomberg TV PR.
Robertson on why hedge funds have had such a challenge in 2012:
- “They are having a challenge because a lot of people in the hedge fund business have become so disenchanted with the economies of the world. Europe is a mess and we see the fiscal problems of the United States. Hedge funds -there are a lot of them that really are disaster funds now. In other words, they are really only going to be profitable in the event of a big disaster.”
On hedge funds that are underperforming:
- “I think right now they are really scared. They have made a mistake. They are now unhedged because they are so scared. They really will succeed only if we have rather disastrous period…We have to assume that a black swan event is very unlikely…They have gotten so bearish that some of them that that is what has happened. They will not get out of it without a black swan type event.”
- “This is still the best place to run money. One reason the hedge funds are not doing as well as they used to is the competition is more hedge funds. And that the competition is so much better than any other form of competition.”
On his support for Romney:
- “I think people are getting to know the real Mitt Romney. I am thrilled that that is happening. He is really quite a guy. He is, in my opinion, intellectually and morally and managerially the man that is most qualified by far to be president of the United States. You’re having a guy this afternoon that is a great hero of mine, but Mitt Romney is even better than Ken Langone.”
On whether Romney has to move away from the Tea Party in order to govern effectively:
- “I think he will have to move away a little bit from the tea party. But I do not think he has ever been thought of as a tea drinker. He has been a little bit separate from that movement.”
On how the economy would react to Romney if elected:
- “I think the campaign is going good. I think Governor Romney is really getting the American people to see the real Romney. That is what we have needed all along. I wish his family would expose itself more…I’d like to see Mrs. Romney, I would like to see the boys out and all of that more.”
On what he’d want to see from Romney in his first month if elected:
- “I would like to see him be himself and be the manager he can be. I would like to see him reach across the aisle to get things done. I think he will do that. His health care bill, which a lot of Republicans despised, to me was essential. I think America needs a health care bill. I do not think it needs Obamacare, but I think it desperately needs a health-care bill. I really look forward to him putting that through.”
On what economic policy the U.S. needs right now:
- “I think America needs a policy on the economy of getting its house in order. It has overspent, overspent, and overspent. And it must get its budget balanced. There must be some strides taken in that direction. The president–this is the tragedy of an inexperienced person being in. he came up with the best idea of all in Bowles-Simpson and if he had done Bowles-Simpson, I think he would be sweeping into office now.”
Mr. Robertson’s CNBC interview with Maria Bartiromo had a different feel to it. It also dealt with stocks that Mr. Roberston likes (Ryanair, Rolls-Royce, Capital One Financial) and doesn’t like (A.K.Steel & U.S. Steel). These are discussed in Where is Julian Robertson Investing? on CNBC.com
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