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. A Launching Pad, Not a Cliff
Last Friday, the S&P went out after the close at around 1384. On Wednesday, two trading days later, it closed at 1462 – a gain of 78 points. What a move! The S&P closed at a new post-crisis high, a 5-year high. The Russell 2000 closed at a new high. The Transports are close to an all-time new high. Can the S&P and Dow be far behind?
Kudos to David Tepper who called for such a rally in his December 17, 2012 appearance on CNBC Squawk Box. He had suggested buying S&P calls to benefit from such a rally without risking a big down tick if the deal didn’t get done. He was right again.
Monday and Wednesday were two back-to-back 90% upside volume days – a pretty rare event according to Jeffery Saut of Raymond James. He told CNBC SOTS that after such an event,
- the performance of the S&P higher 1-month later 83% of the time and 3-months later it has been higher 100% of the time.
But what about the deal itself? Larry Fink of BlackRock, probably the ultimate Washington insider on finance, was explicit on BTV Market makers (see clip 3 below):
- I am very
disappointed, I am incredibly disappointed. This is a negative for
markets. I have been bullish on markets, more bullish than most. I would be fading this rally myself; I would be buying bonds here for a tactical reason in the short term. I look at this as a very bad warning sign.
Larry Fink was not alone. Almost everyone we heard or read was disappointed by the deal including Leon Cooperman, Jeff Gundlach and of course Nouriel Roubini who argued “US has been let down by its leadership”. The one exception is Roger Altman who argued that, though the process is messy, serious deficit reduction is taking place in America (see clip 5 below).
2. U.S. Stock Market
It is a given that the stock market ended the week in an overbought condition. A measure of that condition was tweeted by Bespoke (@bespokeinvest) after the close on Friday:
- “The last time there were this many overbought (1+ st deviation above 50-DMA) stocks in the S&P 500 was in October 2011.”
What does this week say about the near term and the rest of the year? We all know that if the first day & first week is up, then the year is supposed to be up. Larry Fink would fade this week’s rally at least for the near term but the history of Jeff Saut suggest higher stock prices in 3 months. What do others say?
Mary Ann Bartels of BAC-Merrill Lynch told CNBC Fast Money:
- “January can rally a little bit more”. But “as we move into” February, “we’re concerned you can get a 10 to 15% correction in February”.
Most gurus on FinTV are very bullish for 2013. No one more passionately so than the inimitable Ralph Acampora who claims to be extremely bullish and said “this thing is going to sail“. He added that Bank of America is a “double/triple/quadruple” in about two years.
In contrast,the second of Byron Wien’s 10 surprises for 2013 calls for the “S&P to trade below 1300 due to profit margin squeeze and limited revenue growth“. Leon Cooperman wouldn’t be surprised if the S&P trades in a trading range over the next two years (see clip 4 below).
Two great investors seem to offer conflicting scenarios:
- David Tepper said in December 2012 that stock markets will go a much higher level before the markets have deal with dislocations due to the Fed or economy.
- Jeffrey Gundlach on the other hand seems to think we will see a cleansing decline when the markets ultimately face the economic headwinds and he advises investors to buy after that decline (see clip 1 below).
But for 2013, Jeffrey Gundlach suggests a 5% return for the S&P 500 like Bill Gross does (clip 2 below). Larry Fink is at 8-10% return with 2.5% coming from dividends (see clip3 below).
Needless to say, Elliot Wave is at the bearish extreme arguing this stock market’s pattern looks similar to the one in 1937. They add:
Just like in 1937, the current rebound has many investors believing that the bull market is back to stay.
But look at the chart again to see what happened after the 1937 rebound: a severe decline that was much steeper than the one that came right after the top.
Now, consider that today’s price pattern is unfolding at an even larger degree of trend, so if a decline is ahead, it could be much more severe than the one in 2007-09.
Lawrence McMillan of Option Strategist also calls for a “collapse” in 2013. He writes in his 2013 Stock Market Forecast:
- Last year, in discussing the second possible longer-term path for the market, I said “if this scenario were to play out, the market would bottom sometime in early 2012, rally strong into 2013, and then collapse.” I am still sticking with that long-term forecast.
- We have been talking for years about the similarities between the current market (since the mid-1990’s) and the stock market of 1966 to 1983.
- Since that bull market topped in 2000, we don’t expect the current market malaise to be over until at least 2016. Similar periods existed in 1907-1920 and also 1929-1946.
Jim O’Neill of Goldman Sachs argued for a change in global leadership on CNBC Squawk Box on Monday:
- there is a rotation of stock market leadership shifting away from the U.S. …. the U.S. market isn’t cheap any more. I don’t think the U.S. market itself is going to be the sense of global action going forward… I think we’re going to have a lot clearer signs of powerful rallies coming from the rest of the world in 2013 which will make it somewhat different than 2012 and to some extent the previous two years.
In contrast, Michael Hartnett of BAC-Merrill Lynch reiterated his Sell Signal on EM this Thursday even though as he wrote, “but increased equity inflows overall have thus far overwhelmed sell-signal“ . Tim Seymour of CNBC Fast Money concurs and suggested shorting EEM,
the emerging markets ETF.
3. U.S. Treasuries – The Great Rotation?
The most fervent wish of equity managers & CNBC Anchors is for a rotation of investor money from fixed income to equities. This week, this talk of a great rotation from bonds to stocks hit a fever pitch. Witness the comments of Ralph Acampora on Friday:
- did you hear the hissing sound when the yield on the ten-year Treasury went above 1.9%? the hissing, the air is coming out of that balloon..
This time, they seem to have empirical evidence of fund flows. Look at the graphic below from Michael Hartnett of BAC-Merrill Lynch:
Source: Hartnett report – BofA Merrill Lynch Global Investment Strategy, EPFR Global
This fund flow change has been accompanied by a steep rise in Treasury yields over the past two weeks. The 30-year yield has risen by 17 bps from 2.93% to 3.10% and the 10-year yield by 14bps from 1.76% to 1.90%. Treasuries have clearly broken through their 200-day moving averages, a clearly bearish sign.
The selloff on Thursday was triggered by comments in the Fed minutes which stated that several FOMC members were in favor of ending QE or buying of Treasuries by the Fed. Since the Fed buys 80% or more of all longer term Treasury issuance, end of QE is tantamount to removing the bulk of buy interest. The only wonder is why the 30-year did not sell off more dramatically.
The inline employment number seemed to lessen the fears of Fed terminating QE. This and a deeply oversold condition led to a small rally on Friday. Is this just a dead cat bounce or is the selloff a buying opportunity?
- Rick Santelli – I think it is pretty safe to say 1.80-.200% may be the trading range we’ll have to get used to. Remember, when you have a full cup of coffee, when you reach the tipping point, it’s hard to tell. I think it’s been more of a splash than a real tip.
- Rebecca Patterson – huge overreaction… I think yields are gonna come down; they already started to come down today; I think from 1.93% we will get back to 1.85% in 10-year yield very quickly
- Jeff Gundlach – when you’re at the higher end of the range in yields, which you are right now, the higher end of the range for the last few months, it is actually a reasonable time to be putting cash to work in the bond market because the prospect for higher yields just isn’t that great with the Fed’s policies.
- Larry Fink – I would be buying bonds here for a tactical reason in the short term.
From our point of view, Treasuries have to cross back above the 200-day moving average quickly if this is to be a short lived decline.
Gold & Silver were shot this week, especially on Thursday. This week marks the 6th straight week of decline for Gold. Kudos to Jim Rogers who warned CNBC viewers to expect a serious correction in gold back in mid-December 2012. The biggest risk to Gold, in his view, is action by the Indian Government:
- “India’s got a big balance of trade deficit – some Indian politicians are
starting to blame it on gold,,, “[If they] figure out a way
to cut or crimp imports of gold – if something like that happens, that
will be a big shock to all those bulls on gold and who knows how low it
Jim Rogers called it right. This week, on Wednesday, January 2, India’s Finance Minister Chidambaram “hinted at raising the customs duty on gold to check its imports, a measure endorsed by Reserve Bank and Prime Minister’s economic advisory council (PMEAC).” He said that “gold import constituted a chunk of the imports and was a huge drain on the current account” and added “.. we may be left with no choice but to make it a little
more expensive to import gold. This matter is under government’s
But the real solution to reducing the import of gold is “to control inflation”, said C Rangarajan, Chairman of the PMEAC. And of course, a policy that supports a strong Rupee, at least a Rupee that doesn’t follow just one direction, down. In 1982, 7.5 Rs. bought you 1 USD. Today, you need 55 Rs. to buy 1 USD, a decline of 88% in the Rupee. But a steadily weakening Rupee is the safety valve for a Government whose spending is out of control and which runs large current account & fiscal deficits.
This is why the Indian people keep adding to their personal gold reserves, about 16,000 tons of reserves according to a Wall Street Journal report. This is also why Chairman Rangarajan cautioned this week that increased smuggling of gold could result from a large increase in import duty.
None of this tells us or you what happens to Gold and Silver next week or this month. So what do charts say? Carter Worth, the resident technician at CNBC Options Action with a day job at Oppenheimer, was bearish on Friday:
- What’s important it is not just silver, it’s gold, it’s the Yen, it’s all things that are considered safe havens. They are coming apart. We are on the cusp of breaking defined intermediate lows. We closed down [SLV] from $30. We think we are dropping as low as $20.
India is absolutely the land of the bizarre. On December 31, Indian tax authorities raided the home of a trader. In that raid, they discovered $5 billion of bills in his home. These bills of exchange were issued by Barclays. Each bill was worth USD 1 billion and the trader had 5 of them. A bill of exchange is similar to a banking draft between individual or institutions according to a Reuters article about this story.
The trader apparently wanted to set up a refinery in his state with the money. So he kept $5 billion worth bills in his home? If this isn’t bizarre, we don’t know what is. We have heard of old cinema theaters in India used to store large quantities of Foreign exchange or currency worth millions. But $5 billion far far exceeds anything the rumor mills have churned up so far.
The trader and Barclays have been unavailable to Reuters for comment.
- Jeff Gundlach on CNBC SOTS on Thursday, January 3
- Bill Gross on BTV Market Makers on Friday, January 4
- Larry Fink on BTV Market Makers on Wednesday, January 3
- Leon Cooperman on CNBC Fast Money Half Time on Wednesday, January 3
- Roger Altman on BTV In the Loop on Wednesday, January 3
1. 10-Year Bonds now; Stocks for long term – Jeff Gundlach with CNBC’s Gary Kaminsky (09:12 minutes) – Thursday, January 3
This is a very useful interview. Succinct questions and candid answers. Kudos to both Jeff Gundlach and Gary Kaminsky.
Fiscal Cliff Deal & Spending Cuts
- I have been saying for the last few months that’s not really the big deal. the big deal is the fiscal crisis that’s ongoing in the United States and we’re just moving on to chapter 2. Chapter 2 is the coming fight over the debt ceiling and will there be any spending cuts. It is amazing how politicians on both sides of the aisle were talking about how the bill to address the fiscal cliff needed to be balanced and what came out couldn’t have been more imbalanced sort of by definition with nothing but tax increases. so now comes the harder work as we move forward and we’re stuck with the same issues.
10-Year Interest Rate
- When it comes to the bond market, the yield on the 10-year treasury I think almost exactly the same today as it was in the middle part of later September when you visited our offices. So we’re in a range bound market for bond. We have these two competing forces:
- on the positive side if you want to call it a positive, you have rate repression by the federal reserve, buying bonds which obviously keeps interest rates lower than they would otherwise be.
- but on the other side, in the Treasury market, you have no value to speak of from an investor’s perspective.
- However, when you’re at the higher end of the range in yields, which you are right now, the higher end of the range for the last few months, it is actually a reasonable time to be putting cash to work in the bond market because the prospect for higher yields just isn’t that great with the Fed’s policies.
Credit Risk Bubble
- People keep talking about a bond bubble. I keep hearing that all the time. I don’t think there is a bond bubble but I t
hink the year 2013 may be building a credit risk bubble as we move forward because what’s happening is that investors starved for yield now that yields are lower on competing assets versus treasuries, thanks to yield compression, due to yield starvation, the next move I believe that will start happening in the financial industry is funds will start leveraging credit risk to a greeter extent which will build up an overexposure potentially should the market ultimately turn against bonds later on. So I think that’s really an issue that investors should be thinking about. in the near term,
- It is actually a positive for risk assets in the bond market because the leveraging up of those sectors will bring even higher prices and lower yields on things like junk bonds, corporate bonds, emerging market debt and things like credit risk in the mortgage-backed securities market. Those things are likely to go higher in price.
One-year expected total return on various asset classes:
- 10 -year Treasury – 3%; S&P – 5%; Mortgage backed securities – 6%; High-yield – 6%
- Japan – the Nikkei was a fantastically good investment about six weeks ago. It’s up about 23% in just that short period. It’s hard to be that in love with it right now on a short-term basis. But even so I think the Nikkei can go up over 20% this year
- Apple – Apple I think is in a consolidation period. I was on a show on CNBC back in — around November 19th when apple hit its short-term bottom, where it kissed $500 and closed about $525. I think we’ll hover around this level as long as the stock market stays locally reasonably strong. I deeply believe though that Apple is headed to $425 a share, not because I’m a bond guy or stock guy, because I’m a market guy. I‘ve been around for a long time and I know that when something goes vertical like Apple did from $425, once the bubble pops, it goes back down to the point at which it lifted off – that’s about $425.
- I really think what investors should be looking at are things in the equity markets that are down. This is why I like the Japanese equity market, though it’s up a lot and I like the Shanghai, just because if you’re going to have part of your portfolio that’s exposed to inflationary outcome, those are the ones that I think have the greatest up side.
- It is clear to me that investors will be better off over the long term in equities than they will be in fixed income. Because of the valuation of fixed income just cannot support without a sell-off first returns in the high single digits for an ongoing basis. I think equities are a good place to — for investors to be looking for when they’re priced at a lower level which will happen ultimately when we deal with these economic headwinds that we’ve talked so often about.
2. Like stocks, 5-yr USTs, don’t like 30yr USTs – Bill Gross on BTV Market Makers – Friday, January 4
Bill Gross appeared on FinTV three times this week. This interview by Eric Schatzker & Stephanie Ruhle of BTV market Makers is by far the most useful and detailed of the three.
- Economy is doing alright; growing at 2% in the US. but it faces structural headwinds. We think the fiscal drag (of 2013) will lessen economic growth by 1.5% relative to what it would have been with the positives of housing, natural gas & fracking etc; it would have been 3%, now we are looking at 1.5% as fiscal drag comes in to play – we see that in Euroland, we see that elsewhere, simply a question of too much debt and delevering.
Treasuries – How much of a selloff? Can 10-year yield go over 2.40%, high of 2012?
- the 30-year we are fearful of simply because it reflects the potential in out years for higher inflation of 2.5-3%, which the Fed is targeting; the long bond, to our way of thinking, is not an attractive.
- the 5-year however, which is more benched on what the Fed is doing, at 83bps it is not a super-duper deal but when you add the roll down it produces a 1.5-2% return on a safe asset. so we like 5s; we don’t like 30s.
- I don’t [think the 10-year yield can exceed 2.40%]; but it is possible if the Fed abandons QE as it hinted yesterday. Fed is getting more dovish with Rosengren & Evans becoming voting members in 2013 and they join Bernanke/Yellen/Dudley.
Sovereign Bonds in Europe – Are Bunds a short now?
- We are not short Bunds; we are underweight Bunds. We are overweight Italy and at the margin Spain; to a certain that position is dependent upon stability in Europe an effort on part of ECB to stabilize the bond markets.
New York State Munis
- those yields were 40-50 basis points higher than respective Treasuries but at this point going forward we are cautious; Muni rates are in this cloud of will they or won’t they be taxed in terms of witholdings..so we have a cautious stance.
- odds are it won’t happen but there is still a decent chance 10-20-30% that something will take place. We have been surprised before in terms of the payroll tax as most of us were last week so congress at this point can do lots of things that are surprising – so we are relatively cautious on Munis – we won’t be selling them but loading up on more NY Munis probably not
Shift out of corporate bonds into equities
- oh, that is the perpetual question! we do think that stocks are more attractive than bonds; we concur with your thesis in terms of the higher yield and potential of higher returns but whether the public will take that bait – we are not sure; they are getting older demographically, Boomers are moving into the 60s; they want fixed as opposed to equity and so we will have to see and observe .
Are we facing a credit bubble?
- I think we are facing bubbles almost everywhere; we are facing many bubbles in the equity prices, we are facing many bubbles in the high yield bonds & bond markets around the world simply because the central banks have been buying trillions of dollars worth of these assets and the money has then flowed into what we call the outer circles of risk– stocks, high yield etc. so there are many bubbles everywhere – what’s the relief from that? what do they do? –
- They take some risk and go for attractive returns on stocks which are like 5% a year going forward/.. they also become cautions and give up some of that potential return simply to get protection of principal going forward…
Is the rally in Mortgage Backed Securities over?
- it is a safe trade if the Fed is buying $45 billion a month. But it is over in terms of capital appreciation as is the performance kick from corporate bonds. The total return from bond portfolios in 2013 is 3-4% not 10-11.
3. Fading the rally & buying Bonds – Larry Fink on BTV Market Makers – Wednesday, January 2, 2013
Kudos to Eric Schatzker & Stephanie Ruhle of BTV market makers for an excellent interview.
How does he feel & what would he do?
- I am very disappointed, I am incredibly disappointed. This is a negative for markets. I have been bullish on markets, more bullish than most. I would be fading this rally myself; I would be buying bonds here for a tactical reason in the short term. I look at this as a very bad warning sign.
population was a big loser in this – what we got today was not sensible;
I would be truly concerned if we are gonna have a repeat of August
2011, I think that would be very
damaging and probably put our economy in a recession in 1st quarter.
Economy, Debt Ceiling & Foreign Buyers
- 1st Quarter will be very economically now. the economy will grow at less than 1% in Q1. I believe we are going to hold back even more (corporate cash on corporate balance sheets); I don’t see any impetus for a CEO to start investing in plants, equipment & hiring till we see the whole magnitude of this
- Foreigners are disappointed in results of last night; Japan & China, our biggest buyers of debt, are going to have extreme demographic changes; they are going to go from buyers of our debt to sellers; we have a short window of 10 years to start addressing our deficits; we have a short window – if we don’t do that, we are going to have spiraling high interest rates & we can’t afford that… we need to have confidence and this didn’t do it.
- We need a plan where we
restructure our spending & our revenues in a way that we have a
better path in 10 years to lower Debt-GDP, to be better prepared when
foreign investors are not going to invest in our Treasuries as they are
Underweight US for 3 months
- I would not
overweight the US over the next 3 months. I believe the US is going to
have more structural issues – weakening economy, great uncertainty about
how we will resolve the sequestration, how we are gonna respond to true
- I think there can be a lot of negative noise about the
economy… 2% growth in 2013 with 0-0.5% in Q1 and 2.5% in second half
assuming resolution in 2-3 months;
- Expect 8-10% return from stocks with 2.5% of that from dividends; muted forecast due to worries about 1st quarter;
Equities for the Long Term
- despite my pessimism in the short term, I believe the only place is to be in equities in the long term and I believe any selling is a buying opportunity;
- Fundamentals of
American corporations are very strong; fundamentals of American economy
are as strong as I can ever remember – housing, energy, our banking
system – we have great fundamentals in our country that no other country
in the world has.
- if you look at
banks’ earnings pressure; they have huge earnings pressure; the net
interest margin fell dramatically in Q3; I would expect net interest
margins falling another large chunk – we are talking about a real
problem; so banks are going to have to be much more aggressive in
lending dning this year; that’s what all these QEs have been about – – this is
one of the fundamentals why I like the US economy;
- their revenues
will be hard pressed to get but they will get higher PEs because they
will be of higher quality (without a lot of risk in capital markets –
due to Volcker/Dodd-Frank/Basel 3) – quality of earnings will be
substantially stronger than enfore – that is why bank stocks have done
so well and will continue to do well in the future in front of
declining net interest margin problem…
4. Trading range for 2 years – Leon Cooperman on CNBC FM & 1/2 – Wednesday, January 3
Leon Cooperman was up 32% in 2012, Scott Wapner of CNBC Fast Money informed us in his introduction. That’s superb performance indeed. Below are excerpts of his comments:
- to be up 2% on first day is a pleasant surprise. I‘ll take it, but I think it revolves around the fact that people are underinvested…
- I‘ve had some withdrawals in the last year from pension plans that were taking the money out. I asked them what they’re doing with the money, buying fixed income which I think is crazy relative to equities. The market always does what it has to do to embarrass the largest group of investors and my guess is the pain trade has been up over the last year and will continue for a while to be up until people get totally committed and they won’t have to worry about the other side of the equation.
- I wouldn’t be surprised if we remained in trading range environment for a couple of years until the global economy delevered and we set a base on more sustainable economic growth.
- I didn’t lose faith in Apple but we pay attention to the market and I didn’t like the way it was acting, to be honest it was one of the factors. We have not been keen on the financial policies. So i think their financial policies are somewhat destructive – all this cash earning nothing. Cisco accelerated dividend, Costco I think borrowed a few billion dollars to pay dividend to beat the tax increases. We didn’t see anything like that of Apple. It’s an issue of where they’re excessively profitable, they’re getting a premium phone from their carriers, the premium could start to diminish. I think also there’s probably nothing out there that could replace the iphone, and most people have the same form factor now, so that the uniqueness and the specialness of it is probably somewhat diminished but it’s a combination of fundamental and technical factors. Qualcomm is more ubiquitous, it’s a benefit from the growth of smartphones through any number of manufacturers, not just apple dependent, but Apple is a fine company, 11 times earnings we still own it, we are just not as big as we were before.
Cooperman also said that the Federal Reserve’s monetary policy has
created an environment where nothing comes close to offering returns
nearly as good as stocks.
- I think the bubble is in bonds,”
Cooperman added. “Buying U.S. government bonds is like walking in front
of a steamroller to pick up a dime.”
Cooperman revealed his top four stock picks for 2013.
- Chimera Investment
- Qualicorp, a Brazilian health care company
- Tetragon Financial
Cooperman’s No. 5 pick was a mystery stock, he said, citing primary responsibility to his investors. His other stocks are:
In the energy sector, Cooperman liked Sanridge Energy, Halliburton & Atlas Energy. Cooperman also liked Freeport-McMoran.
His health care plays included Express Scripts and Merck. Omega Advisors also owned AIG, Citigroup, JPMorgan and Wells Fargo.
5. $3 billion of Deficit Reduction by Q1 2013 – Roger Altman on BTV In the Loop – Wednesday, January 3
Roger Altman, the founder and chairman of Evercore Partners, was formerly US Deputy Secretary of Treasury in the Clinton Administration. Unlike most other gurus, Altman is positive about debt reduction efforts so far. His comments are below:
- We are doing quite a bit of deficit reduction, just doing it in stages;
- last year 2011, technically 2 yrs ago, the budget control act after that very messy fight over the debt limit; and it installed $1.1 trillion of spending cuts over 10 years; they are in law, they are in the pipeline; they are happening;
- now we have just seen approx. $650 billion of additional deficit reduction put in through revenue actions
- and thirdly, the sequester – the $1 trillion or slightly more than $1 trillion of spending cuts that was to take effect a little more than 24 hours ago, all on the discretionary side, only put off for two months through this agreement reached last night; so in 2 months there will have to be or there will be, in my view, another tranche of deficit reduction, either this sequestration will take effect then or some other package of spending cuts will substitute for it but I don’t see the Congress, particularly the Republicans, acquiescing to any further deferment of that sequester except a different packet of spending cuts is substituted for it;
- So I see a big 3rd round of deficit reduction occurring over the next quarter;
- and so if you add all that up, then you would have seen in round numbers, nearly $3 trillion of deficit reduction over the past 2 years and while that does not entirely solve the US debt & deficit problem, it takes a great big bite out of it;
- So if I am an investor, I look through all that & I like it; yes, this is a messy process and yes over the next 2 months or so, it is going to be messy again; but I look through all that and I see
- a big improvement in the debt-deficit outlook, not solved but a big improvement &
- see the fundamentals, especially looking over 2014-2015 of a much stronger US economy and I like it.
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