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.
This market is running faster and better than even Walter Peyton. The Dow joined the other indices in closing at a new 5-year high. The S&P closed at 1485, a run of 83 handles from the day Harry Reid caused a sell-off, actually 100 handles from the 1384 after-market low on that Friday, December 30, 2012.
The best pattern description of this move came from Scott Redler (@RedDodT3Live) of T3Live on Thursday:
- “Nice technical action 2013- 2 strong days to start- 5 days digestion. Then 2 days continuation. Then 5 tight days- now new highs $spy”
So many people tweeted and wrote that the market is overbought. For example:
- Bespoke Investments (@bespokeinvest) on Thursday – “The last time >75% of S&P 500 stocks were overbought was on 10/28/11 when 80.4% of S&P 500 names were OB (overbought).”
- Lawrence McMillan of Option Strategist – “In summary, the market is overbought, and we expect a correction.
However, if $SPX makes strong new highs above 1475, more side-lined
buyers may come rushing in, producing a shot at 1500, despite any
A trend this powerful doesn’t care for what any one says. It goes on until it exhausts itself. So shouldn’t we seek answers from a guru who specializes in trend exhaustion? But wait a minute. We did hear last week from a master of trend exhaustion, a market-timer so respected that this week CNBC’s Fast Money gang joined BTV’s Adam Johnson in signing his praises. We speak of course of Tom DeMark, the creator of DeMark indicators.
Recall that last week, BTV’s Adam Johnson relayed Mr. DeMark’s “maybe” call on S&P. Adam relayed DeMark’s call that “13”th day of trend exhaustion could come “tomorrow” meaning Friday, January 11. In that call, Tom DeMark had identified 3 things necessary for a a definitive sell:
- Thursday was the “12” count, meaning 12 days of exhaustion have been counted.
- Close above September high,
- “Blow-off” move to 1492.
No. 2 is in the bag. We may get No. 3 next week. Or will it? The S&P closed at 1485. So it could get to 1492 with a steady move of couple of points each day. Will that suffice or does it have to be a one day big move? We don’t know. Apparently, we are not the only ones confused. Doug Kass (@DougKass), that veteran hedge fund manager, seemed confused as well. Witness his tweet on Thursday:
- Anyone current on Tom DeMark’s thinking in the last two days?
This widespread confusion after two consecutive weeks of TV appearances? Not quite cricket, Adam Johnson & CNBC Fast Money.
By the way, we know Mr. DeMark can make superb definitive calls. Look at the spectacular call on Apple on by Tom DeMark on Tuesday, January 15:
- bottom [in AAPL] is in today or tomorrow. We wouldn’t be surprised tomorrow to see Apple gap up above $494, $495 despite trading lower in the aftermarket today. and just move forward right from there and be strong for the next couple weeks. and reach $600. We think the low is in.
This turned out to be a fantastic call. Any one who bought Apple in the after-market, as Mr. DeMark was making the call, made 15-18 points the next day. Now the rest of Mr. DeMark’s call has yet to be proven correct. Perhaps, next week’s earnings could drive AAPL to much higher levels.
So why can’t Tom DeMark make such definitive calls on S&P? Perhaps he does and no body tells us viewers who keep BTV & CNBC in business. Our serious problem with BTV & CNBC is that they leave viewers with incomplete information that actually could be dangerous. If Doug Kass is confused, how confused must the individual viewer be?
We hope either BTV’s Adam Johnson and/or CNBC Fast money will inform viewers when the “13” day occurs in the S&P and when Tom DeMark makes his definitive Sell S&P call.
2. U.S. Stock Market Predictions
This week, CNBC Fast Money brought in 5 different experts to offer their predictions. Their comments are discussed in clip 1 below. Here we summarize what they said:
- Dennis Gartman– “You can take stock prices dramatically higher. In the fund that I manage, I‘ve been long S&P futures, short of treasury notes and equal dollar amounts. I am that way in my own account and I’m going to stay there.”
- Gary Shilling – He sees an eventual decline to 1040 on the S&P, a decline of 29%.
- Tom Fitzpatrick – “Dow could drop 20% from here.”
- Mark Hulbert – “we’re very close to at least some short-term weakness“
- Michael Santoli – “stock market is over-susceptible to any disturbance in the good news.”
3. U.S. Treasuries
Financial TV is full of gurus who are pronouncing the beginning of the great rotation from bonds to stocks. Dennis Gartman not only agrees with them, he has implemented his views by being long of S&P futures & short of treasury notes in equal dollar amounts. In fact, he made a more sweeping declaration this week (see clip 1.1 below):
- it [Treasury market] has fallen rather dramatically. it’s broken almost every imaginable trend line. The back end of the market, the bonds have been the weaker of the sector.it has the look that the 30-year bull market in debt has finally ended.
Going against this consensus makes Jim Bianco a very courageous man. Not only did he reiterate his “I like bonds” stance to Matt Nesto of Yahoo! Finance on Monday, he showed viewers how a 1.90% yield on the 10-Year Treasury note could provide a 7% capital gain (see clip 3 below).
Dennis Gartman & legions of BTV/CNBC guests could be right and we might see the end of the 30-year bond market rally this year. But that won’t happen, says a a long-time bull on the 30-Year Treasury Bonds. Read what Hoisington Investment Management wrote in their 4th Qtr 2012 Review & Outlook:
- Today, with long-term Treasury yields around 3%, our view remains the same. Interest rates may, will and have gone up based on periodic changes in psychology. However, underlying fundamentals have insured they have not been able to remain elevated. The fundamentals of insufficiency of demand and its root cause, over-indebtedness, still point to an environment in which long-term inte
rest rates remain on a path to lower levels.
4. EM & India
The Chinese recovery is probably the most important indicator of stabilization of global growth. In contrast to China, the Indian story seems a total mess. Everything you hear on TV or read makes you throw in the towel on India. But as we wrote on December 29, 2012,
- “In other words,
the macro story of India could be visibly pathetic for the next couple
of years but the micro story could be very bullish.”
This week, a respected voice in emerging markets went farther than us. Andrew Mowat of JPMorgan said the following in his interview on India’s ET Now:
- “Our expectation is Emerging Market Equities will give you a return in 2013 in excess of 15% and we think India will outperform emerging markets.”
- “India remains one the best picks in emerging markets.”
- “Buy the market with the exception of consumer staples. So it is a pretty simple story. We like nearly everything in the Indian market.”
But what about the mess we see & hear? Andrew Mowat says:
- And so, I see a place where people are familiar with all the risks and most of those risks are actually diminishing in India.
- Gartman/Shilling/Fitzpatrick/Hulbert/Santoli on CNBC Fast Money all week
- Larry Fink on CNBC Closing Bell on Thursday, January 17
- Jim Bianco on Yahoo! Finance on Monday, January 15
- Jim O’Neill on BTV Surveillance on Tuesday, January 15
- Andrew Mowat on ET Now on Thursday, January 17
1. Gartman/Shilling/Fitzpatrick/Hulbert/Santoli with Stock Market Predictions – CNBC Fast Money all week
We commend CNBC Fast Money, an old favorite show of ours, for their series of predictive calls on the stock market this week. We will cover each one briefly.
1.1. Long Stocks, Short Bonds – Dennis Gartman on CNBC Fast Money – Monday, January 14
- People are finally beginning to understand that fading the Federal Reserve Bank is going to be a very bad decision. Probably, you are going to see stock prices continue to move higher. I suspect you are probably going to see bond prices continue to move down, yields continue to move up and it could go on for quite some period of time. The corporate balance sheets are in very good shape, even consumers are in much better conditions,
- if we have any news that shows us we make some movement on the budget that is even, just modestly amenable, modestly applicable, i think you can take stock prices dramatically higher. In the fund that I manage, I‘ve been long s&p futures, short of treasury notes and equal dollar amounts. I am that way in my own account and I’m going to stay there.
- [bond market] it has fallen rather dramatically. it’s broken almost every imaginable trend line. The back end of the market, the bonds have been the weaker of the sector. That’s as they should be. Everything that I see going on tells me this is going to continue. I was there in August of ’81, at the bottom of the bond market, at the top of yields and this has the same feeling to it in the opposite direction. It’s been a 30-year, hard to believe, a 30-some year bull market in debt and for the first time in years and years and years, and my old friend Gary Shilling is probably going to call me tonight and say, Dennis, you’re wrong, because he’s been right for three decades, but it has the look that the 30-year bull market in debt has finally ended
1.2. S&P will fall to 1040, 29% decline – Gary Shilling – Wednesday, January 16
Gary Shilling disappointed us a bit. Melissa Lee & her CNBC gang disappointed us even more. They did not ask him about the comment by his friend Dennis Gartman the day before and Gary Shilling did not provide his view of Treasuries.
- Right now, we’re in a risk on trade situation, because you have what I call the grand disconnect – the money is being pumped out the doors by central banks. Investors are only looking at they couldn’t care less about the economies on the ground which are in recession like the euro zone, the UK, Japan, China deleveraging, U.S. limping along.
- The other thing here is the zeal for yield. That’s why junk bonds are up 20% last year, but investment grade only about 5%. This condition, I think, will continue until you get some kind of shock that returns investors to the reality of weak to recessionary economies. At that point, you go to the risk off. And that’s where I think you find that earnings with a global recession and stocks are vulnerable.
- I don’t know where it will start, $80 operating earnings on the S&P and bear market bottoms have averaged about 13, multiply that, that’s 1040, 29% decline from here.
- I think right now, the way we’re structuring portfolios, risk on but with caution. I would go for more defensive stocks, utilities, dividend payers, consumer staples, things like that. we also like natural gas, north American energy. there are other special things, we’re short the yen. but it changes dramatically. right. if and when you get the shock and you move to risk off, because when you don’t want to own equities.
1.3. Dow to drop 20% – Tom Fitzpatrick on CNBC Fast Money Half Time – Thursday, January 17
Tom Fitzpatrick is the Global Head of Citi FX Technicals.
- The S&P just moved to this new high above 1475. Very similar to the way we traded in 2007 and 2000. I wouldn’t be surprised if there’s a little bit of lag here and maybe up towards 1495,
- We’ll peak out around these levels and see a high to down low move probably in excess of 20%.
For a bit more detail, see Dow to Drop 20 Percent on CNBC.com.
1.4. Market Top Ahead? – Mark Hulbert – Thursday, January 17
Mark Hulbert is the editor of a well known investment letter called the Hulbert Financial Digest.
- I should say looking at the relative performance of various sectors, which is what we started out talking about, that’s more of an intermediate term indicator. That’s not telling us that the top has to happen any time soon like immediately.
- I do have other indicators, especially based on the sentiment among the several hundred advisers that I track, that is showing that indeed we’re very close to at least some short-term weakness. We’re seeing far too much optimism. in fact, optimism that’s higher than we saw at all throughout 2012. You have to go back to 2011 to see optimism as great as we’re seeing it right now. And every time before we’ve seen that kind of optimism, the market’s had some short-term weakness.
1.5. Three Downside Risks for Stocks – Michael Santoli – Friday, January 18
Michael Santoli of Yahoo! Finance believes that the stock market is “over-susceptible to any disturbance in the good news.” He identified 3 triggers:
- Sequester takes effect
- Citi Surprise Index falls further
- Earnings season.
Santoli is especially worried about the upcoming debt ceiling season:
- “I do think we’d have a little bit of a cold shower if we’re looking at the economic growth forecasts that involve major cuts, whether its sequestration, whether it is a short-term government shutdown,”
- “I’m not alarmist about what’s going on in D.C., but I feel like what we’re done is, the consensus has really been oscillating between over-anticipating terrible things from D.C. to under-anticipating them, and I think we’re in the latter situation right now.”
2. Two best global opportunities in our backyard – Larry Fink on CNBC Closing Bell – Thursday, January 17
Larry Fink takes a victory lap for his buy stocks recommendation of last year. There is no trace of his “extreme disappointment” and “stay away from US” comments on Wednesday, January 3 (clip 3).
Two Best Global Opportunities
- I love Mexico. Mexico is an incredible growth story. Its economy is going to grow between 4% and 4.5% this year. It’s an energy story. It’s a cheap labor story and it’s a great location story relative to the United States. So Mexico is a great place to be.
- As I’ve said for the past year, the US will continue to be a great place to invest. We are near a bottom in our housing market, we are seeing a real stabilization in housing, our banks are in great shape and we are going to be an incredible energy and manufacturing story over the next 10 years – having natural gas at $3 a BTU vs Europe at $11 and Asia at $15, we have a distinct advantage over most places in the world. You are seeing large scale global companies moving manufacturing to the USA; these are very high quality jobs and we are going to start seeing more and more manufacturing back in the United States – its gonna take 2-3 years for all to play out .
- I see some every large seeds for great success in the United States and I actually think in the next 2 years we are going to see a reduction in our unemployment rate ; obviously that’s gonna translate into the Fed taking its foot off the pedal; its gonna have other issues around there depending on how that plays out we are going to have some sea changes but in all these outcomes subject to Washington getting their act together in the near term. I am bullish on the US stock market.
Rotation from Bonds to Stocks
- we saw behavior change with investors which I kind of talked about over the last year. I think investors are looking at bonds today and are realizing that bonds are not a risk-free asset anymore. in come categories, if they move 15 basis points, you lose your entire year’s return, and you’re seeing behavior where investors are now saying i need to diversify a little bit from bonds into equities. we used to call that a risk-on trade, and I’m not sure that should be called a risk-on trade anymore. It’s really now diversifying your mix of assets, and so we’ve seen a very large increase in flows and equities, probably the largest we’ve seen in years, and most of those flows are not going in the active management side. they are going into index and into etfs, and — and we’ve been a big beneficiary of that philosophical change and a real investment shift into etfs. yeah.
- importantly, maria, we’re seeing systematic behavior change. we’re seeing some large-scale global investors are buying equities, and they are doing it more in the index side, and they are doing it both in the index — institutional index funds, and they are doing it in etfs where they can have much more liquidity to move around that allocation.
Uncertainty in Washington
there’s continued uncertainty around Washington and the actions of Washington. I don’t believe that we’re going to see a continued slowdown in the global economy though. You know, the movement, what you’re seeing in Japan and the Japanese stock market starting to reflect that, the Japanese government trying to really reboot that economy. You’re seeing the Chinese government and the new leadership trying to reboot their economy. So, if any, you’re going to see probably an accelerated economy n.parts of the world. I still think we’ll have structural problems in Europe and all the uncertainty about the United States so I don’t believe it’s going to be as bad as it sounds.
3. 2% on 10-year Treasuries could give 7% return – Jim Bianco on Yahoo Finance – Monday, January 14
Jim Bianco told us last week that he likes Bonds. This week, he was more explicit in his conversation Matt Nesto of Yahoo Finance. Larry Fink told us in clip 2 above to buy stocks and not bonds. Jim Bianco tells us to buy bonds and not stocks. In clip 1.1 above, Dennis Gartman pronounced the 30-year rally in bonds as finished. Jim Bianco disagrees and says that rally is still intact.
Watch this 4:40 minute clip. It is worth your time. Below is a summary of this conversation from Yahoo Finance:
- The list of people proclaiming “the death of the bond market rally” is long and strewn with bodies. Sure, we’ve had a few head fakes along the way, but for the most part, a 30-year rally in bonds/slump in yields is still in tact, with rates wallowing near historic lows. While most investors concede that rates ultimately have to rise, Jim Bianco, president of Bianco Research says that time isn’t here yet.
- “Never get bearish on something where somebody with a printing press has promised to buy $85 billion a month,” he says in the attached video, a thinly veiled reference to the quantitative easing action being taken by Federal Reserve chairman Ben Bernanke.
- By his math, savvy traders who buy 10-year notes when they yield rises above 1.9% would be able to pocket 2 to 3 times as much in gains once (and if) that yield comes back down to 1.5%; which he expects it will. “It’s not great but definitely not bad,” he says of the hypothetical 6-7% return, predicting that the upcoming debt ceiling debate in Congress at the end of February will be nasty and the ensuing turmoil will likely send investors fleeing for the safety and certainty of the Treasury market. “The least probable scenario is that they’re going to shake hands, sing Kumbaya, and we have a deal and it’s done forever,” this Chicago-based analyst, technician and strategist says. “Until we get past the debt ceiling issue it will be supportive of the bond market.”
4. BoJ must demonstrate seriousness – Jim O’Neill on BTV Surveillance – Tuesday, January 15
The detailed summary below is courtesy of Bloomberg TV PR.
O’Neill on whether there is further to go in yen weakness:
- “We traveled a long way since late November. There are some classic indicators suggesting it is a little bit oversold. The next twist is not quite as straightforward of a call. Obviously a huge focus on the BOJ meeting on the 21st and 22nd. In order for us to sustain further movement, the BOJ has to show that it will take this 2% inflation target seriously. Rather than it just being a goal, it has to be a target. And I think it is important that we see continued evidence of the U.S. doing better. I have had this view for a while that the scale of what Japan was thinking about was bigger than what most people realize. That part is now translated. To really get dollar yen north of 100 and higher, we need to sue the other side of it, that the BOJ is serious and that the U.S. is managing to strengthen despite fiscal tightening. Nothing is ever a one-way street, but the basis is very powerful for this story.”
On whether central banks can follow up with the policy action that is built into the markets right now:
- “Throughout my career a lot of the most important impact of policymakers has just been the statement of the intent, not the size of what they actually do, particularly involves an intervention, is not necessarily the key thing to watch…The scale of what the Japanese policymakers are talking about, particularly in the context of inflation targeting, all you need is people to believe it and off you go.”
On the massive move in the Swiss franc yesterday:
- “I think linked to the yen weakness there are many collective things starting to come together. I think the decline of the franc is showing there is growing more retail confidence maybe that the European situation is stabilizing in a stronger way than perhaps many people talk about, otherwise it would be hard to understand the franc move. Of course more broadly, the franc for the whole of my career–over 30-odd years if not longer–plays this critical role of being the true test of global risk aversion. The fact that the franc weakening so much in the short space is another sign on top of others that we’re seeing a bit of a rotation of investor psychology about the whole fragility of the world or less fragility.”
On whether the rotating door in Japanese government diminishes credibility in what Prime Minister Abe actually says to the markets:
- “It is a pretty good point. You have to be careful what any political leader says and what the consequences are in terms of doing, but I think the thing that is so intriguing about this, [Abe] comes into power at a time where he can determine the new Bank of Japan governor. They are making it pretty clear that if the BOJ does not ship to his own accord, they will effectively take over the leadership by putting in the person they think is relevant. There have been further comments said about that in the past two days as well. That is why I think many market participants are giving it so much credence, not simply because of the persuasive powers of Abe. The next twist is quite how powerful the BOJ’s own decision making path appears after the meeting on the 21st and 22nd. If they play the typical role we have seen in the past where they say we hear you but there is nothing we can do about it, then the markets might have some period of disappointment. I don’t think they are going to do that. It seems to me that the pressure they are under…from corporate Japan is much bigger than I can recall in a long, long time.”
5. EM will give 15% return & India will outperform EM – Andrew Mowat on ET Now – Thursday, June 17< br>
Adrian Mowat is the Chief Asian & Emerging Market Equity Strategist at JPMorgan. He spoke to India’s ET Now in this detailed and frank conversation. This is an example of an almost perfect interview. The anchors ask short, direct questions and let Mr. Mowat speak at length.
- Our expectation is Emerging Market Equities will give you a return in 2013 in excess of 15% and we think India will outperform emerging markets.
- We do expect [interest rate] cuts in the first quarter; there will be a modest amount of easing by the Reserve Bank of India. The other factor investors should look at is what is happening in external debt markets. There is a lot of enthusiasm for emerging market credit and we think Indian companies will be borrowing more money abroad and allow market interest rates to fall.
- India remains one the best picks in emerging markets. You are going to see a cyclical uptick in industrial production from low levels of 2012, we are going to have monetary easing, we have a very competitive currency, significantly better policy environment and a market that looks interesting across nearly every sector including IT.
- So the only part of the Indian stock market we are cautious on is expensive consumer staples. But the balance of the market looks very good.
- That’s in contrast to China. The macro environment in China has definitely stabilized and improved but the index composition is less attractive than India.
- We do see strong earnings growth. even with last year’s economic problems, we got double digit earnings growth out of India. Compare that with no earnings growth in emerging markets. So we are expecting high teens earnings growth out of India. We do expect PE-multiple expansion and that’s how you get to this good return.
- We think the fundamentals will attract flows from international investors or FIIs as well as we expect domestic investors to turn from being net sellers to being net buyers as interest rates fall in India and the local savers no longer have the option of high fixed deposit rates.
- India still has a relatively high inflation rate. We think a degree of that is structural that reflects very weak infrastructure. What the government needs to do is try to deal with these bottlenecks and in order to do that we need progress on the policy front. We are absolutely seeing that progress. We have a very interesting situation where the Prime Minister is chairing the investment committee which is reviewing the progress of major projects in India. And we think this hands-on approach is going to allow India to be much more effective than it has been in last couple of years in implementing these large projects.
- And so, I see a place where people are familiar with all the risks and most of those risks are actually diminishing in India. Now if we look at an external risk, that would be the current account deficit that will continue to expand. At the moment, I am not too anxious about that because there is plenty of demand for EM fixed income. But if there was a change in the global bond market, then India would be vulnerable to that because of this large current account deficit.
- Buy the market with the exception of consumer staples. So it is a pretty simple story. We like nearly everything in the Indian market. But to specifically focus on a few things, we continue to like private sector banks, we like engineering & construction companies. They tend to trade on improvement of order backlogs and we are optimistic we are going to see more orders for capital equipment in India as we go through in 2013. We also continue to like building materials.
Send your feedback to Editor@macroviewpoints.com @MacroViewpoints on Twitter