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. 2007 all over again!
The more things change, the more they stay the same. A trite phrase but one that describes perfectly both the reason for the 2005-2007 credit bubble and today’s raison d’etre for QE4ever. That’s what we felt when heard Alan Greenspan speak with Maria Bartiromo, the 2007 cheerleader for “global growth & global liquidity” (see clip 1 below):
- “the stock market is the really key player in the game of economic growth at moment”
- “stock prices are not only a leading indicator of economic activity – they are a major cause of it. The statistics indicate that 6% of the change in GDP results from changes in market values of stocks and homes.”
This is the logic that drove Greenspan to keep monetary conditions so loose that a credit bubble was, in hindsight, a foregone conclusion. This is why Bernanke promised again this week that his stimulus will continue even after and despite this rally. In other words, QE4ever will be forever because once the stimulus is removed, he knows that the stock market will keel over.
No wonder the U.S. stock market is so “resilient“, another word that has been resurrected from the fall of 2007.
- The U.S. stock market will grind higher because of the continuous stimulus from Bernanke and in turn,
- the “resiliency” of the stock market, the economy’s leading indicator, will keep persuading Bernanke that his path is the right one.
This is called a Virtuous Circle, we are told. This prevailing wisdom was tweeted by Scott Minerd (@ScottMinerd) of Guggenheim partners on Friday after the close:
- “The US economy has so much momentum that it’s hard for me to see how fiscal headwinds will knock the pegs out from under it.”
This is hours after the news from Wal-Mart created a transient drop of 40-50 points in the Dow on Friday afternoon. The quotes in the Bloomberg story were depressing:
- “In case you haven’t seen a sales report these days, February MTD sales are a total disaster,”… “The worst start to a month I have seen in my ~ 7 years with the company.”
These quotes were from Jerry Murray, Wal-Mart’s vice president of finance and logistics. The Bloomberg article had a quote from Cameron George, senior vice president of Wal-Mart U.S. Replenishment:
- “Where are all the customers? And where’s their money?”
If you get worried by these quotes and the fact that Wal-Mart knows more about the U.S. economy than any economist, you just don’t get what the stock market got on Friday afternoon. The Wal-Mart economy is not the stock-market economy, not the wealth effect economy that Bernanke-Greenspan are focused on or what Scott Minerd cares about. As long as the stock market is resilient and housing holds, the U.S. economy is deemed fine.
That is why the U.S. stock market grinds higher despite the ugly behavior of European stock markets & European Banks, growth-sensitive areas of U.S. credit, Aussie Dollar, the Euro and now commodities. Every day, mini sell-offs in early afternoon get cured with buying into the close and market timers rest easy with new highs in the S&P.
2. “PE ratio cannot go down very much”
This is not from any sell-side strategist who has to make a living by appeasing her or his brokers. This is one of the 2-3 memorable quotes from the maestro himself (see clip 1 below):
- “The…equity premium …. is close to the highest number probably in American history. This means that it’s going to be very difficult to get stocks down“.
- “.. I should say the price earnings ratio can’t go down very much“
Dr. Greenspan added:
- “I think the odds of it [sequestration] occurring are very high….. if the stock market can hold up through this , I think the effect will be rather minor.“
The conditional “if” shows that the maestro remains modest unlike the financial gurus who populate financial television. So far, the sensible course has been to follow Greenspan and not anticipate the correction. And that is still view of Lawrence McMillan of Option Strategist:
- “This market continues to plod higher without much fanfare. It doesn’t pay to anticipate a correction; there are already plenty who have been carried out on their shields trying to do that. Rather, we will wait for some confirmed sell signals before altering our still-bullish view.”
On the other hand, John Taylor of FX Concepts opined on CNBC Fast Money (see clip 2 below):
- Our stuff says March is going to be an ugly month and we thought the peak would come around Valentine’s day and we’ve been riding that for a while and I don’t know what’s coming around the bend.
During the last few weeks, the U.S. stock market has behaved like a step function and come out of every 3-4 day choppy pause to rally to a higher plateau. Will we see that next week or will the Fed minutes or another catalyst create an air pocket? But even the fo
lks that are worried about March are not bearish on stocks beyond a short term correction. As John Taylor told CNBC Fast Money:
- “I don’t think there’s a long-term bear case on stocks. Actually I like stocks into the fourth quarter.”
And by the way, Savita Subramanian of BAC-Merrill Lynch says the “tenor” about the stock market rally “is very bearish” (see clip 4 below) which Dan Nathan of CNBC Options Action called “completely mental“.
3. U.S. Treasuries
Even the Treasury market was unmoved by the Wal-Mart news. Despite what seems like an over-sold condition, long duration Treasuries refuse to rally. The prevailing consensus is that rates are beginning to normalize, the U.S. economy has underlying momentum and that the Fed will be done by year-end. This assumes that the fiscal drag will not affect the U.S. economy, a la Greenspan & Minerd, and that Europe’s slowdown will not create a ripple in the U.S. economy.
If all this is true, then Treasury yields should go up in a linear fashion till they get to a normalized level, or at least 200-250 bps higher. But if there is any hiccup or if the markets believe there will be a hiccup, then you could get a squeeze of the steadily accumulating short Treasury positions.
4. Precious Metals & Commodities
Not only is growth of U.S. Economy virtually guaranteed but that growth is guaranteed to be without inflation & without pricing power or demand for commodities. That was the message from this week’s action in Gold, Silver, Oil and Iron Ore. Gold & Silver trade horribly. Oil & Oil Services took a hit on Friday and the action in CLF, the iron ore giant, was just ugly. There is no oomph in agricultural commodities either.
You got to hand it to Jim Rogers and those who listened to him last week about his “absolutely not” buying Gold call. This Friday, Carter Worth, resident technician of CNBC Options Action & of Oppenheimer, said Gold will go to $1,500.
As we said, the U.S. economy & the Stock Market are in a Panglossian world, a world with guaranteed & resilient growth without any inflation. The only trouble is an argument that the action in European GDP and commodities suggests a deflationary edge to this picture.
But as long as U.S. Stock market and housing keep humming, no reason to fret.
- Alan Greenspan on CNBC Closing Bell on Friday, February 15
- John Taylor on CNBC Fast Money Half Time on Thursday, February 14
- Lloyd Blankfein on BTV Market Makers on Tuesday, February 12
- Savita Subramaniam on CNBC Fast Money on Thursday, February 14
1. Difficult to get stocks down & PE can’t go down very much – Alan Greenspan with CNBC’s Maria Bartiromo – Friday, February 15
The 2nd & 3rd sections below explain the credit bubble of the 2006-2007 period, in our opinion and explain why Bernanke is at it again.
Sequestration on March 1
- well, I think the odds of it occurring are very high. In fact, I find it very difficult to even think through a scenario in which it doesn’t happen. the effect is not going to be horrendous, but it’s going to be marked.
Importance of the Stock Market
- At the moment I think the critical issue is how does it affect the stock market, and the reason for that is the stock market is the really key player in the game of economic growth at moment because there are two factors are stock prices which I think are important to understand.
- The first is that the so-called equity premium, that is the rate of return that equity is required is a very high number. It is the highest number, close to the highest number probably in American history. This means that it’s going to be very difficult to get stocks down. It’s very much like saying the earnings price ratio is at a level which it cannot basically go down very much, or I should say the price earnings ratio can’t go down very much, and so what you have to do here is to find a way to get through this particular pretty much expected event which will have a negative effect on the economy, but if the stock market can hold up through this, I think the effect will be rather minor.
- let me just say one more thing, Maria, which I think is relevant to this issue. The data show that stock prices are not only a leading indicator of economic activity – they are a major cause of it. The statistics indicate that 6% of the change in GDP results from changes in market values of stocks and homes.
Wealth Effect & the Consumer
- the wealth effect is actually probably the reason why consumers are actually holding up more than one would expect given the payroll tax increase because if you look at some of the data, you can — it’s very hard at this stage to find a payroll tax increase. There’s one argument which I like that says that nobody will really know that they had a payroll increase until the middle of the month like now and that we haven’t yet seen the impact. I doubt that, but I’m willing to have my mind changed if the numbers change.
- I think the problem is so severe at this stage that unless we come to grips with it
in a large way, we’re running into very serious trouble. I don’t want to say that small cuts here and there won’t help, and I don’t want to say that the crisis is sitting right over the edge of our nose, so to speak, but this is a holy unsustainable type of economic series of events that are playing out there. I know everyone thinks it’s going to be easy to bring the deficit down. but we have picked all the — all the low hanging fruit, and the low hanging fruit is gone. And the result of this is to get the budget deficit down it’s going to require some very unpopular actions, and I’m worried because the baby boom generation is now only beginning to retire and we’re getting a shift from highly productive baby boomers working in the economy to retirement. That has a double whammy effect. I don’t think we’ve actually fully understood how big a deal this is, and we’re — and we’re assuming that we’re going to be able to repress the problem and address it in time. The fundamental issue, as everyone has been saying, both democrats and republicans, is entitlements.
Economy in 2013
- I think, first of all, it started off reasonably well in the sense that the weekly data are picking up. industrial production, as you know in January, was not very impressive, but the weekly data are picking up, and very importantly what tends to follow that weekly carloadings, and the carloadings are showing a modest increase in industrial activity into February, and the very actually quite useful purchasing managers indicator for new york was positive as you know, and that’s a good sign.
- the difficulty I have with the longer-term outlook is that, as I mentioned many times in the past, that we’re living in a two-stage economy.
- one is an economy in which only those goods with a life expectancy under 20 years are included, and
- secondly a very significant and dangerously low level of very long-term assets which, unlike the less than 20 years, which you’re doing okay, have been cut in half, and that’s where all the problem is, and unless we get enough confidence going back for longer-term investment, we are not going to find ourselves back at 3% or 4% economic growth.
2. March is going to be an Ugly Month – John Taylor on CNBC Fast Money Half Time – Thursday, February 14.
Impact of Europe:
- [impact of Europe] My feeling is we have an Italian election in two weeks, and a completely weird, outlandish party is running like second and the Spanish situation continues to deteriorate.
- [Berlusconi] is not the weird one, it’s a guy named Pepe Grielo. It puts Berlusconi into the rational and normal. Very low bar. How bad does it get there?
- Our stuff says March is going to be an ugly month and we thought the peak would come around Valentine’s day and we’ve been riding that for a while and I don’t know what’s coming around the bend.
- I don’t think so. It’s done for the next month, I think it will drop down into maybe 1.29, 1.30 again and then it will rally again.
- Buy gold on March 31st, say that, right, because when everybody gets a little depressed actually gold goes down. When people get optimistic, gold goes up and I think that March is going to be a depressing month.
- I don’t think there’s a long-term bear case on stocks. Actually I like stocks into the fourth quarter, but I’m much more of a market timer. Our stuff is saying the time is bad right now and we did pick Valentine’s day for a peak and seems to be there, although it’s not here in the U.S. yet.
China & BRICS
- yes, I think we’ll have inflation problems, interest rates will jack up and those currencies will be strong and those commodities will be strong and everything will be fairly good. this will be a good year. 2014, I don’t know, that’s too far away.
Short Yen Trade:
- I think that trade is done for a couple of months, but i think we’ll go over 100 by the end of the year and this could be a bigger deal even in the longer term so the question is, how quickly do you want to get paid. the yen has moved more in the last three months than it did any other time in history except for 1995 and that was when it first hit 80…. I think the fundamentals are great for this move but it’s gone too fast and i can get it cheaper in a month.
- that’s problematic. the neighborhood is really angry. we’ve seen Korea break lower in the last week and a half or two weeks, and the Chinese are quiet with year and stuff but they’re not happy.
Best opportunities outside US to invest?
- well, my feeling is it’s Latin America, an unusual place. Mexico, Brazil, Chile, Columbia all look
good.…commodity producers, they look good, not too much debt, people, you know, I’m talking internal debt as well as external debt so there’s a lot of growth there…..I think the next catalyst is really the oil area; I think that you know, the glacial but we’re moving in the direction that their oil business is going to open up.
3. $2.3 trillion debt reduction & most nimble economy in the world – Lloyd Blankfein with BTV’s Stephanie Ruhle – Tuesday, February 12
An excellent interview in our opinion. Stephanie Ruhle was able to ask real questions and engage in a dialog because of her prior experience as a credit salesperson at Deutsche Bank. This is why we think Financial shows must all have a professional working as co-anchor with a journalist. The summary below is a part of the excellent transcript provided by Bloomberg TV PR.
On whether the U.S. can be considered nimble given the political gridlock in Washington right now:
politics are tough and some of it is chaos. And I know we’re providing
great theater to the rest of the world who could point at us and be
amused by it. But the fact of the matter, for all the bad politics that
we’re seeing, a lot of stuff is done. Our banks have deleveraged.
Consumer has largely deleveraged. Even the budget deficit, which we’re
fighting over hammer and tong, we did $1.5 trillion of deficit reduction and the sequestration builds in another $1.1
trillion or $1.2 trillion, and that will happen. It may not be the
sequestration. Hopefully that could be put off. It may not be. But if it
is put off, it has to be replaced by other deficit reduction. So for
all the noise, the US will have done something like $2.6 trillion of
deficit reduction, and the man in the street thinks nothing was done.
It’s not a neat process. It’s not enough. More has to be done, but it’s
not nothing, and it’s more than anyone else in the world did.”
US a Nimble Economy
- Look, what’s
the most nimble economy in the world when you look at the problems in
Europe? The most nimble economy in the world is the US economy, the US
economy which makes its adjustments very quickly, industries sort itself
out, deleverage faster than any other economy in the world. You’d have
to say the biggest economy in the world by far, the US economy, is also
the most nimble economy. Nimbleness is not always the enemy of size or
On whether he ever wonders why CEOs like Tim Cook don’t get the same scrutiny that bank CEOs do:
- “I’ll tell you, here’s another slogan that’s trite. It is what it is. We are a very key part, again, of our own industry and help drive other people’s industry. When things go well, we’ve gotten a lot of credit. People of our industry also have made a lot of money in the past when things went well. You could debate who caused what and how many people contributed, but we were certainly near the scene of an accident, and you can debate who contributed and what other things, who could have told what, but you know something? The trauma was very recent. There’s going to be a lot of focus on us for a while, and you know something? That also goes with the territory. So pointing finger and acting defensive and saying, gosh, I wish it wasn’t here, the way I’m trying to live is I want to spend most of my time learning forward trying to help finance businesses that will improve the economy and those companies, that will improve the health and welfare of people in this country and world. And guess what? I’m not going to outrun the legacy issues, and we’ll have to deal with those also. But it’s not going to be 90 percent legacy, 10 percent the future.”
On whether he believes he gets enough credit for how innovative Goldman Sachs is:
- “The fact of the matter is we are in an industry that will always be somewhat controversial. In most industries, you make a strategic decision of consequence once or twice a year. We make strategic decisions about ourselves but also for our clients and when we do it for our clients, we stand by them and we own that decision also. And a lot of them will be right. Some will be wrong. And even the ones that are right, won’t look good for a long time. So we are always going to be a bit in the limelight and some people will wish we had done things differently. Why did you recommend this company be sold to that company? Why did you recommend to somebody that they not finance or expand their business? Why did you recommend to somebody that they do something domestically or overseas. We will always be second guessed on these things. I think some of that comes with the territory throughout a very challenging period. I am always reminding myself, all you can do is the best you can do. By and large, our clients have voted. They have stuck with us and we seem to do ok.”
On how Goldman will have as good a year as 2012 when high yields could be facing a bubble:
- “Certain things worked better last year than we thought, and certain things worked worse than we thought. Now it’s nice to say – I’ll say something – that our returns were nearly 11 percent, but in the history of our firm and what our expectations are, it’s only against the backdrop of very lowered expectations that that looks like it was such an extraordinarily good year. It wasn’t. We still have a lot of work to do, but I wouldn’t have called last year a first quartile opportunity set or even a second quartile. It certainly got a little bit better towards the end of the year. But you commented and others have commented about the low volumes in the fixed income market, in the equity markets, the low volume of M&A for this part of the cycle…”
On where Goldman will make money this year:
- “Well, guess what? A lot of the year when you talk about yourself and you want to extol how great everything is, you talk about how wonderful things are. The minute you turn to what’s going to happen next year, you start to really be happy about all the things that are not going well so they can improve. My expectation is the cycle does shift and M&A will get better and the volumes will go out, if not next quarter then the quarter after. But you know something? A lot of things in the world have changed forever, but a lot of things are cyclical. And one of the things in the world that are cyclical now is people’s anxiety about the future, the low state of security about what happens next, and consequently, the low level of activity is more of a cyclical thing than a secular change. Other secular changes we adapt to wholeheartedly, like technology, like regulation, like the demographics of the world that lead to BRICs becoming very important economies. But certain things like volume and low expectations and anxiety about the future, those are cyclical things that will come and go.”
4. “tenor is very bearish & strategists are luke warm” – Savita Subramanian on CNBC Fast Money – Thursday February 14
Savita Subramanian is a strategist with BAC-Merrill Lynch. That firm has a Sell-Side indicator that measures the level of optimism among sell-side Strategists. It is a contrary indicator as we recall from the days of Richard Bernstein as Merrill’s strategist.
This indicator has had its fifth gain in the past six months. So is it now signalling caution? Ms. Subramanian says no.
- what this means is that strategists are get a little bit more optimistic on equities. but I still think that the tenor is very bearish. So what we look at is just the average equity allocation that strategists are recommending on wall street. we found this is actually, sadly, a reliable contrary indicator for what you should actually do with your money. The idea is that when everybody is saying buy equities, chances are all that good news is probably priced into the market, and the market is likely to disappoint.
- Today I would say the strategists are still fairly luke warm, and, in fact, quite negative on equities. The average allocation to equities that’s recommended is sub 50%. So strategists are really recommending an underweight in equities and slight overweight in bonds and cash which I think still suggests this rally has been met less with optimism and more with skepticism.
- It’s not that we’re all a bunch of idiots, hopefully but really the idea that when everybody is looking at the same stuff, and all of the data is
overwhelmingly negative, and everyone is talking about it, that’s not going to be what blind sides me.
- I think what this sentiment indicator is telling me is that we’re not at a point where everybody is all in. we’re still at a point where everyone is pretty nervous and there’s still more flows that are going to come.
- I think we’re at a mid cycle pause right now where we have avoided a recession. last year it was like everything that could go wrong didn’t go wrong and we managed to avoid a recession. we sort of got to a better place. this year earnings were looking pretty good. I think we’re kind of heading into that cyclical recovery type of a market where you want to be overweight the gdp sensitive sectors and stocks like industrials, tech, energy. I think energy could do something pretty interesting this year because it’s kind of a global cyclical play. The sectors I would avoid are expensive bond proxies, namely utilities and telecom. I think they have run up, it’s all about a search for high yield and I think we’re kind of at the end of that ride.
Dan Nathan, a trader with the CNBC team, scoffed at this idea:
- I think that stuff is completely mental. Everybody I listen to, see, anywhere, read, is bullish to all ends and the market is stuck at 1500-1520. Every time in the last 15 years, the S&P has gotten a 1600, it’s been massively rejected and had a 30 or 40% drawdown. I don’t think putting new money to work makes a whole lot of sense.
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