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 Bernanke Fed
Usually, the Bernanke Fed creates a rally both before and after the meeting. This week, we got the pre-meeting rally from Tuesday’s S&P low of 1538 to 1556 into the Fed meeting. But this time, the day after the Fed meeting was a down day. Unusual. Was it due to Cyprus or something the market felt about the Bernanke comments. We will know next week when Cyprus bows down to Boss Merkel.
What could possibly be a negative take on Bernanke comments? Well, one was provided by another ex-Fed-head and fellow Princeton professor, Alan Blinder on the Charlie Rose show:
- “There is nothing in the Fed’s arsenal that can add, say 0.5% to the growth rate.”
This is precisely our problem with QE4ever. If it doesn’t work, there is very little Bernanke & Co. can do to lift the U.S. economy to a higher growth rate. This week he almost admitted that they can do nothing to address the fiscal drag from the tax increase & the sequester. If that is the case, what can they do if Europe messes up badly? This may be why a sensible man like Mort Zuckerman was so bearish on BTV Rewind on Thursday:
- “I have been very cautious about this economy now since 2006; I think our economy is also very weak… we are growing at less than 2% despite the fact that we have $1,300 billion national deficit, a trillion dollar input of money into our financial system… the most stimulative fiscal & monetary policy in our history and we can’t even get the economy to grow at 2%…something is deeply wrong; the policies are not working… we better figure out what to do… because otherwise it will come apart at the seams… I hope that doesn’t happen… we are all hoping that doesn’t happen… right now the risk is way too great for what the consequences are… I have a theory in business – never take the slightest risk of a catastrophic outcome…we are looking at the possibility of a catastrophic outcome and we are taking risks…”
2. U.S. Stock Market
The great oracle of BlackRock, Larry Fink, scornfully dismissed the Cyprus issue by simply saying
“I really don’t care“. Then he reassured BTV about the U.S. stock market:
- “My view on the market sell off is we have had a huge rally and we are actually seeing quite a few clients take chips of the table and reap some of the gains..So to me this is just temporary. Cyprus is just one of the elements of .. we are going through this digestive stage right now.”
Mr. Fink did slip in the admission that “BlackRock is representing the Cyprus Government so I am not permitted to talk too much the specifics of it…”. But he added “They will come to some form of resolution.”
A smart writer could make some smart comment about the difference between Black Rock & Black Stone. We can’t. So we will simply state that Byron Wien, Vice Chairman of BlackStone, disagrees with the above market complacency of BlackRock Chairman/CEO Larry Fink. Mr. Wien told Maria Bartiromo that he is expecting a near term correction and that “it could be 10% at least“.
Lawrence McMillan of Option Strategist seemed cautious in his Friday commentary:
- “It always seems that the first volatility explosion sends a warning shot across the bow. That appears to be the case now. Tuesday’s low for $SPX was at 1538. That is now a support area. Below that, there is support at 1530. A violation of that level would likely signal the onset of a deeper market correction.”
- “In summary, this week’s action (rising volatility and weakening breadth) has taken some of the steam away from the bulls, putting the bears right on the verge of taking control — at least for a market correction. But so far, the bears haven’t been able to do so.”
The Italian election was the first shot across the market’s bow in late February. The Cyprus smackdown (assuming there is a quick & market friendly resolution as Mr. Fink says) is the 2nd. Much of the bullish commentary we heard about “small Cyprus” reminded us of the soothingly bullish comments in 2007 about how small the subprime mortgage market was. But more on Cyprus later.
Oh, yes. There is also the small & inconvenient distraction of awful news from FedEx, Caterpillar, Oracle et al. These sell to corporations. The wealthy consumer seems fine though as Nike & Tiffany results suggest.
Fundamental support for the U.S. Stock market comes from the push from a strong housing market and a growing U.S. economy. In clip 2 below, David Rosenberg pours not cold but cool water on the prospects of next up leg in housing. He also calls the U.S. economy as “squishy soft” and the stock market “fully valued“.
On the other hand, Meredith Whitney is perhaps even more bullish on U.S. stock market than Larry Fink. As she says in clip 3 below:
- “I have not been this constructive, this bullish on the U.S. and Equities in my career”
She loves Discover, is very bullish on Bank of America and not so much on JP Morgan (see clip 3 below).
3. U.S. Treasuries
Under the heading Your Daily Installment In Bond Market Hate, Jim Bianco quoted the comments made by private equity billionaire Wilbur Ross on CNBC Squawk Box on Friday:
- “Where I’d be very wary is bonds. If the 10 year Treasury reverts back just to its average yield (4.5%) from 2000-2010 , you know how much [the price] will go down?” Ross asked and answered, “23 percent, 23 percent. That’s a huge risk….We’ve been advising friends that it’s not worth getting a few extra basis points to take that kind of downside risk for a year or two while Bernanke keeps this quantitative easing going.”
These sentiments are almost identical to what hedge fund manager Leon Cooperman expressed a couple of weeks ago on CNBC Squawk Box. So far , the Treasury market refuses to oblige them. This week, yields on 30-yr & 10-yr Treasuries fell by 8 basis points each from 3.21% to 3.13% & 1.99% to 1.91% resp.
We believe much of near term performance can be attributed to the positioning of large market participants. If you concur, see clip 1 below for a discussion between Ray Stone of Stone McCarthy and Rick Santelli about the record low reading in the Stone McCarthy survey:
- Stone – “The most recent reading showed a decline in duration to about 97.5% relative to their bogey. This is the shortest they had been in some time, in one measure it is the shortest they have been since 2008…. this is an extreme reading, it is sometimes a contrary indicator.”
- Santelli – “…should the interest rates remain tame and they actually have been dropping, what you are saying is that this could be a contrary indicator that’s big for our viewers and traders out there. Because it can create a spiral where they need to run in and buy futures if rates start to drop“
Any one who has seen the behavior of 30-year T-Bond futures knows the violence of such reversals.
A month ago, Tom McClellan went from a bearish to a neutral stance on Gold. As we quoted him on February 23:
- “I had been officially bearish for my “current opinion” on gold as published in our Daily Edition, but now with the downside objective reached and an obvious oversold condition evident, I exited to a “neutral” stance. I don’t think it is time to catch the falling knife and bet on a big gold rebound.”
This week he seems more favorable towards Gold in his article Gold Priced in Euros Looks Stronger. What does this have to do with Gold in U.S. Dollar terms? He explains:
- “This week’s chart compares the dollar price of spot gold to the price measured in euros, a topic I featured here back in 2010. The key insight which every gold trader or investor should understand is that most of the time these two will move together, but when they disagree, it is usually the euro price that tells the truer story about where both are headed.”
- “Just recently, we saw the dollar price of gold make a flat bottom, but the euro price of gold made a higher low, which disagreed with the dollar price’s flat bottom.”
- “The dollar price of gold is still operating underneath a declining tops line. So based on that one single criterion, gold is still in a downtrend. But the equivalent line drawn across the same points on the euro price plot has already been broken. The euro price plot has already announced that the downtrend is over, and now it is already making a higher high.”
- “But when we do see these divergences, they are worth paying attention to, and the euro price is usually right about where gold is headed.”
5. Cyprus – Guru opinions
We claim no expertise in or with Cyprus. So we include below opinions expressed by people who are more knowledgeable about the Cyprus mess, beginning of course with the Chairman of the firm that is advising Cyprus.
5.1 – Larry Fink on BTV First Touch on Wednesday, March 20
- “I really don’t care. Cyprus is a $10 billion problem. Some thing of concern; it has some symbolism, impact on Europe but it is not a major economic issue. It is a 10 billion issue. It does remind us of the frailties of Europe. It does remind us the European fix will be multiple year risk. But the essence of Cyprus is more symbolic. BlackRock is representing the Cyprus Government so I am not permitted to talk too much the specifics of it . They will come to some form of resolution . But it is really a debate upon whether you want the EU becoming more controlling if there is to be funding in Cyprus and how the funding will be. who will bear some of the responsibilities; there are may rumors about who are the depositors in papers and many of the depositors in Cyprus are not EU members…. we are fine with bailing out EU members but this is quite a bit different.”
5.2 – Mort Zuckerman on BTV Rewind on Thursday, March 21
- “Cyprus – you are looking at an absolute accident that is about to become a tragedy… I don’t see how they stop it, no body is going to be able to bail them out…so many other countries in Europe that are going to have to be bailed out… where is the money going to come from? what is it gonna do to the Euro? what is it gonna do to the European Union? Its a huge issue that has not been addressed…not been resolved… and something is going to happen here that is going to happen very very quickly… this brings to mind the story from Hemingway that I was telling you… where he has two characters, one saying hey Harry, how did you go bankrupt? Harry says, two ways.. .first gradually and then suddenly… there is going to be an event that is going to happen and that is going to destroy the whole fabric, the sheer fabric of confidence in the financial system in Europe…. and who knows where that goes? we have not ever seen anything like that? It will have huge impact on the United States as well…”
5.3 – Jim Rickards on BTV Taking Stock on Thursday, March 21
- “real message to other countries is don’t ask for a bailout in a German election year… Cyprus is not Lehman Brothers…but there may be a Lehman out there somewhere… that’s the problem with cascades of these complex systems…10% of 70 billion dollars is 7 billion dollars…and the Russian part of that may be 2 billion dollars… remember there are 30 billion dollars of loans from Russia to Cyprus companies, you slap on capital controls in Cyprus, you can’t get your 30 billion, forget the 2 billion or so in hair cuts.. its a much bigger thing.. that could put a Russian bank in distress… so you don’t know where the Lehman is that’s the problem…”
We are convinced that America botched up the 2008 crisis, that Secretary Paulson allowed Lehman to go bankrupt was because it was a Presidential election year and the sitting President was not up for re-election. In any other year, President Bush and the American political system would have handled the problem much more aggressively before it came to a Lehman bankruptcy.
So we think Jim Rickards is making a very important point here. Would Chancellor Merkel have behaved differently had Cyprus exploded last year or say next year? How would Ms, Merkel react to a greater problem, say with Greece, Spain or Italy if it erupts this summer just before her election? For that mat
ter, does Italy get a new election and if so how do the Italian people vote? This summer could get very interesting.
We have all heard the expression the last straw that breaks the camel’s back. A similar and more important comment is about the last snowflake that causes an avalanche. That analogy is studied in a fairly new area called Complexity Theory, a study of Complex Systems. One of the axioms of Complexity Theory is that Complex Systems are prone to catastrophic collapse. This is what Mr. Rickards meant in his above “cascades of these complex systems” comment.
For a quick review of concepts of Complexity Theory, read our article of December 10, 2011 – Avalanches, Nuclear Reactors & Financial Markets – A Complexity Theory View by James Rickards.
5.4 – Christopher Mahoney (former Vice Chairman of Moody’s) in Project Syndicate on Friday, March 22
Mr. Mahoney’s article is titled Will Germany Turn Europe Into Latin America? A couple of key excerpts are below:
- “Germany wants Cyprus to default on its bank deposits. That wasn’t understood until now. That’s the black swan. In retrospect, we can see the explanation: bailout fatigue on the part of the thrifty German people; the desire to disallow the enabling of tax evasion by a eurozone member; and outspoken distaste for the Russian kleptocracy. But the truly dangerous part of the German rationale is the mistaken opinion that a Cyprus banking collapse is manageable. This is the same stupid complacency that led to Lehman….. A Cypriot banking collapse will have unpredictable consequences; it’s a shot in the dark. It will inevitably create contagion–maybe not immediately, but eventually. “
- “Southern Europe is at risk of going back to a Latin American-style financial system. Latin American depositors instinctively understand that you must keep your company’s money and your family’s wealth in a hard-currency deposit in a big bank in a strong country. Southern Europeans used to know this: it was called a numbered Swiss bank account. They are relearning this lesson.”
- “The West has spent the last sixty years building an institutional framework to allow global trade and capital flows. This has meant the dismantling of currency controls, capital controls, trade barriers and barriers to foreign investment…. If eurozone bank deposits now become subject to sovereign risk, that will reverse the whole process.”
The bailout amount of 10-15 billion euros is trivial. So why is Angela Merkel so determined to punish Cyprus? Christopher Mahoney opines:
- “Germans are very skilled at making things and being thrifty. They are economically admirable in every way except one: they have never accepted modern capital markets. They have resisted anglosaxon capitalism for forty years, and they still don’t accept it. Germany (like France) believes in intermediated financial markets which can be controlled by the authorities in order to ensure financial stability. They don’t trust independent market actors like hedge funds, US investment banks or rating agencies. You can make an argument that they are right, but it’s way too late. They lost that battle and global finance is now substantially anglosaxonized.”
Now you understand why Mr. Mahoney calls the Cyprus treatment as “punishing shoplifting with the death penalty.”
5.5 – Megan Greene on Bloomberg.com on Monday, March 18
- “…the Cyprus bailout deal makes a mockery of deposit insurance in Europe. This doesn’t bode well for the credibility of a European Union-wide deposit guarantee, one of the basic tenets of a banking union.”
- “The bailout agreement will fail to deal with the Cyprus problem and may reintroduce the risk of a financial collapse in the region, which had been significantly reduced. If this is the case, then market pressure on the weaker economies in Europe could reach levels not seen since last August, only this time against a backdrop of much higher austerity fatigue. That is an explosive combination.”
- Ray Stone on CNBC Santelli Exchange on Friday, March 22
- David Rosenberg on CNBC Fast Money Half Time on Thursday, March 21
- Meredith Whitney on CNBC Closing Bell on Monday, March 18
1. Survey at 97.5%, lowest reading since 2008 – Ray Stone on CNBC Santelli Exchange – Friday, March 22
Dr. Ray Stone is a co-founder and Managing Director of Stone McCarthy Research, the well known research firm.
- Santelli: listen, there’s many ways to look at a market an ascertain if the biggest players are bullish or bearish.…you ask portfolio managers much more in depth questions such as sensitivity of their portfolios to interest rates or duration and you look at actual versus targeted during ration. and you see it shrinking and dropping to 97.8% where it is the lowest in many years. can you explain?
- Stone – well, you’re exactly right. our survey goes back to 1991. It’s a weekly survey and we ask specifically about metrics like duration. that gives a better sense to what they are actually doing. The most recent reading showed a decline in duration to about 97.5% relative to their bogey. This is the shortest they had been in some time, in one measure it is the shortest they have been since 2008. What it tells us is that portfolio managers are thinking interest rates are probably going to go up. Therefore they want a short duration so that they don’t suffer too much loss in their bond portfolios. This survey tends to be usually a leading indicator or at least a coincidental indicator of bond prices. Sometimes when you get an extreme reading, and this is an extreme reading, it is sometimes a contrary indicator. So in a way we’re not sure how to interpret it. will this continue and yields rise, or is this something oversold and you can bounce back in the other direction?
- Santelli – now, considering we were operating in an environment that can be only described as Alice in Wonderland in my opinion, how does the Fed managing interest rates play into the interpretation of your survey? Or doesn’t it at all in your opinion?
- Stone – well, I’m not sure if they do look at our survey or not. the reading. But our survey is influenced by what the Fed may be doing. The reading I would take away from this is more and more of the participants of our survey are of the view the Fed may, sometime in the months ahead, start tweaking with the bond buying program, they may pare back the bond buying program.
- Santelli – now from my perspective. let me make an assumption. let me say in my opinion I don’t think they’re going to pull back in a big way any time soon from some of these programs. So I guess the question I’m going to ask you this, is the bearish news showing up in concrete terms, not just opinion in your survey, should the interest rates remain tame and they actually have been dropping, what you are saying is that this could be a contrary indicator that’s big for our viewers and traders out there. Because it can create a spiral where they need to run in and buy futures if rates start to drop. It could be a self fulfilling reversal of the original premise. Could that not be true as well?
- Stone – well, Rick, I think you’re right in thinking that is a possibility. We scratch out heads and wonder if that is the case as well. We don’t know for sure whether this reading is a contrary indicator or not. If you have reasons to be bullish, maybe that’s the way you want to interpret it. We don’t know. time will tell. Unlike you, I think there is some chance that the fed may tweak the bond buying program, maybe as soon as say the June FOMC meeting. right now they’re buying $85 billion a month. Maybe they pare it back go down $75billion or something. I took that away from Bernanke’s testimony.
2. Market fully valued, Economy squishy soft – David Rosenberg on CNBC Fast Money Half Time – Thursday, March 21
Wachner asked David Rosenberg “I mean, everybody seems to like housing. why don’t you like it?” Rosenberg answered in some detail.
- – well, it’s not that I don’t like it…. We’ve certainly had a housing recovery, but, remember, you know, back in the great recession, net household formation went all the way down to levels that were almost 400,000. the home builders took housing starts all the way down to levels that were close to 400,000, all-time lows, and so what’s happened since then is that net household formation has improved along with the economy, running, say, close to 1 million right now, and housing starts are close to a million so we more or less had a catchup in housing starts to where underlying demographic demand is.
- the question really is are we going to get net household formation to 1.3 million, 1.5 million, 1.8 million? it’s a situation if you’re a bull on housing or a bear, it is a matter of your assumptions driving the conclusions.
- you mentioned before existing home sales, but almost a quarter of those sales are institutional investors gobbling up homes and then re-renting them out. That’s not a natural buyer. The natural buyer is the first-time buyer. They are only representing 30% of total turnover activity, and so I would say this much. I am willing to become bullish on housing, but I have to see the natural buyers come back to the market to believe we are going to get another series of legs to the upside in this cycle. It’s not going to happen through institutional investor buying and re-renting.
- it will happen because first-time buyers are no longer 30% of the market which is abnormally low. yeah. they will have to cross above 40% and once i start seeing the home buyers, first-time buyers, the critical bottom of the pyramid that that really creates the whole chain of demand through the pipeline, when i start to see that cross 40%, hopefully it’s not too late by then, but that’s when I’ll be a believer that this thing has additional legs of the story. A 3% first-time home buyer ratio is really low.
Then Scott Wapner asked him “where are U.S. stocks going from here?” The answer was what you would expect:
- I think the U.S. stock market is fully valued. I wouldn’t be surprised if we basically fluctuate around current levels through the balance of the year.…There’s a huge correlation now between the direction of the Fed balance sheet and the direction of the equity market, and…when Bernanke said yesterday that QE is still in
vogue, that at least over the next several months, so that’s going to put a floor under the market.
- I still think that the economy is squishy soft, that we’re fully valued right now. It’s a question of where you want to be invested versus the major indices and the story that I’ve been espousing which has been dividend growth, dividend yield, dividend coverage in non-cyclical parts of the market are still going to be places where you can still make money over the course of the next several months.
3. Never been so bullish on US equities – Meredith Whitney on CNBC Closing Bell – Monday, March 18
Bank of America stock
- It was one of the most undervalued stocks going into the stress test. What’s amazing about this is very rarely do these big banks have both value, catalyst and momentum. And Bank of America had all of that. So up 20% just in the last three months. and probably another 20% from here. And it will continue having momentum. This catalyst, when I say it’s a stock to own, the stress test was a huge catalyst for this name. It’s been this stealth, you know – they announced cost cutting measures back in 2010. No bank has announced the kind of cost cutting measures that Bank of America did. It takes two years.
Where can BAC go?
- Easily $15, easily 15 over the near term. Over the next year and a half, in the 20s. This is not sexy stuff, it’s not revenue growth it’s all cost cutting, it’s all operating leverage.
- I don’t have a lot of revenue growth expectations for the big banks in general. but they are selling things, they’re getting smaller, they are going to throw off a lot of excess capital, buying back $5 billion worth of shares just over the next 12 months. So more of that to come.
Regulators & Banks
- you have to be bullish on U.S. equities here. Because you have so much offshore money coming into the U.S. looking for some place safe and sound.… the banks now being so well capitalized are also a great place to go and try to exact money, exact funds. That’s certainly what the consumer finance protection bureau is doing. I think that’s what AGs are going to do. It will be a steady beatdown. There’s nothing going to be as huge as the mortgage clickback. It will be an omnipresent concern. I think that’s why you see a certain portion of discount in the stocks.
- This is factored into Bank of America. But Bank of America has the most operating leverage of any of these big financials. So, yeah, it always bothers me. But they have so much stuff in the rear-view mirror as opposed to maybe some other banks.
JP Morgan & Discover
- They [JPMorgan] don’t have as much cost cutting to do as the rest of the group. So just because they’re probably in a better position than a lot of other banks, there’s less upside in my opinion.
- [Levin hearings] – it reminded me of how bad it was seeing Goldman Sachs in the same position. and it took Goldman a long time to get over that. and it will probably take JPMorgan a considerable amount of time to get over it.
- There’s over 30% opportunity in Discover inside of this year. Discover has been an unbelievable name. largely because it is taking market share from a lot of the banks but it’s also providing liquidity where the banks aren’t providing liquidity. So it’s an over 20% return on company. It’s one of the true growth companies within financials.
- you know, I was late to upgrade the stock. we’ve been constructive on the stock since 2010, but I was waiting for a better price point, entry point. And I was just wrong. Finally I pulled the trigger in December. they had an investor meeting last week. it’s all guns blazing on this name. I mean, this is — from a pure growth perspective, $20 billion market cap. it’s probably double that in the next two years.
The U.S. Stock Market
- without a doubt. I have not been this constructive, this bullish on the U.S. and Equities in my career.
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