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. Market Intelligence
There is no question that the U.S. stock market has been in total sync with the underlying indicators of the U.S. Economy. Friday’s Non Farm Payroll report was the perfect opportunity for the market to suffer because it had priced in too much of a recovery. Instead, the 236,000 jobs number showed that even the whisper number of 200,000 was too light.
Is this Fed-induced or not? Is it transient rise like in 2012 or not? We leave that to analyzers of productivity like David Rosenberg, Lakshman Achuthan or ECRI fans like John Burbank of Passport Capital. We will focus instead on the market before us and not on the underlying economy.
We remember a similar market in 1987, mid 90s & 2007. Marc Faber reiterated his belief that this may be like 1987, unless a correction comes along soon. The 1987 scenario would require a far deeper divergence between the stock market & 30-year T-Bond price. In 2007, the 30-year T-Bond bottomed about 4 months before the stock market began sinking. And in the mid90s, the T-Bond rallied with the stock market. That is why we tend to focus on the 30-year T-bond in our empirical lens.
2. Minnesota Twins & this Rally in Equities
We noted a couple of weeks ago that according to Howard Marks of Oaktree Capital, the market was not in an advanced inning while Bill Gross labeled it as the 6th inning. This week, Gross raised the innings count to 6+ or 7- on BTV’s Street Smart. Stanley Druckenmiller took this count up a notch when he said the following on CNBC Squawk Box on Monday (see clip 1 below):
- “this thing will probably end
even though QE will go one for ever, just because all the lobsters are
about to get into the pot and may be we are in the 7th or 8th inning,
but they are going to get boiled at some point but right now supply
demand looks great.”
But as we all know, many late innings can go on for a long time. This point was made rather well by Doug Ramsey of the Leuthold Group:
- “there have been seven other bull markets that have made it to four years. and interestingly enough, five of those seven have gone on to see another year. So, you know, when you get in these extended phases, they can last for a while. I would say, and I have probably been saying for a while, that we’re in the eighth inning of this thing. but hey, I’m a Minnesota Twins fan. I’ve seen some really long eighth innings.”
Moving from innings to cycles, Charles Nenner told BTV Street Smart that 2013 is the year his cycles turn down and he sees a down cycle from then until 2017-2018. The Dow could get down to 5,000 sometime in this period, he said.
Walter Zimmeman of United-ICAP essentially told CNBC Fast Money viewers that the stock market could go to 1,590 in this run but they should be very worried if it breaks 1,420. Our recommendation to both Mr. Zimmermann & CNBC – post the detailed report on CNBC.com so that we can read the entire report rather than a rather useless recommendation that lies outside a range of 170 S&P points.
3. Equities vs. Credit
David Tepper said way back on January 22, 2013 on BTV:
- “I think you will get tighter. You will go very full to extreme value in credit… but [credit] is by far inferior to the equity markets. Not even close .”
This week, John Burbank of Passport Capital almost pronounced credit at full extreme value but remained just as positive on equities vs. credit. A couple of excerpts from his discussion with CNBC’s Simon Hobbs on Friday:
- “I definitely prefer equity here, credit has been taken to almost a ‘Nirvaan* level.’ Allocators were correctly risk-averse here, and all that money that went into credit produced spreads that are now extremely tight and not appropriate for the current economic environment,”
- relative to equity, spreads on credit are their lowest level. He pointed to yields in junk bonds, which he said “for the first time ever (were) trading tighter than the S&P earnings yield. So, the junk bond companies basically have no revenue growth, no EBITDA growth and are obviously very susceptible to a bad economy.”
- “High yield bonds have “limited upside because there is no growth in any credit instrument. You only have downside when spreads are get really tight,” said Burbank. “I’m not predicting with all this constant liquidity that it’s all going to go down. I’m just saying that the risk-reward is much worse than for equity.”
- “After the recognition of central bank easing coming in Japan and Europe, the risk-reward of credit is actually turning into more risk. Any kind of inflation in the distance is terrible for credit and a boost to a lot of equities generally,” he said. “I‘m not a believer that all equities are going to do well. The economic environment is not that good.”
* the correct spelling & pronunciation is Nirvaan and nor Nirvana, which actually is a feminine name, a case of Carl & Carla.
4. Tom DeMark vs. Louise Yamada
We probably have been more critical of Mr. DeMark than most. He enjoys a stellar reputation and advises very successful hedge funds. However, we only care about experts being right in their calls especially when they specialize in market timing. And Mr. DeMark has been very wrong so far this year just as he was wrong in the 1st quarter of 2012. Besides being wrong, Mr. DeMark seemed unduly hasty to appear on TV before his trend exhaustion indicators reached the 13 count. Why doesn’t he wait until his indicators reach 13 and then tell us, we asked.
This week, he did. In the chart he sent CNBC’s Melissa Lee on Wednesday, the Daily, Weekly & Monthly DeMark indicators all reached 13, a condition that shows “serious and negative consequences” for the stock market. The chart in the videoclip shows that this condition occurred in April 2011 and in late 2007.
DeMark also predicts that the S&P will top at 1,567.40.
We don’t know whether Mr. DeMark will prove right this time. But for what it is worth, his accuracy in 2012 improved after the 1st quarter. CNBC FM trader Guy Adami said of Tom DeMark, “What he’s saying is exactly the opposite of what Louise said last night, which is why it’s very interesting,”
And what did Louise Yamada say on Tuesday on CNBC-FM:
- “But when the Dow joins it [Dow Transports], and they both make a new high, as they did today, you’re in a much better position in terms of the Dow Theory bull market,”
Ms. Yamada dismissed the idea of a triple top in S&P and explained the difference in today’s rally from the peaks in 1998 & 2007. She pointed out that there were tops in major stocks in 1998 & 2007 and added:
- “Today, you can’t really say that,” she said. “You have some extended names. You don’t have a plethora of major tops, and you do have some stocks that are coming out of basis, as particularly as we’ve seen in the Dow.”
- “The point is that we have momentum confirmation.”
Then Ms. Yamada discussed breakouts she sees:
- the breakouts in stocks coming out of ten-year bases; IBM was the first which may be consolidating now; KO, MMM, JNJ. PG, HD, VZ..they all fit that basing configuration. So you can’t call it a top.
The discussion about breakouts reminded us of Ms. Yamada’s comments on BTV Surveillance on March 2, 2012:
- “What is starting to come to the
fore in terms of the Nasdaq breakout, you are seeing some of the heretofore dead issues like Microsoft, Intel come to the fore and they have a significant weighting too…plus the bases we are seeing in a lot of technology names from pullbacks to breakouts that offer the opportunity to buy on weakness.”
- “I would be long Microsoft, absolutely . You have a nice 3-4 year breakout that has just taken place, a little farther you will perhaps exceed that other peak.”
- “Intel…..has broken out of a much longer base so that’s actually looks like the Nasdaq itself. It is one that is initiating, definitely if you want to buy something at the initiation stage.”
How have MSFT & INTC, Ms. Yamada’s breakout choices, performed since her call?
- On March 2, 2012, MSFT, INTC & SPY closed at $32.08, $26.92, $137.31 closed resp. On Tuesday, March 5, 2013, the day of her appearance on CNBC-FM this week, MSFT, INTC & SPY closed at $28.35, $21.51 & $154.29 resp.
- So while S&P is up 12.3%, Ms. Yamada’s breakout candidates MSFT & INTC are down 11.6% & 20% resp.
To simple folks like us, these seem to be breakdowns and not breakouts.
On Monday, June 4, 2012, Louise Yamada returned to BTV Surveillance and sounded cautious on the stock market:
- “I think, it is a little late to short….There is no doubt this bull is long in the tooth.”
- “we have triple tops in place in many of those markets..and you have to understand that topping process is a very slow erosion“
- if you look at some of these other markets, one of the characteristic things that one can do when you get 2-3 year topping patterns, is turn them upside down – if then they look like a bottom, then you have a top.”
We remind readers that June 4, 2012 was the day the stock market bottomed. Since then, the SPY has risen from $128.10 (close on 6/4/12) to $155.44 an increase of 21.3%.
In contrast, Tom McClellan said on BTV that the stock market had bottomed on June 4, 2012 and would rally until just after the election. That was a spectacular call indeed.
So what is Tom McClellan saying now?
5. Tom McClellan & Lawrence McMillan
Lawrence McMillan, as usual, provided a sensibly cautious commentary on Friday:
- “In summary, the market has made new highs, and that alone is enough
reason to be bullish. By far the most bullish indicators are the price
charts of the major indices. There is nothing wrong with that, per se,
but if the other indicators don’t improve as prices continue to rise, it
would be quite easy for them to turn negative quickly if a stock market
correction should develop. I would not be surprised to see a modest
stock market correction — should one get underway — quickly turn to
something more nasty.”
Readers might remember his insightful article of last year, when Tom McClellan compared the then high flying Apple stock to RCA, another technology high flier of its era. That comparison and the related bearish call on Apple has paid off big.
This week, Mr. McClellan discusses the relationship between GE and the Dow Jones Industrial Average in his article GE says Dow’s New High is Suspect. We urge all to read the entire article and view the charts. Below are a couple of key excerpts:
- “the correlation [between GE & Dow Jones] is not nearly as interesting as is the fact that when the two disagree it is usually GE that tells the truer story.”
- “Spring forward to March 2013, and we see that GE has not yet exceeded its Feb. 19, 2013 closing high even though the DJIA has risen almost 300 points higher. Is this another failure like late 2012, or is it instead a more standard legitimate sign of a bearish divergence like most of the rest of the instances in the history of these two price series?”
- “Since 2007, however, copper has acted much more like a financial asset, with the fascinating property of making divergent top conditions versus the SP500 at interesting places. We are seeing just such a divergence now.”
- “By itself, this divergence between copper and the SP500 could be set aside as an anomaly. But when we combine it with the divergence between GE and the DJIA, it becomes much more of an attention-getting situation, calling attention to the problematic nature of the current multi-year high in the major averages. When these situations appear, there is usually a scary-feeling dip which ensues, and which helps cure the problematic price anomaly. That remains on the agenda for March.”
6. Gundlach vs. Cooperman
On January 24, Jeff Gundlach told CNBC Fast Money that long term bond yields would fall. A week later, on January 31, his colleague Bonnie Baha confirmed on CNBC-FM that Gundlach likes 10-year Treasuries at 2% yield. This week, Gundlach told Reuters:
- “I bought more long-term Treasuries in the last
month than I’ve bought in four years. I am a fan of Treasuries now. I
wasn’t a fan of Treasuries in July,”
Gundlach explained to Reuters:
- “They looked cheap at a yield above 2 percent,
compared to certain riskier assets, which had gone up in price over the
last six months while Treasury prices fell,….Also, owning
10-year Treasuries at yields above 2 percent provides an offset to
credit risk we are taking elsewhere in the portfolio.”
Bonnie Baha added this week on CNBC-FM that Treasuries are 20% of their fund while U.S. high yield corporates have a very small weighting.
While introducing Bonnie Baha, anchor Melissa Lee quoted what Leon Copperman said about Treasuries on CNBC Squawk Box on Wednesday:
- “buying U.S. government bonds today are like walking in front of a steamroller and picking up a dime. not a good policy. belongs at 4, 5 or 6.”
This reminded us of Leon Cooperman’s question to Jeff Gundlach on June 30, 2011 on CNBC:
- Cooperman – “Jeff,…forget this year or next month or next week or tomorrow, look out two or three years. From my historical knowledge, the ten-year government bond is generally yield in line with nominal GDP, and if I’m looking at the world two, three years out that the real growth is something approaching 3%, which you kind of need to keep unemployment flat, and inflation is 2 to 3%, that would give you nominal GDP of 5 to 6%. Do you see, two, three years out, that the ten-year government yields 5-6%?“
It has been nearly two years since that question and the 10-year yield hasn’t come anywhere near 4%, let alone 5-6%. Mr. Cooperman seems to make it an annual practice to rant against owning Treasuries. Read what he told BTV’s Erik Schatzker on February 22, 2012:
- I have great confidence the Fed is ultimately going to get their way….The Fed is trying to elevate asset prices, help consumption, help the economy and in two-three years time, we will be worrying about inflation and interest rates will be materially higher…
- An instrument that I have absolutely no interest in – the most widely traded instrument in the world – is US government bonds. I don’t think people understand how risky a US government bond is at 2% return…
- So if inflation is ranging 2-3%, let’s say and real growth is 2-3%,that would mean nominal GDP would be growing normally between 4-6%. So if I told you 10 year government bond was going to 4-5%, you wouldn’t think that was a bold or unusual forecast. Well, that is an enormous capital loss for the person that holds that 2% government bond.
This clip was appropriately titled “Don’t Buy Government Bonds“. Mr. Cooperman’s reasoning in February 2012 seemed perfectly reasonable. The only trouble is that it was a great time to but 10-Year Treasuries which dropped in yield to 1.46% in the summer. The reality is Mr. Cooperman has been wrong about Treasuries whenever he has trashed them on FinTV. Will it be different this time?
However, it has paid to listen to Mr. Cooperman’s opinion about the stock market. This week, he appeared more cautious than before about the valuation of the stock market..
- “I see all this excitement. … The last time I saw excitement like this, Apple was at $700, Facebook was $38...But I say to myself … every bull market ends in overvaluation and every bear market ends in undervaluation. So the market is still probably okay.”
- “Equities are the best house in the financial asset neighborhood,…[But] we don’t know yet whether it’s a good neighborhood or a bad neighborhood.”
- “The market is fairly valued at 1,500 and we’re about 1,540 [on the S&P 500],” he said, adding that Bernanke has “gotten the market into a zone of fair valuation.”
7. Larry Fink & Maria Bartiromo
Larry Fink is the Chairman & CEO of the world’s largest asset management firm. He is also an extraordinarily smart investor and a very astute analyst of the financial landscape. Surely a man of this caliber should not have to pad his record, right? Unfortunately, Mr. Fink does. We pointed this out last June and we have to do it again today, a little more gently than the last time.
During her conversation with Larry Fink this Thursday, Maria Bartiromo praised him for asking viewers to buy stocks in October 2012. Then, in his comments, Larry Fink took credit for the entire rally from October 2012 to this week:
- I believe, you know, from October when we made that projection, bonds were up 6% so they did very well over the last — this last period of time, but equities were up 32%.
Guess Mr. Fink has forgotten what he said on BTV MarketMakers on Wednesday, January 3, 2013:
- “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.”
This is pretty clear. Mr. Fink told viewers to sell the stock rally on January 3, 2013 and buy bonds instead. So how can he now take credit for the stock rally from January 3 to this week? Shouldn’t he be apologizing for this awfully wrong recommendation?
Respectfully, Mr. Fink doesn’t do himself any favors by trying to embellish his record in this manner. He is without question an gifted, accomplished investor & CEO. Honesty and humility might serve him better. The same goes for Maria Bartiromo, a Cable Hall of Fame anch
or. Her passion and natural inclination is to behave like a cheerleader for her guests, especially her most favorite guests like Larry Fink. That was fine when she began covering the New York Stock Exchange but not now.
We wish they had discussed the really spectacular call made by Larry Fink on that momentous day in August 2012, the day when Mario Draghi made his famous statement that “ECB would do everything” and that “it would be enough.” The U.S, stock market didn’t understand the importance of this call until Larry Fink told traders that the Draghi plan was a very big deal. That statement, we think, led traders to believe and the huge rally began. Very few people can understand the really big change and even fewer people can convince others of the change. Larry Fink is one of these very very few.
- Stanley Druckenmiller on CNBC Squawk Box on Tuesday, March 5
1. in the 7th or 8th inning & all lobsters are in the pot – Stanley Druckenmiller on CNBC Squawk Box – Tuesday, March 5
Stanley Druckenmiller is considered a legend in the macro investing world. His comments today, despite his intense desire to reveal very little of his investment thinking, are worth a serious read. With respect, we shall use our abbreviation StanD below to protect our fingers.
His opening comments:
- I will tell you why I am confused. When they did QE1, the game plan was to own stocks till it ended; Sure enough the market went up like crazy, QE1 ended, then it went down & they announced QE2. Market went up, they announced QE2 would end, news of government fights, but I would like to point out that market peaked out exactly when QE2 did. So now that we have QE3 forever, I don’t know when this thing ends…. You have a great supply & demand situation for stocks right now but …. this thing will probably end even though QE will go one for ever, just because all the lobsters are about to get into the pot and may be we are in the 7th or 8th inning, but they are going to get boiled at some point but right now supply demand looks great.
- well, bonds are being subsidized by the same thing equities are. If you print enough money, everything’s subsidized. real estate, bonds, stocks, you know, we all think we’re clever, but there’s no reason bonds should go down if they’re printing — what is the government buying, 80% of the bonds?
- one of the frustrating things we mention in our piece is those purchases are canceling market signals. The bond market has, and the stock market has, have provided wonderful signals for many years as to potential problems out there, or potential signals. and when you cancel those signals, whether it be to congress or other people the markets themselves, you could run into a problem.
- I mean, I thought we were done with wage and price controls back in the ’70s, this is the biggest price control of my lifetime. it’s one thing to control short-term interest rates. it’s another thing when you’re taking 75%, 80% of the bond supply and holding that price down. and we had a lot of, what I would call, mal-investment, dislocations back in the ’70s.
- I think at some point in time we’re going to find out, and it may be years, exactly where you had a misallocation of resources here. but this is a big, big gamble to be manipulating the most important price in all free markets.
His closing thoughts:
- look, here’s my problem. the Fed is printing a lot of money. They are forcing people into markets. You shouldn’t be buying securities because you’re forced to buy them, by zero rates. You should buy them because you think they’re great value. They’re great value only relative to zero interest rates. They’re not great value on an absolute basis. Having said that, the party’s going on, money’s being pumped in, as I said early, supply and demand is good, so I think this party can continue for awhile.
- The problem is, I don’t know when it’s going to end. But my guess is, it’s going to end very badly, And it’s going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated you get a misallocation of resources and this is going to end in one of two ways.
- with a mal-investment bust which we got in ’07-’08. we didn’t get inflation; we got a mal-investment bust because of the bubble that was created in housing.
- or it could end with just monetizing the debt and off we go in inflation.
- So that’s a very binary outcome. They’re both bad. They’re both off in the future. I don’t know when.
- that’s my problem. is, when this thing ends, it could end very badly.
- However if it ends in a mal-investment way, what will happen is,the money pumping in, it has less and less efficacy, and the economy slows down or goes down to the point that those securities you own are exposed. by a falling economy.
- let’s take the other case. let’s say given big inflation, I own a lot of companies out there, because they have a 3% yield. 3% seems pretty good. okay? what if rates go to 6% o
r 7% or 8%, what do you think those stocks I own with these steady 3% yields are going to go?
Kevin Warsh stepped in to answer a question about the Fed’s exit from QE:
- I would say markets seem to be confused about who’s running the show down there. Chairman Bernanke is.The minutes continue to put out noise and market participants think that the Fed is conspiring to send signs about what the next steps will be. I think the Chairman is, for better or worse, calling it the best he can see it, and his judgment out there is that he is going to continue to provide extraordinary monetary accommodation until these labor markets in his own words are substantially improved.
- so the trick for central banks is always to figure out when to exit and I think he has told us and told your viewers that he’s going to wait until he’s darn sure this economy has real legs, and I think what you’ve heard from these other guests over the course of the last hour is this economy does not appear to any of us here to be showing the kind of extraordinary growth that has marked virtually every recession since the second world war. So we do not see growth that is moving well above trend, and as a result, I think the Fed is prepared to keep at this level of combination for a very, very long time.
StanD stepped in at this point.
- Can I just comment on that exit for one second. The thought that you can exit by wherever the balance sheet will be at that time, 4 trillion, wherever it is, in an orderly manner, the Chairman testified that will give the market plenty of warning. Do you know what guys like me are going to do when they sell the first bond out of 4 trillion?
- And don’t think that letting the bonds run off isn’t selling. That debt has to be refinanced. If you do not — if you just let all the bonds run off that is still 4 trillion in selling.….what do you think the markets are going to do when they figure out the exit. Look what happened when QE1 & QE2 ended which is why i don’t think this is ever going to end.
StanD did not bring up a possibility that Roubini did a couple of weeks ago. We address that at the end of this clip.
At the end Joe Kernen asked key questions:
- Kernen – I hear what you’re saying. there have been times it’s started backing up the yields and either we’ve had problems in Europe or a spring swoon here in the economy and it almost looks like the rates come back down on their own. It doesn’t look like it’s all the Fed. What do you think the real rate of the ten-year would be if there was no QE?
- Druckenmiller – I have no idea.
- Kernen – you sure it would be higher? (Kudos to Kernen; no other CNBC Anchor would have asked this question).
- Druckenmiller – No, No, we might already be in a bust. I have no idea. And we know the longer you keep it there, the greater the misallocation, and the greater the pain.
- There’s been some commentary about ’01 and ’02. and what happened, and not being fair to workers. I can promise you, had we had a tighter monetary policy than we did in ’02 and ’03, it’s true, we wouldn’t have had the boom in ’04 and ’05 and ’06 we had. It’s also true that we wouldn’t have had half the subprime mortgages written, people thrown out of their homes, so many people unemployed.
- So you take a little less prosperity in the near-term, or even, god forbid, a minor recession as opposed to just keeping the party going, because when the party ends, we all know about drinking. The hangover is a lot worse if you drink a lot more.
What StanD said is exactly what caused the credit bubble in our opinion. Greenspan was so so afraid of taking another slowdown that he let a credit bubble build. We have two guesses why Greenspan was so afraid:
- He remembered the volatility he created by raising rates faster than expected in 1994 – the volatility that torched the long end of the Treasury curve, caused Orange County bankruptcy and/or
- He knew the recovery in 2004-2005 was wobbly and would relapse into recession if rates were raised higher or faster. And his fear about getting into Japan-style slowdown could not let him create financial volatility.
So he told the entire world that he would raise rates by 25bps in every meeting. That the quants could model and the credit bubble started building.
Nouriel Roubini told us a couple of weeks ago that Bernanke, more likely Yellen, will do exactly the same. Exit very slowly with total transparency and that certainty/stability will create a bigger bubble as the economy recovers. And this will prevent StanD from shorting long Treasuries with abandon.
StanD’s warning to Individual Investors:
- Warning to Individual Investors – The one thing I would say, if you’re going to play,…. for god’s sake play in liquid instruments. I think a lot of people knew by early mid ’08 that there was a problem but the reason they were hung, because they were instruments they couldn’t get out of.… playing in stuff that if you changer mind, and if the signs come that this game is coming to an end, you can get out.
Send your feedback to firstname.lastname@example.org Or @MacroViewpoints on Twitter