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. What a quarter?
But for a couple of points, it would have been the best first quarter since Q1 1987, as CNBC told us on Thursday. Since Dow rallied by more than 8% in Q1, CNBC told us that the Dow will close in the green this year. This was the 18th time the S&P was up in each month of Q1 and in all previous 17 times, the S&P closed up for the year. This fact was tweeted by CNBC’s Robert Hum, who also tweeted that the Dow was only down 5 days in March, the fewest declines in a month since April 2010. And, the S&P finally made a new all-time high to end the quarter. But now what?
2. U.S. Equity Market
A few expert opinions about what’s next:
Laszlo Birinyi on CNBC Fast Money Half Time on Thursday, March 28
His stance is simple:
- “As long as the market is holding up, I want to be in stocks.”
Chris Johnson of JMK on CNBC Closing Bell on Thursday, March 28
We have heard Chris Johnson for years and we have always heard him bullish. This is the first time we remember him being cautious.
- “I‘ve seen a few marathons in my time. I’ve never run them but it is not odd to see those runners as they finish up that final 0.2 of the 26.2, stretch out across the finish line and then just collapse, because they need a rest. That’s the way I’m looking at this market right now – the finish line was the S&P 500’s new all-time high. I think it was important for investors and traders to see that. but the fact of the matter is, when you look at the daily, weekly, and monthly charts, you’ll see a market that is well overbought right now, so far overbought, we haven’t seen it since October of 2007 in the case of S&P 500. I think it’s just time for a rest.… We had a great year in the first quarter. I think we just need to see a pullback. Stocks are going to be the place to be for 2013, though”
Mark Newton from Greywolf on CNBC SOTS on Monday, March 25
- “my thinking is the S&P likely has another 1% to 2% on the upside and we should see a top in mid-April and stocks like Apple which have already been very weak, I think, are a better place to be after this pullback.”
Rick Bensignor from Wells Fargo on BTV Lunch Money on Thursday, March 28
- “we think if you get above 1567.5 today,… then we get one more leg up to just over 1600, we have specifically said 1613 and we think, that is actually going to be most likely, the final leg up to this whole wave and then we will get a decent decline… defensive stocks are leading the market …typically historically an indication that you could be forming a top…”
Mark Dow from Behavioral Macro on CNBC Futures Now
- when the curve (2yr-10yr) gets steeper, people are selling bonds and taking risk…now it is flattening out and starting to roll over..this is a powerful market, a lot of people are still not in.. a lot of angry bears sitting on the sidelines and there are a lot of nervous bulls that usually fuels a rally.. but makes me say its really been a good run but pare back a little bit on trades that are extended but don’t get outright short because you are likely to get run over…if you are looking to get short, wait for signs that market is weakening more significantly before trying that..otherwise you will get run over…
- add some bonds to your portfolio, add a little bit of carry… simplify, add a little fixed income and take some profits.. if the next move is down, this might just be a consolidation pattern before going higher, it could be another head fake,… it looks a little bit more meaningful..
- gold, its a bubble like Apple…I flattened out my gold & silver positions; I prefer to short silver and I am looking for a re-entry point… That’s a really good trade and its also a good hedge.
3. U.S. Treasuries
Investors are already doing what Mark Dow suggested above – they have been buying Treasuries. Yields have been down every week for three straight weeks now. Look at the drop in yields from Friday, March 8 to March 28 – from 3.25% to 3.10%, from 2.06% to 1.85% & from 89bps to 76bps on 30yrs, 10yrs & 5 yrs resp.
Perhaps the bond market is sniffing weaker incoming data that we saw on Thursday – Final Q4 GDP at 0.4%, Chicago PMI weaker & higher jobclass claims. Or perhaps the Treasury market was way oversold and a bounce was overdue. Now the 10-year is bumping against the 1.84% level that turned bonds back down in the first week of March. Much depends on next Friday’s payroll number, we think.
4. Is the Fed worried?
It seems so. On Monday, Bill Dudley, the “Castle” of the Fed in the Gross terminology (with Bernanke/Yellen being King/Queen resp.), gave an emphatically dovish speech in which he stressed the need for continued stimulus:
- “We need to keep monetary policy very accommodative,” Dudley told The Economic Club of New York. “I see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery.”
- He also zeroed in on tighter U.S. fiscal policies, including tax hikes and sharp spending cuts enacted for this year, as a stumbling block that he predicted would shave 1.75 percentage points from U.S. GDP growth this year.
Two days later, previously hawkish Kocherlakota asked for even greater QE:
- “My outlook for unemployment and my outlook for inflation both point to a need for more accommodation than is currently being provided by the FOMC,” he said in prepared remarks to local business groups in Edina, Minnesota, referring to the Federal Open Market Committee.”
This smells different to us. Perhaps, these doves are just trying to get the center of gravity to the dovish side as CNBC’s Steve Liesman suggested. But we are not so sure. To us it seems that they are getting worried about the economy slowing down despite their QE.
What does record demand from investors & record issuance from experienced large issuers signal? What is the signal when CNBC anchor Sue Herera lauds “smart money focusing on a tiny corner of the fixed income market” and leads a glowing segment by CNBC’s Kayla Tausche on that “tiny corner” just as the moving averages & RSI of that corner are turning down? What “tiny corner” did they feature? The Floating Rate Debt market.
So we have the combination of Dudley/Kocherlakota expressing need for greater QE and record issuance/demand in floating rate debt. Are these two related? A leading indicator of a trend change? Consistent with last week’s Ray Stone – Rick Santelli segment on record low duration of fixed income investors? If so, shouldn’t investors be increasing duration? At least that’s what simple minds like ours would argue.
The stock market acted as if Cyprus is over and done, just as the market acted after the Italian election. Those who don’t concur might want to watch/read the two clips below.
- Athanasios Orphanides on BTV Surveillance on Monday, March 25
- Marc Faber on BTB Surveillanceon Wednesday, March 27
1. Athanasios Orphanides on BTV Surveillance – Monday, March 25
Athanasios Orphanides, a professor at MIT, is a former governor of the Central Bank of Cyprus. Here he speaks with Tom Keene & Sara Eisen on BTV Surveillance. The detailed summary below is courtesy of Bloomberg TV PR.
- “I have to say that these are difficult times for Cyprus. But I believe that the Cypriot people have demonstrated that they want to stay in the euro area and they are willing to make sacrifices to that effect. Frankly, let me point out something else that is important from this revision in the euro group deal that came out this morning. The other periphery countries in Europe should thank the Cypriot parliament for rejecting the earlier plan–that was about 10 days ago–that essentially asked for the confiscation of deposits. I think it is a very positive step that because of the rejection of that plan by the Cypriot parliament, we have returned to more traditional ideas and a greater respect of how banking issues should be resolved in a country.”
On whether he sees the deal as nothing more than Russian large depositors bailing out Cyprus:
- “I don’t look at this at all. Let me remind you that there are depositors from Cyprus and all over the world in the major bank that is being shut down, so I would expect that there would be other European citizens as well who will be facing losses as a result. That said, to the extent that a bank had to be resolved, this is the proper way to do this. First, the shareholder should take a hit. Then, the bondholders should take a hit and then, the unsecured depositors. It was a travesty to observe last week European governments asking the Cypriot parliament to impose a confiscation of secure deposits. I’m glad this is behind us. I am not sure that the confidence hit for the European project has gone away, not at all because once we have an arbitrary decision then we need to rely on the parliament of a small country to undo this, we do not know. We cannot tell what is the next arbitrary decision that may happen in Europe.”
- “This is one of the disheartening elements of what we observe. The agreement that was made confirms the damage that the German government wanted to do to the Cypriot banking system. I should tell you that following the decision of March 16, it was hard to avoid that damage. Here we have an instance where, essentially, Merkel’s government acted as the prosecutor, the judge and the executioner of the banking system in Cyprus because of unsubstantiated allegations of Russian money that shouldn’t be there. It is very sad that the other European governments did not actually account for the pain that these events have
created in Cyprus. Clearly, Cyprus will face a deep recession going forward. I would have expected to see some solidarity from other European governments in order to ease the recession that is coming up. It is unfortunate that that is not forthcoming, but that does not surprise me. We do not see the solidarity that is supposed to be there in the European Union. I will say this, the Cypriot people are very proud and resilient people. If you had a map of the region earlier on, Cyprus over the millennia has suffered so much because of its strategic location. I have no doubt that the Cypriot people will rise again and persevere.”
On whether the IMF helped or hinder the Germans and people of Cyprus:
- “My understanding is that the IMF had aligned itself very closely to the German government’s position. This is a reflection of the dysfunction of how Europe works right now. Local politics appear to dominate completely. The IMF as an international institution cannot change that. This is a flaw, a deep flaw in Europe. We have the September 2013 elections in Europe, Cyprus unfortunately got into the middle of the arguments between Merkel’s government and the SPD Party and the position in Europe. This is what forced events in Cyprus. I would not look outside Europe for this fundamental friction in Europe.”
2. “considerable downside risk” for U.S. stocks – Marc Faber on BTV Surveillance – Wednesday, March 27
Marc Faber, editor of the Gloom, Boom & Doom Report, is an interesting speaker in addition to being a famous investor. In this clip, he takes the Cyprus action to its natural conclusion, natural meaning what the governments may end up doing when nothing else works. The summary below is courtesy of Bloomberg TV PR.
Faber on whether he’s participated in the equity rise in the U.S.:
“I think that I was relatively positive about U.S. stocks since March 2009. I haven’t been shorting any stocks since 2009. The U.S. march is up and consumer confidence is down. Emerging markets are performing badly relative to the U.S.. the dollar is strong, indicating a tightening of international liquidity. I do not think the U.S. market will go up a lot from here. I rather think there is now considerable downside risk.”
On whether Europe can repair its house:
“They can repair it and actually Europe now has a current account surplus, which is positive. But obviously the economy is contracting. We are in recession in Europe. This will have an impact on the corporate profits of U.S. corporations as well because 40% of S&P earnings come from overseas, but the bulk actually comes from Europe and not emerging countries. I think that corporate profits in the U.S. will continue to contract as they have actually — according to S&P — contracted in the first quarter of 2012.”
On why gold hasn’t held up as a safe haven:
“When you print money, the money does not flow evenly into the economic system. It stays essentially in the financial service industry and among people that have access to these funds, mostly well-to-do people. It does not go to the worker. I just mentioned that it doesn’t flow evenly into the system. Now from time to time it will lift the NASDAQ like between 1997 and March 2000. Then it lifted home prices in the U.S. until 2007. Then it lifted the commodity prices in 2008 until July 2008 when the global economy was already in recession. More recently it has lifted selected emerging economies, stock markets in Indonesia, Philippines, Thailand, up four times from 2009 lows and now the U.S. So we are creating bubbles and bubbles and bubbles. This bubble will come to an end. My concern is that we are going to have a systemic crisis where it is going to be very difficult to hide. Even in gold, it will be difficult to hide.”
On whether the raiding of bank accounts in Cyprus set a precedent for Europe:
- “MF Global, the depositors were also raided. It is nothing unusual. Philosophically I believe that we shouldn’t have deposit insurances, blanketed insurances by governments because it would force savers to be very careful with which bank they would deposit the money. The good banks would pay very low interest and take low risks and the banks that take high risks would have high interest. By the way, in Cyprus, banks were paying very high interest like in Lebanon at the present time I can get 6% on my deposits. So the depositors should have known that something is dangerous, but I would say that the principal now is very important to understand. Until now, the bailouts in Europe and the U.S. were at the expense of the taxpayer. And onwards, in my view, the bailouts will also be at the expense of the asset holders, the well-to-do people. So if you have money — like I am concerned — I am sure the governments will one day take away 20-30% of my wealth.”
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