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. Foundation for the global stock rally.
Everyone agrees that the stock market rally, both in America & globally, is based on continuous stimulus by Ben Bernanke and the assurance of Mario Draghi. Absolutely true. But this week revealed the real foundation of this stock market rally – the belief that the U.S. economy is OK, not that it is great but that it will grow at 1-2% & avoid recession. Once this is assured, then the Bernanke/Draghi medicine works.
We all saw this on Wednesday, when a very weak ADP report followed by a weak US ISM report sent stocks skidding with a deflationary blow up in commodities & resource stocks. The next morning saw a steep drop in the weekly jobless claims preceded by a ECB rate cut and professed willingness of Draghi to go to negative deposit rates if necessary. Dow jumped up by 130 points, the S&P hit a new all-time high, with a snapback rally in commodities and resource stocks. Yet, there was palpable fear about a very bad jobs number on Friday morning.
When the jobs number surprised to the upside, S&P futures jumped 10 handles in 20 seconds as CNBC’s Bob Pisani kept telling us all day. It was a rather boring number but the break of fear fever was so great that Dow rallied to 15,000 and the S&P closed above 1,600. Europe rallied big demonstrating that the entire world is dependent on U.S. growth remaining, not strong, but merely ho-hum.
What a move it has been since that Thursday afternoon on April 18, when we were focused on finding the Boston terror suspects, a move of 70+ handles in two weeks from 1541 to 1614. And this move has featured a rotation or a change in leadership from defensive, bond-equivalent stocks to cyclical, resource stocks & out-performance by emerging market equities.
Anyone, even simple folks like us, can salute the rally now but one trader was helpful to all CNBC viewers on Thursday afternoon before the S&P hit a new high. Read what Steve Grasso said on CNBC Closing Bell on Thursday at 3:00 pm:
- “we’ve been banging up against 1,600 as resistance since April 11th. the more times you take a run at a level, the better chance you are at breaking through that level. we waited for Ben, we waited for the ECB, now it’s about jobs. That jobs number has to be very poor to stop this rally. I think we’re looking at 1625, 1650 very soon“.
Wow; that’s what we call actionable advice. Any viewer who bought weekly calls on Thursday afternoon had a good Friday. Mr. Grasso remained bullish on Friday afternoon arguing for a “foot on the pedal” as long as S&P stays above 1576.
We must also give kudos to David Tepper who essentially called, in the beginning of 2013, for a rally based on the foundation of stronger than expected economy, continued stimulus by Fed & Draghi. Again, simplicity works and is often hard to see. Of course the caveat is that the economy remain strong or else the foundation will develop cracks.
2. This is Las Vegas, the Fed’s the dealer, and you’ve got to play the game
Trust Rick Santelli to state reality succinctly and with vivid imagery. So how are long term bulls playing this game?
2.1 Jeremy Siegel on CNBC Street Signs on Friday, May 3
- “I still think it has good gains in it – 16,000-17,000 is my call by the end of this year, maybe 18,000 next year. I think we got a good 15-20% left in this bull market before we even have a significant correction.“
- “We are 15-20%
above the earnings that was in 2007, we are 25% above on dividends from
that level. So there is tremendous fundamental support and most
importantly in an environment with much lower interest rates which means
much less competition for stocks. I think those are going to be the
drivers for continuous gains we in the market for the next year or two.”
- By 2017, 20,000 on the Dow… USA is on the verge of becoming energy independent..when that happens all the concerns about budget deficits get muted and the market looks ahead, Maria and that’s what it is looking at.. where we are going to go in 4 years..just imagine, we are going to be in a position we have not been in our lifetime…
- we are definitely not in phase 3, that is the complacency & speculative phase. The last time we saw anything like that was the bubble in late 1990s, the tech bubble. We are not even close to that. I see no speculation whatsoever.
- What is so impressive about this market is we get sector rotation. Technology stocks which have been really dormant are really now starting to take over… Perhaps, we are on the cusp of going from phase 1 of disbelief to phase 2 where we are starting to see belief and trust…. This has got a long way to go.
- Technology- semiconductors. Technically they are all breaking out. They look fabulous.
2.3 Donald Hodges on CNBC Closing Bell on Friday, May 3
- “the market is back. the market is back. does it keep going up? yes, it does. we’ll have some down days, but we’ve lost about fiver years and it’s time for it to go up a while. when it went down, it went down a lot more than we thought it would. when it goes up, it is going to go up more than we think does.”
- This is a beautiful picture and it can continue… we need to see some of what we saw today, some rotation in the cyclical areas that have lagged. it is the defensive stocks, as you know, that ve done well year-to-date. they can’t carry this market, in my opinion, straight up. it need to broaden out. we need some better momentum. it might take some sort of sloppiness in pullback before we get there. I think we will hear from the technology and industrial stocks before this is over
- we broke through that…trend line through the tops of the s&p 500 in 2002 and 2007 bull market. so that was very important resistance, if we were going to get a correction, that’s where we expected it. we expect the markets still to peak later this year in the summer. but the next target is 16,000 on the dow. over 1,700 on the s&p an 6700 on the dow transports where we get similar resistance on those markets. the markets look like they will be up more at this point. but we’re still warning people. we think a top this year. we think this is the third bubble to peak
2.6 Keith McCullough of Hedgeye on Friday, May 3
Hedgeye has been correctly and consistently bullish on the stock market all year. So what does Hedegye say now? They posted their refreshed trade support/resistance levels on Friday at 4:30 pm:
- Fundamentally, the most important data point this week was yesterday’s
jobless claims report of 324,000. Our non-consensus bull case for US
Equities continues to get more bullish as the market is rising. Weird,
but cool. Across our core risk management durations, here are the levels that matter to me most:
- Immediate-term TRADE overbought = 1626; Immediate-term TRADE support = 1590; Intermediate-term TREND support = 1520
2.7 Lawrence McMillan on Friday, May 3
Another consistently bullish, consistently right commentator:
- In summary, despite considerable gains already this year, $SPX remains
bullish. The technical indicators are bullish, too. If $SPX were to
fall below 1575, then the situation would change to neutral, and a close
below 1540 would be outright bearish
2.8 Jim Cramer on CNBC SOTS on Friday, May 3
- This is the 90’s, Carl.
If all the above makes you want to sell come Monday morning, read on.
3. Debbi Downers
This is CNBC Fast Money parlance for bearish traders. And the first tactically bearish trader is their own Mr. T, otherwise known as Joe Terranova. We begin with him because he has acted on his bearish call. We always prefer doers than talkers.
3.1 Joe Terranova on CNBC Fast Money & 1/2 on Friday, May 3
- “It is prudent at this point to buy some protection for the market. I do think, short-term thinking, you will get a correction at some point over the next couple of weeks. What am I doing? I have liquidated my mini S&P futures, taken some short positions via put market in Amazon & Google; I am protecting longs I have in IBM which has had a nice run up as well as Goldman Sachs and staying with the energy space where I think the real opportunity is & trough is in place for the year.”
3.2 Scott Redler tweet on Friday, May 3:
- @RedDogT3Live – Oscillator is +50 – extremely overbought like we saw September 2012 around 1474 was 70ish..
3.3 Bill Gross tweet on Thursday, May 2
- @PIMCO – Gross:
World awash in money. Fed buys 85 billion per month. BOJ 75 billion.
ECB hints at neg interest rates. Don’t buy – sell risk assets.
3.4 Carter Worth on CNBC Fast Money with Sell in May call on Tuesday, April 30
- “well, that’s is obviously seasonally that’s quite good over time, about
100 years worth, also the last four years specifically. But this May is
in many ways worse in terms of the bifurcation we’ve had at any point
since the March ’09 lows.”
- “It’ll be worse than a normal
correction. the last time we had a classic bifurcation it all reversed,
energy materials up at the high in ’07 and consumer and financials were
down at the low. but typically ends with a strong one succumbing but the
weak ones staying weak.”
3.5 Scott Minerd on CNBC Closing Bell about a 10% correction on Tuesday, April 30
10% correction on the horizon…. I think that the data’s
starting to come through now that’s indicating that
expectations got ahead of the real economy and the market’s just ahead of itself….priced for perfection.”
- “Absolutely [a buyer of stocks after a 10% correction]…. I liken this to 2004….The Fed is not going to remove
accommodation very quickly. It’s going to fall behind the curve. I think
stocks will be 30, 35% higher in the next three years. and so it’s
probably a good time to be in equities.”
3.6 Leon Black on Tuesday, April 30
- “We think it’s a fabulous environment to be selling,” Black said today during a panel discussion at the Milken Institute conference in Los Angeles, adding that Apollo has sold about $13 billion in assets in the last 15 months. “We’re selling everything that’s not nailed down, and if we’re not selling, we’re refinancing.”
The last time we heard a smart & wizened private equity stalwart talk about selling everything as in 2007.
4. U.S. Treasuries
Well, the Treasury market was overbought and holding on with so many investors talking about 1.57%, 1.40% and so on. If the stock market was priced for perfection as some put it, the Treasury market was priced for Nirvaan. That is why the carnage in Treasuries was so awful. How awful?
- @DRodriguezFX – Simply massive moves in global bond markets today. One bank says profit taking fueling ‘carnage’ in EM bonds, UST’s. Add EZ bonds to the list.
TLT, the so-called safe Treasury ETF, fell by almost 3 points on Friday and EDV, the Zero coupon ETF, fell by over 4 pts. Yields rose by double digits with 10-year & 30-year yields rising by 12 bps & 14bps resp. The weaker than expected Service sector ISM did nothing to stem the rout. Such is the penalty for overstaying your welcome in the long duration Treasury market.
What next? Is the economy going to get better over the summer or the recent trend of weaker than expected data will continue? Next week’s 3-year, 10-year & 30-year auctions should prove interesting.
Rick Santelli said on Friday that he expects treasuries to trade in a range with 1.80% as the pivot with a peak at 2.00%. In contrast, Elliotwave Forcast seems to be calling for a cycle change:
- @ElliottForecast3m – $TNX 10 Yr Treasury Yields appears to have ended a down cycle as were expecting. Expecting a recovery over the coming days
And CNBC Fast Money trade Joe Terranova made “Sell Treasuries in May” as his final trade on Friday.
5. Jeff Gundlach on “Why Own Bonds at all?”
Those who are not completely been pied-pipered by CNBC anchors & guests should run not walk to the ZeroHedge article titled Jeff Gundlach: Why Own Bonds At All. Below are a couple of excerpts:
- “Let me be clear. This is absolutely wrong. Yields are NOT going to rise any time soon.”
- Furthermore, as opposed to most mainstream commentators, equities are not under allocated. The U.S. currently has more than 40% of household assets in stocks which is the highest of all other major countries. There is also no stash of cash waiting on the sidelines waiting to rush into the markets and, lastly, bonds are only a small percentage of most investor’s holdings.
- Should you own bonds? In such an environment as currently exists, and will likely continue to exist, bonds are absolutely appropriate in a portfolio. Yields will be lower in the future – not higher. This is why you should own TLT in your portfolio as long as QE remains in play.
- While there is ample evidence that the Fed’s Q.E. programs have supported stock prices – QE is NOT a “put” on stocks. In reality, QE is a “put” on treasury and mortgage bonds as injections go directly into the bond market.
- “Let me reiterate….bond yields are not going to rise. QE drives yields lower as it goes straight to the heart of the bond market.”
- DO NOT buy stocks for the dividend yield simply because they yield more than stocks. There is no guarantee that dividend yielding stocks will perform better in the long term versus owning bonds. History says that is unlikely to be the case (see clip 1 below for a different view by Bill Gross).
- Rates will not rise as it will kill any economic growth. Housing, private investment and consumer borrowing all rely on low interest rates. If rates rise it is the end game for the economy.
- If the current financial experiment fails – the only place to be will be long US Treasuries. A decent hedge in the event of an economic disruption will be long US Treasuries and short French Bonds. As all European bonds converge toward 1% the reversion due to economic disruption could be hugely profitable.
- Real Estate will go higher because of lack of supply. However, IF YOU BELIEVE that rates are going to rise DO NOT BUY A HO– USE.
6. Long Japan & Short Rwanda and other trades
This interesting trade caught our eye in the Thundering Word report of Michael Hartnett of BAC-Merrill Lynch. As he writes:
Rwanda offered 6.875% yields to borrow an amount equivalent to 6% of its GDP. The offer was 9-10X oversubscribed. EM is not alone in its fixed income excess but a sustained credit boom requires Goldilocks-infinity. Unlikely, in our opinion. We would start to reduce EM debt exposure in 2013 (in contrast, Indian stocks look a good tactical trade) – Beware high-risk bonds with low yields = reduce EM debt
What about Japan? – 2013’s best performing assets: Greek bonds & Japanese equities.
QE printing war is currently being won by Japan, where growth
expectations are rising. The valuation of and positioning in the
Japanese equity market suggest more upside, in our view. – Japan’s Asset Bubble Economics = long Nikkei
Another interesting trade:
Europe’s End of Austerity = long EU IG & Utility stocks
German wealth has doubled in the past 10 years; youth employment in Portugal, Italy, Spain and Greece has halved. The potential for social unrest is high, so markets discount the “End of Austerity“. Long EU IG & utility stocks, short US IG & utility stocks is the trade.
As he writes in his The Flow Show report,
- Investors still infatuated with EM debt and floating-rate debt (more than 40 straight weeks into each)
- Bond inflows trump equity inflows for second straight week; also, first LO equity fund redemptions of the year
- Bill Gross on BTV Surveillance on Friday, May 3
- Jim Rickards on CNBC Fast Money Half Time on Thursday, May 2
1. Low rates enticing Pimco to sell European Debt – Bill Gross on BTV Surveillance – Friday, May 3
This is a detailed interview which is an excellent read. The summary below is courtesy of Bloomberg TV PR.
Gross on whether tepid GDP and disinflation is what we can expect from the U.S. economy over the next five years:
- “Well, we continue to expect that. We have a secular economics forum that Mohamed [El-Erian] will be chairing next week. We’ll give you some more answers I guess in the next few weeks. But nonetheless, what we have seen, Tom, over the past few months and over the past few years, since Mohamed came up with the term ‘new normal’ has been a 3.5 percent nominal GDP growth, which has reflected about two percent real growth and about 1.5 percent inflation. And do we expect that going forward? Yes, we do because there haven’t been structural changes made to the economy.”
On whether output gap is narrowing and GDP potential rising:
- “Well, the output gap is narrowing, as we saw with the unemployment rate coming down. That suggests perhaps a little bit higher inflation from the standpoint of labor. And let’s hope they get some of that. In terms of productivity and growth in the job force, no, we don’t see much change there. We see global influences. We see potential negatives as far as the eye can see in euro land,. We see a hazy cloud of growth in China. And you put the package together and its influence on the United States is not necessarily significant, but it is important. And so we don’t see higher real growth and two percent going forward, no.”
On whether futures improving is a surprise:
- “I think so. You know, we had been looking at strong jobless claims, but the gloom in terms of the manufacturing numbers and investment percentages and the growth rates there, it is a little bit of a surprise, the revisions as well. You mentioned March revisions; February revisions. We saw an increase in hourly earnings this time around, where it was flat last time. We did see the decline in the work week, a small decline, which was a minor negative. But it shouldn’t diminish the positive nature of this particular report.”
On his essay “There Will Be Haircuts” and whether the U.S. will have to write down debt at some point:
- “We do. Typically what governments want us to do is to write it down gradually so that we don’t know we’re in the barber shop and certainly we don’t know we’re in front of Sweeney-Todd. The writing down of debt suggests, in some cases, like in Greece, and other areas, that the head will be dismembered.
- But the haircutting that policymakers are doing come more surreptitiously in the form of negative real interest rates, higher inflation, currency devaluation, which is what we are seeing in Japan, capital controls, which is what we see in various countries like Brazil and China with their currency peg, and ultimately, as you mentioned, default, which is the ultimate resolution to a debt crisis.”
On what return we should expect per year from bonds five and ten years out:
- “It is like the oil filter man says, pay me now, pay me later. We are being paid now with some capital gains as interest rates come down. Not this morning, but typically the aggregate, the Barclays aggregate index, which includes investment grade mortgages and treasuries yields about 1.7 percent. And so you should expect 1.7 percent absent that brilliant alpha generation from PIMCO. But typically a bond investor is in a two percent to three percent world.”
On where Europe’s markets are headed:
- “A cut on the policy rate that occurred yesterday, but importantly, as you mentioned, a hint that the deposit rate, the rate at which reserves earn interest when left at the central bank, that they might not only be zero, which they are now, but they might go negative, which is a stretch of the imagination or was up until yesterday. In other words, the banks – central bank might charge them money for safekeeping. And I happen to think that that reality is really far away. That that suggestion yesterday by Mario Draghi was really a form of moral suasion trying to entice the private sector further into the markets by buying bonds instead of the ECB buying bonds. But we’ll have to see.”
On whether he’s enticed:
- “No. If anything the lower yields and the high
er prices are enticing us to gradually reduce our position.”
On the possibility that Europe is going to ramp up securitization of ABS and whether that would work:
- “I think they might be required. We have seen that in the U.K. as well in terms of a central bank becoming more directly involved in private market lending. It is an advanced debt, it is something that the fed did three years ago and has gradually exited. It is something that the Bank of Japan is doing. All central banks are basically merging fiscal and monetary policy and is that a good thing? To us, it is not a good thing. Is it a necessary thing? Perhaps, but it does produce consequences going forward and haircuts for investors going forward as well.”
On whether dividend growth can be a constructive alternative to bonds priced to perfection:
- “Well, certainly. And I think, to be fair to us, over the last year or two we have favored stocks versus bonds. What we have said, Tom, is that both asset categories – I mentioned bonds and their two percent to three percent return category. The stock story we think are in the four percent to five percent category. Does that mean that that is a great return? Certainly not relative to historical parameters. And can they increase dividends going forward? Of course they can. You know, dividends can increase. But let’s be fair, too, that top line revenue growth, Tom, of the S&P 500 is basically flatlining here. And any dividend growth basically comes out of, yes, existing profits,
On whether dividend growth and buybacks a la Apple is taking away from an investment that can create jobs:
- “Most certainly, yes. And not to criticize Apple because they are a good client and they do what they have to do and perhaps there is not an investment out there that would absorb $100 billion to $200 billion worth of cash, and so there is a little bit of financial engineering there. But let’s face it, what Apple has done has been done basically by the United States over the past several years. They have bought back our bonds, so to speak, and they have stimulated fiscally. But there has not been any real, direct investment to produce future growth. And so Apple is indicative I think not only of the technology sector, but of the United States as a whole that is lacking in investment and is lacking in productivity going forward.”
On who should take over as chairman of the Federal Reserve:
- “Oh, we don’t want to nominate any particular one. I think PIMCO would want to see a chairman with a common sensical attitude towards the policy rate that includes savers as well as investors in stocks.”
On whether it should be El-Erian:
- “Oh, Mohamed is not going to Washington. His wife would never let him.”
2. Jim Rickards on CNBC FM & 1/2 on Thursday, May 2 – Jim Rickards on CNBC FM & 1/2 – Thursday, May 2
The conversation begins with the recent selloff and rally in Gold.
trading activity, some combination of fundamentals and technicals. In
the long run, the fundamentals usually prevail. in the short run, the
technicals can dominate.That’s what happened. Beginning around April
5th there was a negative research report from SocGen, a negative report
from Goldman got a lot more attention, then the Cyprus overhang, that
started the drawdown. but April 15 was the panic.
- I don’t care if it was
gold or soybeans or pork belly, panic is a panic. And even the strong
hands like China who had floor around 1550 just went no bid. What’s nice is that now been
rung out. To me what’s going on is a transition from weak hands to strong
- Weak hands are comex traders with margin calls and hedge funds
that have nonpermanent capital and mark to market, newbies in GLD.
They’re all rung out now.
- The strong hands are Russia, China and
actually people around the world. They lined up to buy physical
beginning on April 16th. So we’re back up 10%. I think the technicals
have been wrung out, the fundamental story is intact and the trend is
higher from here.
- Gold does very well in inflation and does very
well in deflation. The 1930s were the grandest period of sustained
deflation in US history. Gold went up 65%. The problem is when central
banks fear deflation more than anything, they try anything, currency
wars, money printing, zero interest rate policy, forward guidance. They
do everything they can. When they can’t win the battle against
inflation, they devalue their currency against gold because gold’s the
only thing they can’t fight back.
- If the Fed wins, you get inflation,
Gold will go up.
- If deflation prevails, they will say one day gold’s
$4,000 an ounce,we are buyers at 3995, sellers at 4050 and we’re just
going to make market.
- I think it’s actually going to go sideways
for most of the rest of this year. I think it will go up by the end of
the year. There are some seasonal factors. Inflation’s coming with a
lag. It’s really been a long haul for the fed. they got their bubbles,
they got their stock bubble in the housing bubble. They don’t have
velocity going yet. They are just going to print more until they do.
Fed only has two choices.
- They can throw in the towel, say we’ve tried
everything, it doesn’t work. We are done.we are raising rates 25bps. Congress, you go fix it.
- or they can double down. My feeling, they’re
going to double down. They have got Janet Yellin, she’s more of a dove
- it’s nonsense. The euro is not falling apart.
First of all,
- It’s a political project, not an economic project and the
political will is there number one.
- The fundamentals are very good.
you’ve got three things going on. The unit labor costs are lower, German
technology & good business climate in Germany and finally, Chinese
capital coming in.
- Capital flows dominate trade flows. China has
wanted to invest in Europe in a big way, but they want to see Europe
get their act together. Now they are getting their act together. So here
come the Chinese capital. of course, the Chinese want to get out of
dollars. They are not going to dump their dollars. But at the margin,
they will buy euros instead of dollars – lower unit costs in the
periphery, good technology coming from Germany & China’s capital – sort of a Singapore….
- the thing about cross
rates, it is a zero sum game. the fed wants a weaker dollar, so you have
to have a stronger euro. It can’t be anyother way.
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