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. Speed Kills!
This famous John Madden declaration is this week’s story of the markets. Everyone wanted bond yields to go up, but no one was prepared for the speed of the rise. This speed led to fear and fear-induced selling in bonds and bond-proxies. The result was absolute carnage in high beta bonds, in spread products from Emerging Market Debt funds all the way to Municipal closed end funds. The decline was so fast that it finally shocked the US stock market which dropped 100 points in the last couple of hours on Friday to close down 208 points.
(MSD – MS Emerging Debt Fund) (MHN – BlackRock NY Quality Muni Fund)
treasuries had a wild day on Friday with TLT up 1/2 point in the morning on weak
GDP, income & spending data to above 115+ , a sell off of almost 2
points after the strong sentiment numbers & Chicago PMI to 113.20ish & a final 1 pt rally to close at 114.60 – only down 28bps on the day.
No asset class can withstand this level of panic in its Sovereign bond market. So the stock market finally had a down 200 day on Friday, with the past 100 points coming in the last couple of hours. The action was so ugly that it even scared Maria Bartiromo who has been openly praying for bond yields to shoot up.
The panic was in the JGB market for the past two weeks. We said last week that we weren’t too worried about it because both Abe & Kuroda had begun to panic. This week, the panic has shifted to US Treasuries and we all should worry. Because Bernanke is unable to do what Kuroda did. Bernanke cannot simply step in to buy his sovereign bonds at random and in larger & larger amounts without a FOMC meeting.
So, in our humble opinion, nothing matters next week except the action in the Treasury market. It is once again the absolute determinant of all asset classes.
But not everybody is a worry-wart like us and like most market participants. We allude to CNBC’s Bill Griffeth who actually said the following as his final comment in the segment titled Is the Bond Sell-Off For Real?:
- “This just proves we are not in Kansas anymore because we just spent 5 minutes in a compelling debate about Treasury Bonds of all things!”
Of all things? What a pregnant statement? Did he mean discussing treasuries is taking time away from telling viewers to buy-buy stocks? Or did he mean treasuries are simply not worth discussing?
Is this what they mean by Ignorance is Bliss or is it simply let them eat cake attitude of a non-investor who gets paid to babble and only babble. And this is an anchor they call a veteran. With such veteran leadership, ratings of CNBC Closing Bell must surely be at all time highs.
2. Treasuries – Widespread optimism instead of panic?
The action in Treasuries has been terribly ugly this week. Next week is the all important payroll report. What if that report is stronger than expected like 200,000 and higher? Where would the rates go then? We expected widespread panic among the gurus on Friday and very surprisingly we didn’t see it.
First we saw the tweet below at around 1:45 pmish:
- Scott Minerd @ScottMinerd “I doubt a 1994 style bond-market crash would happen if the Fed tightened b/c the market is weary of and anticipating a spike in yields.”
About two hours later, we saw the following tweet exchange:
- Michael Santoli @michaelsantoli “I agree folks are extrapolating the rate move too aggressively (cont) RT @ReformedBroker Yield-play bloodbath is overdone and presumptuous.”
Frankly, this worried us a bit. Especially after a week when the majority of CNBC gurus appeared sanguine about bond yields going higher.
That was not the case in June 2007 when a noted technician showed a chart of the 10-year yield and asked “wouldn’t you buy this chart if it were a stock?” meaning the 10-year yield would have a sustained rally higher. We recall CNBC Fast Money was uniformly bullish on 10-year yields going higher and higher.
But this week, Guy Adami, a founding member of the Fast Money team, said the following in his final trade call on Friday:
- “Buy TLT – I think yields are going back down.”
This was mild compared to the sacrilege that he uttered on Thursday :
- “I think there’s a chance we [10-yr yield] go back to the 1 1/2s [1.5%]“
Tom McClellan turned positive on bonds on Friday morning in his article M2’s Slow Growth Creates Opportunity in Bonds. His analysis always interests us as it did this week:
- “In this week’s chart, I compare that 4-month ROC of M2 to a monthly plot of T-Bond futures prices. It is interesting how good the correlation is, and the conclusion from that is that surging money supply seems to end up causing bond prices to rise. All of that extra money has to go somewhere.”
- “Also interesting is that when this 4-month ROC dips below about 1%, that tends to be followed by a period of rising bond prices. The last dip below 1% in 2012 did not work out so well, but others in the past have a reliable association with bond prices rising as the M2 growth starts coming back on again.”
- “With T-Bond prices pulling back now to the top of the broken upper channel line, this information about M2 growth coming down now to a low level provides evidence to argue for higher bond prices in the months ahead.“
Granted that Michael Santoli, Josh Brown, Guy Adami and Tom McClellan are smart veterans and not your average equity-fee-collectors (otherwise known as long only stock or stock mutual fund managers). But still, we wonder whether there is still bullishness around!
So what would be really ironic? The payroll number comes in much stronger than expected and bond yields shoot up on June 7. That would just about make everyone bearish, both fundamentally & technically. Just as bearishness becomes universal, Treasury prices could ironically bottom the following week, say on June 12, the date of the 10-year auction.
This is not just wild speculation. Empirically speaking, when Treasuries have suffered steep sell-offs in May, the 10-year auction in June* has usually marked the bottom or near bottom in Treasury prices.
Obviously we have no clue what will happen next week and neither does anyone else. But we do expect hawkish members like Dallas Fed President Fisher to tone down their “taper” comments to try & calm the bond market.
* As an aside, we remember the 2009 case vividly because we made a bet with the CNBC Fast Money team on June 10, 2009 that prices had bottomed and would rally until thanksgiving. We won that bet handily but Fast money anchor Melissa Lee has yet to pay off that dinner bet. We have given up on Melissa but still have hopes that Guy Adami, Tim Seymour, Karen Finerman will honor the bet.
3. U.S. Stock Market
A fast vertical sell-off in Treasuries is like a tsunami. It tends to wash away all indicator buoys and stuff. That is why we won’t bother readers with our usual summary of guru opinions.
Empirically speaking, a steep speedy Treasury sell-off in May-June has almost always led to a sell-off in equities in June-July. Stocks tend to bottom in June-July and rally. The rally is real & sustained when the economy is strong and remains strong like 2006 & 2012. The rally is not long lasting when the economy begins to weaken in the second half like 2007, 2011 etc.
So it comes back to the same question that a comment from Sam Zell brought up weeks ago and where Larry McDonald & Anthony Scaramucci disagreed last week – is this like 2007 or 2006?
4. U.S. Economy
Friday demonstrated once again that we are in data dependent markets. The economic data released at 8:30 am was weaker and so Treasuries rallied while stocks were OK. Then the 10:00 am date came in stronger than expected and Treasuries sold off all afternoon. The stock market followed in late afternoon.
Even a conviction heavy bull like Cramer-colleague Stephanie Link admitted on Friday afternoon that this week’s data was weak. Pimco’s El-Erian is worrying about growth (see clip 1 below). ECRI’s Lakshman Achuthan is still singing the recession tune, at least in his Friday’s article titled What Wealth Effect?
- “Despite surging prices for homes and equities, consumer spending is contracting, registering its biggest monthly decline since September 2009. Quite simply, the wealth effect is rendered moot by languishing incomes.”
- “No wonder yoy U.S. import growth has also plunged into negative territory. In recent decades, this has happened only during U.S. recessions. Notably, unlike data for GDP and jobs, imports data are not revised substantially, long after the fact.”
- “The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009.”
Below is the chart from the ECRI article:
5. The Tweet of the Week
It comes from Charlie Gasparino of FBN via Doug Kass, according to Mr. Gasparino:
- Charles Gasparino @CGasparino2m – “Jeff Gundlach(via dkass)”I’d say the bullishness today looks remarkably similar to the bearishness of Mar 09″ take that larry “dow 28K” fink”
With a little bit of search, we found this comment on stocktwits.com attributed to Gundlach:
- < font style="font-size: 14px;" face="Times New Roman">“Perhaps it started yesterday. I think that the complacency regarding stock market risk is very similar today to 1998, 1999 and 2006 and 2007. … I think we’re at 92% bullishness right now in the world of advisors on stocks. … The most extended sentiment I’ve ever seen is 98% bearishness in mid-March 2009. … I’d say the bullishness today looks remarkably similar to the bearishness of Match 2009.”
Will any of our FinTV friends check with Jeff Gundlach and enlighten us viewers?
6. Seinfeld episode and Alex Steel, Sara Eisen, & Becky Quick
Most people thought the near doubling of yield on the 10-year JGB was a big deal. Certainly BoJ’s Kuroda-san thought so. But not BTV’s Alix Steel. She jeered at this rise in JGB yields in her conversation with Jay Pelosky on May 23. Her exact words:
- “Is there any concern that the 10-year government bond yields in Japan move up ever so slightly?“
Watch the steely & almost disdainful look on her face at 00:36 of the long clip. The look is even worse than the “ever so slightly” words of contempt. Of course, BTV’s Sara Eisen is still the reigning champ of “real men don’t hide in treasuries” sentiment.
We know CNBC’s Becky Quick shares the same sentiment. Usually she hides it well. Not this week though. When Jurrien Timmer of Fidelity told her that his benchmark was 60-40, Becky interrupted:
- “60-40 meaning 60 in stocks, 40 on bonds? … that’s a big bond exposure.”
We watched that exchange live and the look on Becky’s face made it clear what she thought of it. And almost instantly we remembered the Seinfeld episode in which he orders a salad after his blond date orders a porterhouse steak. For those who can’t instantly remember every Seinfeld episode, we include the 51 -second clip below:
It seems that Alix Steel, Becky Quick & Sara Eisen react just like Seinfeld’s blond date when some one tells them they are invested in Treasuries. Thankfully, they don’t say to their Treasury-investing guests what Seinfeld’s date said to him:
- “what! Are you one of those?”
We have a gentle suggestion for these successful, high-income, national TV anchorwomen. Ladies, Buy some 30-year Treasury Bonds and hold them during a week like last week. Then you will realize that only “men” who can hold a knife invest in 30-year Treasuries, “men” being a gender-neutral adjective for proverbial “alpha meat eaters”, of course.
- Mohamed El-Erian on CNBC Fast Money Half Time on Thursday, May 30
1. Walking Away from Risk Assets & Secular Bear Market in Bonds – Mohamed El-Erian on CNBC Fast Money Half Time – Thursday, May 30
This is a very big call. El-Erian explains in detail the cryptic tweet from Bill Gross in which he announced the end of the secular bull market in bonds. But he doesn’t think this is a cyclical bear market yet. His basic case is that while we need genuine growth, all we have had so far is growth assisted by central banks behind the wheel. The hand-off has to occur before the turn otherwise current valuations cannot be supported.
- there’s two distinct issues. there’s what’s happening to the bond market and there’s the more bigger question, how is Japan impacting all this. I think in order to answer the bond market, you also have to have a view on Japan. Because let’s remember that the last bit of the rally has been very much induced by Japan and more generally by indications that central banks are all in, they’re all in. And what is happening in Japan is either a blip or, and this is important, could be an indication of something more fundamental. It’s an indication of something more fundamental, we should be paying a lot of attention to it.
- so if you run it forward a few months as opposed to a few hours or few days, I think we are going to get growing indication that this hyperactive central bank policy in Japan is becoming increasingly ineffective. So they’re going to have to do even more. Already today, there are rumors that the public pension fund may buy more equities to support what the central bank’s trying to do.
- I think the message is going to come out of Japan over the next few months is careful guys, central bank policy is becoming increasingly ineffective. I think that’s a really important issue.
- so critically it comes down to are we going to make this transition that the markets have priced in? And the transition that the markets have priced in is assisted growth where central bank liquidity is behind the wheel… that is wonderful for the equity market. it’s wonderful for risk spreads. it’s also okay for interest rate spreads. Will we make that transition to genuine growth? Will we go to fundamental growth? That is what we need.
- unfortunately today’s data suggesting that transition is not happening quickly enough. That’s the key issue, okay, because at some point, central banks are going to become ineffective.
- If it’s after the transition is made, than no risk for investors,
- but if it’s before, we’re going to have a hell of a lot more volatility in front of us.
- we think the time has come to bring that risk positioning to, “neutral or slightly
underweight” and do so by walking away from risk, by selling, not running away but walking away from risk. The reason why, it’s very simple. We’re not seeing this handoff occur. Valuations and prices need to be validated by fundamentals. We don’t see that happening as smoothly as we’d like. In addition, we started to see dislocations in markets. We look across a lot of markets and there’s something going on the last few days. There’s something going on. So, you know, all this is saying, you know what, let’s book the profits, let’s get more liquid. it provides us optionality as we go forward. and let’s get more data.
- most corporations as strong as we’ve ever seen them. rock solid balance sheet. more cash than they know what to do with. so they are rock solid. but they need top-line revenue growth. so you need growth in general. okay. so far we’ve had borrowed growth. Central banks have brought growth forward from the future. We need genuine growth. look at Europe. sure, Europe is relaxing in austerity, but there is no growth model. There is no growth model in Europe. So you’re not going to get much growth out of Europe.
- the saving rate is down to 2.5%. We better see either another source of demand or we better see export zoom. But China is also slowing. So I worry a little bit. The issue’s not corporations. They are rock solid. Can you get the growth that validates the fundamentals that you need to validate the prices? And that’s the big question mark.
- in general, we think Treasuries are still range bound. and we have indicative levels, indicative of 2.25% on the 10-year, and we don’t think that this is the beginning of the cyclical bear market. We think we may get a secular bear market. Interest rates have bottomed. ..so we’re…entering a different phase for the bond market. but we don’t think it’s a cyclical bear market for interest rate risk as yet.
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