Editor’s Note: 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. “Bernanke got cold feet”
These are the words David Rosenberg used to describe Bernanke’s posture in his congressional testimony this week. Jeff Rosenberg of BlackRock made similar comments, albeit in a more roundabout manner (see clip 1 below). Guess what the markets did in response. They all went up this week with bonds rallying even more than stocks; EMB up 3%, HYG up 1.4%, TLT up 1.35%, GLD up 80bps and SPY up 70bps.
If the data cooperates for the next 6-7 trading days, then perhaps the S&P, even in its extended overbought condition, might keep levitating until the FOMC meets on July 30. After all, as Lawrence McMillan tells us (see section 2 below), there is no overhead resistance for the S&P.
1.1 Bernanke vs. Markets
Chairman Bernanke kept insisting on making statements that the markets simply don’t accept:
- Tapering is not tightening of monetary liquidity – suffice it to say that both Rick Santelli and Jim Bianco dismissed this self-serving assertion this week.
- Size of the Fed’s portfolio is important, not the size of the monthly purchases – Drew Matus of UBS answered this week on CNBC SOTS – he believes that the size of the Fed balance sheet matters. If you went down to the trading floor and asked what everybody believes they would say it is a flow effect or 99% the buy for the month.
But markets don’t really care about these disagreements or what Bernanke actually believes as long as he remains soft & accommodative.
1.2 Bernanke to Larry Fink & David Tepper – Forget about it.
Readers might recall what Larry Fink said last week:
- I would .. just as worried if the FED does not slow down purchases as the same time treasury reduces issuance. The FED would then be buying 130% of new issuance
David Tepper had made a similar argument on May 14:
- “so $400 billion is going to be taken out of the bond market. … to keep a steady pace, the Fed has to taper back. … else you are back, I think, in the last half of 1999“
Well, Bernanke essentially told them to forget about such caution via his congressional testimony. Because, he answered a direct question on this topic and said amount of monthly QE purchases will not necessarily change when the Treasury reduces its issuance of treasury securities.
So it will come down to the economy.
1.3 Economy vs Economy
The last 3 months have seen a divergence between strong payroll data and weak GDP, ISM etc. This week, Goldman & JP Morgan downgraded their estimates of Q2 GDP. So the future of tapering and the direction of the financial markets will depend on how the economic twain shall meet – whether payroll data weakens or whether the rest of the economy strengthens.
2. U.S. Equities – Guru opinions
Ralph Acampora has been among the most outspokenly bullish predictors on TV and his conversation with Scott Wapner on Friday, July 19 shows he still is:
- Wapner – “when we spoke last week, maybe midweek, you were about as bullish as anybody I’ve ever heard. You still?”
- Acampora – “Yes. Absolutely.”
- Wapner – “Not wavering one bit?”
- Acampora – “Not at all.”
- Wapner – “Microsoft dropped a bomb, Ralph.”
- Acampora – “so what? GE broke out. It hasn’t been this high since October 2008. Rotation. It’s good.”
Lawrence McMillan was just as consistent in his Friday summary:
- Now that the Standard & Poors 500 Index ($SPX) has made new intraday and closing highs, joining the other major indices (except NASDAQ), there is once again no overhead resistance. However, increasingly overbought conditions may combine to slow the rally at least temporarily.
- In summary, the indicators remain bullish and our intermediate- term outlook is thus positive. There might be a sharp, but short-lived correction at any time, but as long as the majority of the indicators remain on buy signals, any correction should be limited in nature.
But many others had a very different message this week.
Jim Chanos on CNBC Delivering Alpha on Wednesday, July 17:
- “We just did a study on a series of companies to take a look at today versus spring of 2000. You remember the spring of 2000? A lot of silliness going on. We wanted to see just how the high
end of valuation, and we don’t short on valuation but we just wanted to see what it looked like, and there are as many companies today trading at three times the market multiples in terms of price to sales, market cap and price earnings looking out one year as there were in the spring of 2000“
Jeffrey Saut from his article “Philosophy of Tops” on Tuesday, July 16
- we have arrived at my major timing point of July 19th, which for months I have suggested represents the best potential for the first meaningful decline of the year. Of particular interest is Justin’s last sentence, “They (read: tops) come before anyone is ready.” Currently, very few are actually ready for an intermediate “market top” given the consensus opinion the recent Dow Wow is the start of another leg to the upside. That bullish feeling is presented in a well-written article by technical analyst Michael Kahn in this week’s Barron’s whose title reads “The Rally Is for Real,” but with his bullish conclusions, at least on a short-term basis, I am in total disagreement. My analysis suggests the extremely oversold condition that spawned the recent rally has evaporated, leaving my proprietary indicators just about as overbought as they ever get. Take the NYSE McClellan Oscillator (see chart); it has traveled from the deeply oversold levels of June (minus 190), to last week’s high of +150. Indeed, the McClellan Oscillator is more overbought than it has been at any time over the trailing 12 months. In past missives I have discussed my various “timing points” (minor 7-11/12-13; major 7-19-13), and backed up those quantitative/technical timing points with a potential news backdrop supporting the rationale for a trading top including: the “Fed speak” of July 17/18th, weaker than expected earnings/revenues season, rumblings out of the D.C. Beltway about sequestration taking a “bite” out the economy accompanied by arguments about debt-ceilings and continuing resolutions, etc.
Scott Minerd of Guggenheim Partners
- “I hold a bullish long-term view of equities as an asset class, but it appears the stock market is in for a rough summer. One of my favorite indicators is the New York Stock Exchange advance/decline line (NYSE breadth) which is calculated by taking the difference between the number of advancing and declining stocks in the equity index. In the most recent equity market decline, NYSE breadth dropped more than equity prices, which can indicate a larger sell-off coming in the near- to medium-term. Although equities have recently rallied, mature markets often exhibit this type of behavior as they come closer to topping. The current outlook for equities has parallels with the trajectory of stocks in 2007.”
- “In that year, breadth turned down by 17 percent in February, while the Dow Jones Industrial Average only declined 6 percent. Although equity prices then enjoyed a brief rally in the spring, the divergence foretold further downside risk, which materialized in July of that year when equity prices collapsed by nearly 10 percent. A similar pattern could be playing out today. The oversold position in the stock market last month and declining market breadth seems to indicate that, while equities are now enjoying a rally, investors should view it with caution. This is a rally to sell, not to buy. Given the deteriorating technical indicators and worrying signs in the global economy and particularly in China, it is likely that stocks will see more damage before the end of the summer.”
Brian Kelly of CNBC Fast Money on Thursday, July 18:
- “you can look at Warren Buffett’s measure which is market cap to GDP. Today the market cap in the US hit an all time high. That ratio is at 118%. The last time it had gone over 100% was 1999 and 2007. These are now extreme valuation scenarios. We are in a bubble and it could go on forever but at least be aware this is not a cheap market.”
J.C. Parets on CNBC Fast Money on Thursday, July 18:
- “from a secular perspective, the market is fine. we exceeded the 2000 highs, the 2007 highs. We can see 2,000 in the S&P 500 as long as as long as we remain above those highs; So from a secular perspective we’re fine.consumer discretionaries hitting all time highs, financials are hitting new 52 week highs. industrials are taking out the 07 highs. technology is not where it was in 2000 but well above where we were in 2007. I think that is helpful from a longer term picture.”
- “Now in the shorter term i got to jump in with these guys. We rallied back up to the May highs .I think now is probably a good time to be selling, probably fading these highs, if you are looking at individual stocks, you can stay in the stocks that have exceeded April-May highs, the biotechs, the financials of the world, the industrials and stay away from those that failed to see those highs.”
Doug Kass on CNBC Futures Now on Tuesday, July 16
- “The market could be making the high for the year this week and possibly even longer. I am flat out saying the market is making a top here.”
A summary of his reasons can be found in the CNBC.com article Seven reasons why the market is topping out: Doug Kass. His seven reasons are – Stagnating GDP will weigh on revenue, UPS lowers expectations, Coca-Cola’s weak shipments, Citigroup’s North American worries, Refinancing slowdown, the coming taper, the stronger dollar.
3. Huge Backwardation in Oil & Dow Jones Average
This week, Tom McClellan writes about the move in oil futures and the message that might have for the stock market.
- “This current spread between the August 2013 and the July 2014 contracts is the biggest raw price spread in years, although as a percentage of the current price we have seen more
severe backwardation at other times. The message to take from this is that the current pop in near month futures prices is not likely to continue much farther, with the rubber band already stretched.”
- “And one additional message to take from this concerns the stock market. In recent months, there has been a strong correlation between the movements of oil prices and the movement of the DJIA.”
- “So if near month crude oil prices are stretched enough relative to far month prices to merit a pullback, then the implication is that the stock market ought to pull back in sympathy.”
4. Fund Flows – U-S-A! U-S-A!
The USA chant was the title of this week’s report of Michael Hartnett of BAC-Merrill Lynch. Why? Look at the numbers:
- Largest weekly inflows to US equity funds since June ’08
- Huge $20bn global equity inflows versus $1bn out of bonds
- Largest inflow to HY bond funds since Oct’11 but
- redemptions from Treasuries, Munis, IG, EM debt funds;
- floating-rate debt funds see 56th consecutive week of inflows
5. Cooperman vs. Gundlach – IV
As we wrote on May 11,
- “Leon Cooperman is a
stupendously successful hedge fund manager. His forte is equities and
especially picking value stocks that deliver great upside. But he does
not seem content to talk about stocks. He goes out of his way to trash
Treasuries in his TV comments especially when he is paired with a
bullish-on-Treasuries Jeff Gundlach.”
- “The first was on June 30,
2011 and the second on March 6, 2013. The third was this Thursday, May
9. On each occasion, Mr. Cooperman made the same arguments, came to the
same conclusion that 10-year Treasuries should yield 5%-6% and used the
same analogy about buying Treasuries is like “picking up pennies in front of a steam roller.”
On the first two occasions, Cooperman proved to be completely wrong and
Gundlach was proven correct. Will this 3rd time be a charm for Lee
Yes it was. Mr. Cooperman has indeed won the 3rd round. The 10-year Treasury yield has risen steeply from 1.81% on May 9, 2013 to 2.49% on Wednesday, July 17. Why Wednesday, July 17? Because Mr. Cooperman essentially reiterated his disdain against U.S. Treasuries in his comments at CNBC’s Delivering Alpha conference this past Wednesday. We are assuming, of course, that Mr. Gundlach is still of the opinion that 10-years at 2.49% are an attractive investment. The 4th round has begun.
What about the skill that made Mr. Cooperman so successful? His best picks for the next year courtesy of CNBC.com.
- Quality Growth – Express Scripts, Qualcomm, Thermo Fisher Scientific
- Phoenix from the ashes – Qualicorp, SandRidge Energy
- Growth with high-income – Arbor Realty Trust, Atlas Resource Partners, Chimera Investment, KKR Financial Holdings, THL Credit.
- Jeff Rosenberg on CNBC SOTS on Monday, July 15
1. 2.5% year-end target for 10-year Treasury – Jeff Rosenberg on CNBC SOTS – Monday, July 15
Mr. Rosenberg is the chief fixed income strategist at BlackRock. Here he speaks with Kelly Evans and Carl Quintannia of CNBC.
- Evans – Treasury yields have risen 50% in the last three months. The question is how high will yields rise and where we go from here? It seems this spike has been one of the sharpest moves in history.
- Rosenberg – It certainly has especially when you look relative to the low yields that we came of off and in terms of a percentage of yield – it was one of the worst performances in fixed income markets for May and June period. The key question on everyone’s minds is of course can that persist? The answer is we don’t think so. You need a much stronger economy to justify this continuation in pace of increase in interest rates. We don’t think that’s likely for the second half.
- Quintannia – is your general expectation that we are going to see 3% soon in the next 6 months, 12 months,
- Rosenberg – we have to be careful in talking about what is the terminal rate of interest rates versus what rates could we hit on a short-term spike. We hit 2.75% last Friday, and we touched it and Bernanke said last week that that was a financial condition that was too tight and he had to push back against that. What we got was lower interest rates .It doesn’t mean you couldn’t spike to 3%, but we think right now what we see in the economy, terminal interest rates for the end of the year, our forecast is 2.5%, roughly where we are today.
- Evans – do you look at 2.75 or 3% as a buying opportunity or generally if rates are moving higher here and there maybe something from Bernanke Tuesday, Wednesday, or Thursday and again that’s the time when people should be thinking about increasing their allocation?
- Rosenberg – tactically, yes. Of course, it depends on what is the source of that increase. if we have a big acceleration in the economy today, retail sales, we are getting the opposite, but if we had a big acceleration then all bets are off. you could be to a more permanent level of higher interest rates. But a short-term spike to 2.75%, 3% on an over reaction by the bond market, you can see that as a it can tactical buying option.
- Quintannia – do you believe the economy sustained any damage because of these spikes?
- Rosenberg – that’s the big uncertainty. I think the economy is very vulnerable to these types of spikes but the damage was mitigated because the key issue for the economy is the performance of the stock market. the stock market did okay because it is all about confidence, right? Fed’s policy works through the wealth creation channel. Monetary policy is working backwards here it is all about financial stability and financial conditions generating confidence that confidence generating spending. So far what has held up the economy – this stock market didn’t get hit too bad relative to the bond market. I think the damage has been mitigated. another 100 basis points increase in mortgage rates and interest rates from here, probably harder to see. that’s why Bernanke pushed back last week.
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