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. “Fed blew it”
said Jim Cramer on his CNBC SOTS show on Wednesday morning. Cramer went on to explain that Fed should have tapered when they had the chance. We concur. That is why we had humbly appealed to Chairman Bernanke to taper in the July 30 FOMC meeting. But have they really blown it? And what if they taper and then they discover it was a mistake? We let a few gurus answer these questions:
Tony Crescenzi of Pimco on CNBC Futures Now on Thursday, August 29
- “chance of a September taper we put at 8 out of 10 … 80% or more.”
Rick Santelli on CNBC Closing Bell on Friday, August 30
- “the Fed isn’t going to let what’s going on in Syria get them off track. … my opinion is they’ll taper in September, unless we get a nonfarm number, one week from today, in double digits or negative.”
Bob Doll of Nuveen on CNBC FM-1/2 on Friday, August 30
- “my view is the Fed has decided they need to find reasons to taper. One of them, a technical reason, the federal budget deficit is much smaller than it was when they started. So the technical reasons are causing some distortions at $85 billion a month. unless there’s a disaster, I think it starts in September. … “
- “bonds have taken it on the chin as rates have moved up. I think short-term bonds are a bit oversold, but I think the march up in rates will continue as the system normalizes, as the financial system heals. I still think high twos for ten-year treasury is too low.”
Jeffrey Gundlach (see clip 1 below)
- “I think the Fed will taper. … they’re just financing the budget deficit. The budget deficit is less. They really need to slow down purchases.”
- “I think after we get
the tapering, I think we’re going to be in a nervous condition because
what happens if interest rates spike to 3.50%? Is the Fed going to
instantly reverse curtailing their bond buying program because interest
rates rise? I don’t think they can. I don’t think that gives any
credibility to their policy machinery if they do that. What happens if
there’s a weak economic print? Can they go back to buying bonds? I don’t
think they can.”
Stephanie Pomboy of Macro Mavens (see clip 2 below)
- “the Fed’s spotty
language has been pretty clear on that and I agree with Steve they
probably feel like having put it out there so aggressively they have to
- “my feeling is
taper, because it can’t be handled, will have to be reversed. So if the
Fed is concerned about its credibility right now and it has to do
taper for credibility, it will have less credibility.”
- “if the Fed goes
out there and tapers, in Sept-October and then come December has to
start scaling that back and say, maybe we shouldn’t have tapered, maybe
we’re going to have to go back to the full $85 billion a month,
credibility is going to be destroyed and volatility in the market I
would imagine would pick up way beyond anything we have seen so far.”
Julia Coronado of BNP Paribas on CNBC Street Signs on Thursday, August 29
- “… We have to keep in mind when the Fed gave its guidance on tapering, it believed it was not going to tighten market conditions nearly as much as we’ve seen. so the market reaction to their efforts at transparency has been beyond their wildest nightmares, and we’re starting to see that have some impact on housing, on durable goods orders, on investment,… so I think these are worrisome signs for the Fed. There is no real reason to move forward with any urgency. You’ve given the shot across the bow, squeezed out some speculative positions. Now you can be patient, and I think the Fed wants to taper into strengthening data. I think what we saw today isn’t good enough. It still depends very much on the employment report and what the tone of that is. But I think on September 19 they’re going to decide on the err on the side of caution given what the markets are.”
Scott Minerd of Guggenheim Partners on Wednesday, August 28
- “My view is that it appears likely that the Fed will continue signaling that a reduction of its bond purchases will happen, but that the central bank will probably start hinting about taper-lite, or a smaller reduction of its bond buying, than it signaled back in June”
Jeffrey Saut of Taymond James on CNBC FM on Friday, August 30
- “I don’t think you will get a tapering in the September time frame with some of the weakening soft statistics. I don’t think you will get it. I really don’t think you will get it this year, which is a complete contrary point.”
We continue to watch the yield curve to get clues about both a tightening of monetary liquidity and the consequences of it. To us,
- rise in the 5-year yield is the best measure of a tightening of monetary conditions or reduction of easing by the Fed,
- the 100-basis point level of the 30-10 year yield curve is the key signal for determining a QE and non-QE phase, and
- fall in the 30-year yield is the best measure of expectations of a slowing, disinflationary economy.
This week, the 5-year yield remained flat at 1.63% (2-year yield rose by 2 bps to 40.7bps) suggesting steady resolve of the Fed based on economic data. The 30-year yield fell by 9.3 bps suggesting higher expectations of a future slowdown. The 10-year yield fell only by 4 bps thus lowering the 30-10 year yield spread to 92.4 bps, one of the lowest levels for this spread since QE began.
Does this mean, at this moment, that the Fed will reduce liquidity in some way and that would be negative for the economy? That would be our guess. Of course, next week’s data, especially next Friday’s payrolls data will be the main determinant.
The leading sector & perhaps the strongest sector of the economy has been housing. That is why housing is the most important factor for Josh Brown of CNBC Fast Money 1/2:
- “if we have to prioritize what’s most concerning right now to me, I would put Syria a little bit lower on the list. I think the housing market is really, really important here. I think the telegraphing we’re getting from the home builder stocks is highly negative. The 20% drop in new home sales, which are much more concurrent than existing home sales we saw in June and July are vexing and, frankly, if you look at GDP growth in the second quarter, about 40% of that was housing related. So if we’re going to worry about all of those issues, I would pick housing to be the number one right now thing that people want to be considering and watching very carefully“
We concur and that is why we elevated this section to the number 2 slot this week. How does this all important sector look to other gurus?
Robert Shiller on CNBC SOTS on Tuesday, August 27
- “I think that there
is a risk of a weakening housing market. It is a speculative market,
and this has been not by research, but by irrational exuberance and
that can suddenly change. it is a story, and evolving story, and nobody
who can really predict this for sure. It is risky.”
- “the momentum that we have seen historically may be weakening, because there’s so many more professionals in the market. … They are thinking it is a market with real momentum, and it is going up, and I can flip something and buy it and sell it year later, it is pretty safe .. this idea of a lot
of speculators in the market is not healthy“
Scott Minerd of Guggenheim Partners on Wednesday, August 28
Friday, new home sales came in at their lowest level in nine months,
down 13.4 percent from June. New home sales are booked when a contract
is signed, a key difference from existing home sales, which are booked
months later when the deal closes. As such, new home sales are the most
current indicator of housing activity. This makes the recent collapse of
new home sales exceptionally disturbing. All told, there has been a
20.7 percent decline in new home sales in June and July. We would view
any other business that experienced a 20 percent decline in activity
over a two month period as in a highly difficult position.”
all of this together, there is strong evidence that the economy is
eroding below the surface. Importantly, this comes at a time when the
U.S. Federal Reserve is under increasing scrutiny over whether it will
maintain its apparent commitment to tapering its bond-buying after the
Federal Open Market Committee’s September 19 meeting. My view is that it
appears likely that the Fed will continue signaling that a reduction of
its bond purchases will happen, but that the central bank will probably
start hinting about taper-lite, or a smaller reduction of its bond
buying, than it signaled back in June. As all this plays out, it appears
as though volatility will continue to rise as we head into September.”
Jeffrey Gundlach (see clip 1 below):
- “the belief in the housing market seems really overextended at this point given how low home sales really are, how the new applications for mortgages are down by two-thirds from where they were in 2006-2007, new home sales are down by two-thirds. The statistics are not really that good yet home prices are back to where they were on the national average all the way back to where they were in ’06-’07. There seems to be a real disconnect between home prices, rising mortgage interest rates, and so I think that’s something of an Achilles’ heel to the economy“
3. U.S. Bond Market
What is the near term direction of interest rates and where will the 10-year yield end up at the end of the year? Below are a couple of guru opinions.
Tony Crescenzi on CNBC Futures Now on Thursday, August 29
- “yields we think will move lower from here, there can be volatility , low 2s to mid 2s … on the US 10-yr – but we will be reassessing and we say show me wrt 3-3.5% forecast of the Fed … there wont be a rate hike until 2015 at the earliest and we think until 2016″
Jeff Gundlach (see clip 1 below)
- “I think the ten-year could go to about 3.10% or so somewhere between now and year end”
Andy Brenner on CNBC Santelli Exchange on Thursday, August 29
- “we continue to see bond funds getting outflows. you had a huge amount in June. You had a significant amount in July and in August it’s picking up again. We just see interest rates going higher. … we see us taking out 2.92%, 2.93% going well above 3%. We have been saying this for six months.”
- “I think you are definitely going for higher rates. We tend to think it’s going to be the ten-year. but you know what? … the market is still way too leveraged. Everyone still feels the Fed will continue to taper and maybe a reduced rate, and at some point it’s just going to turn around. You have already gone from 1.60% ten-years out to 2.80% today. It’s just going to get worse. You’ll probably end up somewhere around 3.25%, 3.5%. may be stabilize at 3.25% .., Elliott Wave is a looking around 3.33%. “
A tweet on Friday afternoon:
- Ryan Detrick, CMT @RyanDetrick – A month ago, $GLD was hated. Now it is $TLT. Consensus pol bonds % bulls near Feb ’11 lows. http://stks.co/rQpR
4. U.S. Equity Market
Ralph Acampora on CNBC Closing Bell on Friday, August 30
- “… step back and look at weekly bar charts, not minute by minute or daily. Look at Weekly. You see a lot of blue chip stocks are very, very heavy. … the implications are that multinational companies are saying something to us. When I combine that observation with the emerging markets, it is not a very pretty picture. So, I would take advantage of any rally to lighten up. .. I am a secular bull, which means I’m looking out four, five, ten years or more. but even secular bulls have bear markets. This could be a pretty difficult period.”
- “… you cannot turn your back on large cap stocks. Ultimately they dictate. and, yes, you do have a period of time here where small caps and midcaps are doing well. Honestly, if IBM and McDonald’s and Google all start breaking down, they will follow through on the downside.”
- “… in any kind of a pullback, that we’re all talking about, it’s the sector in groups that get down the least. I would suspect small and midcap will not get as badly damaged as large caps. Therefore, you want to be in small to midcap later on. but near term, don’t fight papa Dow.“
His interview-mate Lance Roberts of Street Talk Advisers:
- “look at weekly charts. we have a weekly sell signal in the short term which suggests this could lead to lower prices over the next month to month and a half.”
- “you could probably see this market on the S&P 500 test closer to 1500. … I think it’s reasonable to take profits on rallies. … there’s a lot of the drivers you’ve had earlier this year are kind of dissipating at the moment. Stocks are overvalued and extended. a deeper correction would provide a much better buying opportunity than trying to buy here”
Jeffrey Saut of Raymond James on CNBC Fast Money on Friday, August 30
- “I think we’re involved in a correction here. I think Guy Adami could be right if we don’t have activity over the weekend, you could get relief rally. I have been saying for months, you know this, the first window for a meaningful pullback would come in the mid-July to mid-August time frame. I think we started that. Even if we get a relief rally, I think we’re headed lower into the middle of September before you get a decent tradeable bounce.”
- “the zone is 1530 which is somewhere around the April reaction lows and 1560, the June 24th reaction low. The 200 day is around 1560. So the zone is 1530 to 1560.”
Lawrence McMillan on Friday, August 30:
- “The stock market has continued lower, after first breaking significant
support at 1680 about two weeks ago. With the further breakdown this
week, below the next support level at 1640, there is a distinct pattern
of lower highs and lower lows. That makes the $SPX chart bearish.”
- “In summary, the intermediate-term indicators are bearish. The fact
that some oversold conditions have spurred a short-term rally doesn’t
change that fact.”
A few interesting tweets from Friday afternoon:
- Helene Meisler ?@hmeisler7m – Closing put/call ratio 112% is highest since 7/3. No surprise, both pre holiday weekends
- Bespoke ?@bespokeinvest29m – Midcaps and Smallcaps got crushed to the tune of 1.5% today. Not a good sign for those hoping for a quick bounce back.
- Jason Goepfert ?@sentimentrader2m – This week saw the 2nd-largest weekly liquidation in speculators’ long positions in index futures ever, next to 3/6/07.
- Bespoke ?@bespokeinvest3m – Looks like no one wants to hold stocks heading into the long weekend. Can’t blame them, but like the odds of a bounce back on Tuesday.
- Ryan Detrick, CMT ?@RyanDetrick3m – Ugly bearish engulfing pattern on monthly chart for $DJIA. Yet, vol. lowest since early 2007.
One of the worst currency markets within EM has been India. But something interesting happened this Wednesday. Thanks perhaps due to Secretary Kerry’s hawkish speech on Tuesday and Indian parliament passing its huge spending & food entitlement on Wednesday in India, the Indian Rupee had its worst one-day decline as NY markets opened on Wednesday morning. Everything India related opened lower on Wednesday morning. And then around mid-morning, we saw the following tweet:
- Michael A. Gayed @pensionpartners – India ETF $INP intraday kinda having a massive reversal.
And he was right. The Indian Rupee ETF, ICN, closed up on Thursday and the Indian equity ETFs rallied strongly into the close. A day later, on Thursday, Jon Najarian of CNBC Fast Money told viewers:
- “I saw some real big activity yesterday in emerging markets, one of the big ones of course, India. the EPI. This is the India fund by Wisdomtree and somebody stepped in and bought 1.2 million shares of this ETF and they bought a bunch of puts. That’s a synthetic call. All you really need to know is that’s a very bullish trade.“
That’s nice, Dr. J but why didn’t you tweet this on Wednesday morning?
On Thursday morning, we saw the following tweet:
- RR Trades @rr_trades Emerging mrkts poised for hard bounce.
$EIDO +4% today after recording a Demark daily buy signal y’day. pic.twitter.com/60hk3gXBdl
The picture in the tweet is below.
The strange nature of markets running ahead of news was tweeted by Michael Santoli of Yahoo Finance on Friday afternoon:
Michael Santoli @michaelsantoli – The $EEM up 3.5% from the June 24 low even as emerging markets news flow has
only gotten worse. Not sure it’s decisive, but worth noting.
So what does Michael Hartnett of BAC-Merrill Lynch say about EM? He called EM the comeback asset class of 2014:
“But while we end summer more nervous than we began it, the structural underweight of equities argues against an ’87/’98/’08 meltdown in stocks. And central banks still control the bond market. Policy makers have yet to panic sufficiently for an inflection point in global risk, but an improving long-term risk-reward trade-off could make EM the comeback asset class of 2014. Successful long term investing requires buying “humiliation” rather than “exuberance“. “
Interested readers might want to take a look at our adjacent article – Indian Rupee, Existential Battle & Echoes of Soros vs. BoE.
6. Gold & Wheat
What does Gold have to do with Wheat? And what does the recent action in Gold predict about Wheat Prices? Read Tom McClellan’s article Gold Says Wheat Prices to Drop. A few excerpts below:
“I don’t trade wheat futures, but I am an end user. And I know how
important grain prices can be for the economy generally. So it is for
that reason that I care about the relationship in this week’s chart. I
showed this once before in a Chart In Focus article back in April 2011, when gold was forecasting a surge higher in wheat prices.”
“We did get that surge, but now the message has changed dramatically.
The big drop we saw in gold prices into gold’s June 2013 bottom is
saying that a similar looking drop is coming for wheat prices.”
“I do know that gold has proven itself as a great leading indicator for a
lot of things in the past. Back in the days when there was a CRB Index
(before it was bought by Reuters, then Jeffries, then discontinued),
gold prices would lead the overall commodities market by about 4
months. I don’t know why that same 4 month lead time did not also work
for wheat, but the chart evidence is sufficient to say that it is
“good news for consumers is often bad news for
producers. So if wheat prices do indeed fall into Summer 2014, that’s
not going to be bullish news for farmland prices or for makers of
- Jeff Gundlach on CNBC Fast Money Half Time on Thursday, August 29
- Stephanie Pomboy on CNBC Fast Money Half Time on Wednesday, August 29
1. Change of psychology needed – Jeff Gundlach on CNBC FM -1/2 -Thursday, August 29
This is a detailed and very interesting interview. Kudos to Scott “Judge” Wapner and the FM-1/2 team.
- we’re looking for signals on interest rates as to what might be a signal that the interest rate increase is over and, frankly, I don’t really see those signals right now. The sentiment that I talked about being different from a year ago is now basically fear and loathing. People have gone from I don’t care about volatility, I want income, to I don’t care about income, I don’t want volatility.
- When I asked my large investors what would they do if the ten-year went to 2%, they all say I would sell heavily. and that means you have this kind of circular argument against interest rates falling. You need a change of psychology away from fear and loathing.
- One of the things I’m looking at every single morning, the first thing I look at is I look at what’s happening in the emerging market currencies, in the rupee, rupaiah and looking at kind of marveling of how good a leading indicator they’ve been. Although there’s been some movement overnight in terms of trying to shore up the currencies, I don’t really think you want to go long those currencies, and we need to see some sort of better movement there I think to help us understand when interest rates might stop rising in the U.S.
- I think we might get a flush higher in interest rates after tapering. I think the Fed will taper. As I have talked about, they’re just financing the budget deficit. The budget deficit is less, they really need to slow down purchases. The moment that happens I think you get rallies in markets. After that we’ll start to enter a period of higher volatility because the markets won’t have a safety net and I mean equity markets also won’t have a safety net that has been very important in psychology heretofore ever since basically year end.
Wapner – do you have a number in your mind to where you think the ten-year note yield tops out at?
- I don’t think it’s that much higher from where it is. One thing people have talked about and I think correctly is they’ve compared this year, the rate rise that started May 1st, they’ve compared it to the rate rise that started way back in 1994, January 31st. And if you put those charts next to each other, they are remarkably similar. in the first few months of the sell-off in ’94, you had a liquidation cycle and rates spiked higher very similar in pattern to what happened in May and June, and then they kind of stopped going up after a few months, and that’s kind of where we seem to be right now, and then they kind of leaked higher because of fear and loathing again.
- I mean, there is plenty of yield right now in the bond market. It’s not in Treasuries. It’s in areas where investors that watch your program probably can participate because it’s very good for an individual investor. I’m talking about closed end bond funds. I’m talking about mortgage reits. These areas that are trading at 10% discounts to the value of their underlying bonds or in the case of the mortgage reits, more than 10% discounts to their book values. So they have a cushion of safety, and they’re generating yields. It’s not that hard to put together a portfolio that yields 8% using a basket of these types of vehicles. That sounds pretty good, but nobody wants to buy them because of the sentiment and the fear and loathing. So there’s plenty of yield in the bond market.
- It’s not really in short-term treasuries obviously or even in the ten-year, but one of the signals I’m looking for that would signal an end to the interest rate rise is some interest in these types of vehicles and it isn’t there. I think investors are supposed to be accumulating these things in the current conditions, but I think the ten-year could go to about 3.10% or so somewhere between now and year end.
Steve Weiss – Jeff, why couldn’t the bond market yields go to 3.50% in the next six months or so, particularly if you have an improving economy? it’s been a market of excess that brought us to levels, low levels that we hadn’t seen before ever. so why can’t that reverse?
- I think this concept the economy is so great is not something I really believe in. I know the GDP was revised upward but that’s a rear-view mirror. If it had been revised downward all people would talk about is that’s a rear-view mirror. It was revised upward because of exports and inventories. what Josh was talking about at the top of the hour, something I really think is very important, and that is that this belief in the housing market, which has been correct and I have certainly been part of that belief for the past 18 months, the belief in the housing market seems really overextended at this point given how low home sales really are, how the new applications for mortgages are down by two-thirds from where they were in 2006-2007, new home sales are down by two-thirds. The statistics are not really that good yet home prices are back to where they were on the national average all the way back to where they were in ’06-’07. There seems to be a real disconnect between home prices, rising mortgage interest rates, and so I think that’s something of an Achilles’ heel to the economy.
- But about 3.50% on the ten-year, specific to your question, I think after we get the tapering, I think we’re going to be in a nervous condition because what happens if interest rates spike to 3.50%? is the Fed going to instantly reverse curtailing their bond buying program because interest rates rise? I don’t think they can. I don’t think that gives any credibility to their policy machinery if they do that. What happens if there’s a weak economic print? Can they go back to buying bonds? I don’t think they can. so the markets are going to start operating they will still be walking on a tightrope regarding the economic problems, but there won’t be a net underneath the market. I think if the ten-year goes to 3.50%, I think you’re going to see serious downward movement in risk assets and that would stop the rise in interest rates in its tracks.
Wapner – you can agreement based on a call for 3.10% by the end of the year, the equity market seems to have an awfully a difficult time accepting rates where they are even now.
- I think that’s right. there’s fear and loathi
ng in the markets right now. It’s hard to find anywhere that you can make money. Right now what’s making money is gold. That’s what’s been making money in the last few months, and it’s interesting when we talk about real estate,
- real estate and gold have been interestingly negatively correlated really since housing started to fall back in 2007. When housing was falling, starting in 2007 , gold went on a rip upward and it went up, up, up into 2011 and it peaked right when housing bottomed. and it’s interesting. it’s like real estate became the new gold. gold suddenly wasn’t an asset class. there was no confidence. big money was moving to real estate because real estate is something you can put big money into and there was confidence in real estate in the later part of 2011 and then gold started to fall. when gold is falling, suddenly its not an asset class anymore, it’s just another element on the periodic table. suddenly when there’s confidence again in gold, which seems to have started to happen again, weirdly real estate seems to be softening a little bit. If you visit here and look at new home prices, they’re actually down over the last three months. they rebounded in the most recent print but they were down the two months before. they are not really going up
Josh Brown – Can stocks & bonds go down at the same time? What can offset a portfolio if that happens?
- I think that there’s real risk of that happening in the short term. I don’t think that can happen in the intermediate term. If bonds fall and stocks fall, I think ultimately that curtails the bond rate increase. I think that’s going to happen. But it’s true, in the last couple of months or last several weeks, like I say, there’s fear and loathing, and people are losing money in most categories. I think that that can definitely continue if interest rates rise.
- So the answer to that actually is look for cash and look for some of the asset classes that are really down a lot. I mean, a lot of times investors say they want to diversify into international markets, and then they don’t want to do it when they’re down. The S&P 500 has mightily outperformed many stock markets and many of the stock markets look kind of scary, but buy low, right? isn’t that sort of the mantra of investing. buy low, sell high.
- I think you’re supposed to be looking at doing some of that diversification now. but relative to bonds, specific to your question, I think some of these things I talked about have a very interesting 12-month return profile if you’re looking at some of the mortgage reits, like an Annally (NLY), like some of these closed end funds, even that are trading a the big discounts from an asset value, I think those preserve capital. I can see returns on some of these things of 15% pretty easily as the discounts shrink when fear and loathing starts to ebb.
There was a second segment in which the discussion focused on Emerging Markets.
Wapner – Jeff. are you finding any opportunity because there certainly is a lot of carnage there, whether it’s the equity markets and as you referenced already, the currencies?
- it’s interesting that when the liquidation cycle began on May 1st, you really saw emerging market equities broadly speaking underperform the S&P 500. The S&P 500 had really historic outperformance through June or July of this year relative to a basket of emerging markets. What’s interesting is that two markets which had been sort of soft have shown to be somewhat immune from this liquidation cycle and one of them is Russia. The Russian stock market bottomed relatively to the S&P 500 literally the day of the beginning of the liquidation cycle and it’s been outperforming and with oil prices being strong, there’s a reason why the Russian stock market might be of interest. but also what I like about it is it’s not really dependent so much on global liquidity like QE that seems to be the issue with Indonesia and with India.
- Another market that clearly seems to be an island that doesn’t need fed liquidity is the Chinese stock market. The Shanghai composite which has been one of the worst stock markets multi-year period. It seems bizarre how it trades between 2,000 and 2,100 seemingly most of the time. I’m not interested in going long the Shanghai composite today. I’m just interested in playing a breakout either way on the Shanghai composite because after this long period of really no volatility, when it goes up or down, I think you want to go with that market and I love it when that happens because you don’t really have to take some sort of a speculative bet on it.
- you let the market do the talking, but I like being long the Russian stock market today versus a basket of emerging markets. We’re doing that in macro strategies and I like to wait and see on the shanghai. Other than that I think the Emerging markets are too volatile right now. I’m too low risk to get involved in trying to bottom pick say the Indian stock market or something like that. It’s almost like it could be fatal like shorting Tesla. I don’t know where Tesla is going but I’d be scared to death to short that thing because it’s a monster in terms of its cultish momentum – so similar on the downside with emerging markets.
- one more thing on Emerging markets. Emerging market fixed income is a basket. Take a look at the EMB etf. The thing is down over 11% year-to-date. There’s this monstrous divergence between emerging market fixed income performance and U.S. high yield performance for reasons that are understandable, but they’re pretty well embedded in investor psychology by now.
- I think you’re supposed to be buying some of that EMB etf and increasing emerging market exposure, certainly not cutting it. If you don’t have any, I would add. That’s another area where there is yield again. Just to repeat what I said, we’re in a world where people used to say, I don’t care about volatility, I want income. Now they’re saying I don’t care about income, I want volatility. You won’t make money in these income vehicles until that psychology changes, which will require some of these signals to materialize like we talked about in the prior segment and also a basic shift in sentiment which isn’t in evidence yet in the marketplace.
Wapner -let’s talk some quick stocks before we run, Jeff. Chipotle. last time we talked, you said you hadn’t put a short on yet. that’s right. did you miss your chance or are you short now?
- No. I actually am waiting for it to break down. I think when it breaks down, it should break down pretty sharply and you can play that move. So I want to see it break down. Chipotle today reminds me a lot of where Apple was a year ago. Went above $700, and ultimately peaked out there. It was quite overvalued. I don’t think Chipotle is necessarily overbelieved, but I definitely think it’s overvalued. It’s just a basic valuation argument, a PE of 43 with the forward looking PE over 38, I just don’t see it and it doesn’t pay a dividend either. So I
think that when you have a breakdown in that stock, I think it’s going to drop by 30%. So we’ll wait to see some evidence of that before shorting it.
- HLF – If you force me to do something on HLF, I would probably short it. The PE is not very bad but the stock chart is an invitation for a short.
- Apple – we bought apple below $425. we thought it was going to go to $500. That was the easy money. Apple, I can see moving a little bit higher. I think it has problems around $530 though. So apple is a stock that we’re going to be saying good-bye to and just having a neutral on. I was happy when Carl said he bought it and it popped up because that’s how it got to $500. It seems to be making no progress recently and so i think It’s kind of a dead money stock really for quite a while to come once it settles in around the low 500s.
2. “as levered in Debt/GDP as at peak of credit mania” – Stephanie Pomboy on CNBC Fast Money – 1/2 – Wednesday, August 28
Stephanie Pomboy is the well-regarded founder of Macro Mavens. This is another thoughtful interview by FM-1/2 team with Steve Liesman.
- I think the question clearly is when, not if, on taper. the Fed’s spotty language has been pretty clear on that and I agree with Steve they probably feel like having put it out there so aggressively they have to deliver now. My feeling is that there’s way too much complacency around what that means for the economy and the markets and I think that complacency is a function of, one, a misapprehension about just how sensitive the U.S. economy is to any increase in rates and, in fact, how dependent it is on consistently low rates. We are now just as levered in terms of Debt to GDP as we were at the peak of credit mania.
Liesman – but that’s all included. the private sector is less levered. okay. the government took some of the place of the private sector.
- absolutely. and indirectly by having the government lever up, they have supported consumers because part of that leverage has been to fund transfer payments to support low end consumers. that’s been an important support for the low end even though the leveraging isn’t on the consumer
Liesman – I guess i would question how much more rates would rise in the face of a taper right now? I mean, a 2.80%, 2.90% and looking at the forward curve on Fed funds, they were pricing in 1.50&, 1.60% for 2015 which is a full point above where they were before. so a lot of that is baked in already.
- let’s put a pin in the discussion about how high rates can go and talk about how important low rates are. It now takes $4 of new credit to drive each incremental dollar of GDP growth. So the Fed can talk about how taking its foot off the gas is distinct and different from tapping on the brake, but as in driving, the only difference is how quickly you slow the car. And it’s the same with the U.S. economy. It needs that extra credit. We’ve already seen credit issuance in the corporate market cut in half from May taper to today.
Liesman – so you think we need the junk, we need to stay on the junk.
- … the transition point is when employment picks up. I think of it like a showdown in the wild west. You have the corporate sector on one end of the street and the consumer on the other and someone has to move first. Someone has to say I’m going to put the spending cart before the income horse. I’m either going to spend in anticipation of employment gains, the consumer, or the corporate sector will say I’m going to go out and increase capex and hire in anticipation of the economy coming back in. Neither thing has happened right now. Corporations are just shoveling money at shareholders instead of pursuing capex and consumers, while the nominal numbers look good, unit demand is dead even of where it was at the peak of the crisis. Look at unit auto sales, unit real retail sales. We’re exactly where we were in 2008 after five years and umpteen trillion dollars of stimulus. You really think the economy can on top of that take an increase in rates? We already saw the impact on new home sales, refi activity is down 65% since the May taper.
Liesman -I would like to agree with you and shortly after that shoot myself after that particular scenario. you’re right. I mean — there’s always tequila. I think I have been there and done that. I’m not sure that helps anymore.
Wapner – let’s look at areas where you think you can make money and what you think is going to happen. the talk of the taper among other things has just obliterated the emerging markets. certainly currencies. but yet you say that’s a place to go.
- not in this instant. I’m not crazy, I don’t want to jump in front of a falling knife here, but my feeling is taper, because it can’t be handled, will have to be reversed. So if the Fed is concerned about its credibility right now and s like it has to do taper for credibility, it will have less credibility
Liesman – let me report from Jackson hole, a lot of talk about the affects of tapering on emerging markets and the potential need for emerging markets to put if place capital controls. and so you may just want to be careful with that play as to — everybody said what you should have done was put the capital controls in before the money came in, but now that it’s going out, there was a lot of talk — by the way, from leading western officials, not just the emerging markets central bankers. you want to be a little careful of that.
- I guess my point is just if the market sold EM on the idea that taper was going to suck liquidity out; now buy it because it’s going away. That was the rumor. The news is taper is going to be recanted and you are putting the floor back under there; so whether that is a rational approach or not, that’s the way the markets have traded on the taper around EM. I think the number one position is volatility and to my mind if the Fed goes out there and tapers, in Sept-October and then come December has to start scaling that back and say, maybe we shouldn’t have tapered, maybe we’re going to have to go back to the full $85 billion a month, credibility is going to be destroyed and volatility in the market I would imagine would pick up way beyond anything we have seen so far.
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