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. Taper Schmeper
We first used this phrase with a question mark on August 10. Then we used it with an exclamation point on September 21 after the September Fed meeting. Today it is a simple statement of fact. That Bernanke will not taper in 2013 is now accepted wisdom among the cognoscenti.
- David Tepper on CNBC Squawk Box on Tuesday (see clip 1 below) – “they’re not tapering for a long time now, unfortunately, or fortunately depending on — and they have no choice.”
- Larry Fink on BTV Market Makers on Thursday (see clip 3 below) – “It is our view today that the Federal Reserve is probably going to delay their tapering by three to six to nine months, maybe longer, because we are now looking at an economy that is going to grow at the slowest point of this year in the fourth quarter.”
- Richard Fisher of Dallas Fed on CNBC Closing Bell on Tuesday – “My personal opinion is that it’s not in play… This is just too tender a moment“
- Dennis Gartman on CNBC Futures Now on Thursday – “tapering is off the table for a long period of time; it may be off till the end of 2014“
On August 3, we asked “Game Over for Bernanke?” meaning will tape decision be pushed over to the next Fed Chair. This week Fink, Fisher and Tepper all emphatically answered YES.
2. Hail to Thee Blithe Spirit
That is what the U.S. stock market sang once the Debt deal was done. Dow jumped 205 points on Wednesday and S&P 500 by 23 handles. The Blithe spirit we speak of is not Shelly’s skylark but Janet Yellen, the new Chair of the Fed. President Obama let it be known last Tuesday, September 8, that Dr. Yellen was his choice. The S&P had closed that Tuesday at 1655. This Friday, S&P closed at 1744, an increase of 89 handles in 8 trading days.
Since it is Game Over for Bernanke, the first chance for Yellen to taper is the March 2014 meeting. That might be hard to do in her first meeting. So, as many gurus opined this week, Yellen’s first realistic chance to taper is the June 2014 meeting. So now we have 9 months in which the Fed will continue to buy $85 billion of Treasuries & Mortgages every month. As David Tepper said on Tuesday (see clip 1 below),
- “my basic belief has been when you have this large QE, markets go up. markets go up and you have a chance for asset prices to go up”
What did Percy Bysshe Shelley say to the skylark?
- O’er which clouds are bright’ning, Thou dost float and run; Like an unbodied joy whose race is just begun
How apt! The clouds over the stock market are indeed brightening with the debt deal behind us and earnings coming in ok. Liquidity will now keep floating and running into bond markets. So the stock market is acting with unbodied joy.
The question is whether its race is just begun. The year-end targets of 1760, 1775, 1780 which seemed out of reach just 2 weeks ago can be reached in a day or two at current pace.
3. U.S. Stock Market
David Tepper more cautious than before on Tuesday (see clip 1 below):
- “to know the uncertainty of three or four months may be a little tough for markets to really fly up. … I don’t think you’re going to get, you know, ’99 because I was talking about not tapering in a world where you didn’t have politicians who have nearly lost their minds. I was talking more stable environment if they didn’t taper.”
Who are we to question David Tepper? But the uncertainty he addressed doesn’t come to head until 2014. That is a different lifetime for performance-fee compensated managers. For them, isn’t the environment for the remaining 2.5 months in 2013 is as stable as they can desire with QE pouring in & earnings Ok?
We would have asked Mr. Tepper his views about market’s reaction to the September payroll numbers report on Tuesday. If it is weak, will the stock market care? After all, QE is already factored in into early-mid 2014. If it is strong, then will the market care? Or will that lead to arguments for upward multiple revaluation. And a lukewarm report would be pure goldilocks, right?
As David Tepper added,
- “what people ignore is that interest rates are also lower and will be lower. okay. I think they are going to be lower in the future. … you know, historically when you have a 4.5% multiple, 4.5% interest rate, 5% interest rate, you have 20 multiples. I think your interest rates will be more like 4% okay now. and maybe your growth instead of being historically 3.5% or 3.25% might be 2.75% going forward. both sides will be different and I think you’re going to end up with a higher multiple in the future. Not right now but in the future. I think you’re going to get more toward a normal multiple of 18 to 20 times.”
Leon Cooperman sounded a similar note of cautious bullishness on Tuesday on CNBC Squawk Box (see clip 2 below):
- “I choose to think in terms of 15-16 multiple. I put that on $109 in earnings. I don’t want to sound so precise because the market isn’t that precise. It gives you something like 1650-1750 range. So the market is fairly valued. I don’t think it’s overvalued, I don’t think it’s a bargain anymore.”
Tony Dwyer actually pronounced an18-20 multiple as historically guaranteed on Thursday on CNBC FM -1/2 and opined his 2013 & 2014 targets of 1760 & 1955 might prove very conservative:
- “back drop hasn’t changed – perfect correlation between yield curve & my bullishness so as long as that stays the same which looks like it is going to till 2015, pretty hard pressed to say its going to get negative”
- “valuation debate – whether it is cheap, expensive, fair frankly, it is totally irrelevant … it is the trend of the valuation which has since October 4 2011 it has been up. What changes that valuation? – 20 multiple and tighter fed — we are nowhere any one of those“
- “any correction is a buying opportunity until inflation expectations go up & Fed tightens interest rates to the point that it inverts the curve … the sectors that led the first part of valuation expansion continue it — financials, industrials, health care, tech”
Tom Lee of JPMorgan was also bullish and spoke about 1775 as being done this year. That’s just 30 points away. Where are the really bullish forecasters, we wonder? The Nasdaq 100 rallied by 100% in Q4 1999. Now it merely had the best week in 3 months.
Lawrence McMillan was pragmatically bullish in his Friday commentary:
- “Stocks have been on an explosive move to the upside ever since seven days ago, when a swift, but short-lived decline was abruptly halted in an intraday reversal at 1645 on $SPX. Since then, $SPX has risen 88 points in very short order and doesn’t seem to be done rallying yet“
- “In summary, all of the indicators are in a bullish mode, except the put-call ratios (which have been distorted by hedging activity). There are already overbought conditions, but they can persist while the market rallies. At this time, we remain bullish, with stops tightened up to recent support areas.”
Tom McClellan points to a potential top in his weekly article:
- “Historically, low Money Market Fund asset values have been associated with the bullish sentiment extremes of important market tops. And similarly, high asset levels in this fund are an indication of safety-seeking investor behavior which is typical of an important bottom.
- “Gordon Scott finds that this incentive shows up in stock price indices with a meaningful selloff appearing about 13-14 months after an important price bottom“.
- “Coming up just ahead, we are now almost at that same 12-13 month point following the selloff in October and November 2012. And we find that at least the Rydex investors seem to be “fully” invested as depicted by the low Money Market Fund asset level”
Paul Richards of UBS, a hero last week, was upset with America this week on CNBC FM -1/2.
- “I like Europe because. it is not the U.S. I like the fact of foreign investors today getting out of the U.S. dollar. They are reallocating capital going away from the U.S. New money is not finding the way here. … we are 10% of a foreign exchange market and money going out of the U.S. after this deal. So I like Europe because of relative political stability. a central bank that’s credible, systemic risks have dropped and it is not the U. S.”
- “seeing the euro close to 140 we could see another ltro-style deal from Draghi. He’s sniffing at it. It’s quite close so yes. My best trade on a relative basis to be long European stocks over U.S. stocks after thanksgiving“
This comment of Paul Richards was blasted by CNBC anchor Brian “Sully” Sullivan that afternoon on CNBC Street Signs:
- “I saw a graphic on a different show earlier today on CNBC and it was talking about a guest that said the guest name, likes Italy or Europe because of political stability. and I thought to myself, I need a drink. because I can’t believe someone’s like wow we’re looking at Europe now as some sort of model of political stability.”
Kudos to Sully. We applaud his outburst. CNBC shows would become lot more interesting if anchors start blasting or laughing at what they hear on other CNBC shows. Sully’s guest Jim Paulson laughed aloud at the notion of Europe being considered more stable than USA. But Paulson does like global markets more than he likes U.S. markets:
- “I would point out is the international markets have been outperforming the U.S. stock market now for the last couple months. I think that’s going to continue. The U.S. currency against developed world markets as well as emerging markets is now weakening and it’s weakening even more today and that’s giving excess returns to overseas. I think one of the best opportunities is to put a little more both in international developed and international emerging markets relative to the domestic market
Bill Gross seemed to concur with Sully’s views about Europe on Sully’s show on Wednesday. But he warned that US might be exhibiting some of those European symptoms (see clip 5 below):
- “Italy and Spain are good examples of dysfunctional governments and their effect on bond markets and prices and we’re beginning to see that in the United States.“
Larry Fink of BlackRock sounded even more disgusted than Paul Richards (see clip 3 below):
- “I am much more worried about the United States now
than I was the last time I was on your show, when I gave a very large
endorsement towards the equity market. I would tell you today the equity market is fairly priced, but if the economy and corporate earnings start deteriorating, we are going to see a lower equity market and probably see a longer period of lower rates“
This outburst reminded us of similar comments from Mr. Fink on January 3, 2013:
- “I am very disappointed, I am incredibly disappointed. This is a negative for markets. I have been bullish on markets, more bullish than most. I would be fading this rally myself; I would be buying bonds here for a tactical reason in the short term. I look at this as a very bad warning sign.”
Fading the stock rally on January 3 was a poor call indeed. The reason we bring that up because those circumstances are similar to today’s. Mr. Fink was very upset at the Fiscal cliff deal of January 2013. Now he is very upset at the debt deal worked out this week. His emotional reaction of this week seems driven by the reactions of BlackRock’s foreign clients (see clip 3 below):
- “I think we are going to see more trepidation from foreign investors in our bond market. How we play out this next round of debt ceiling negotiation will truly change the course or move the motivations of investors. Many of our foreign investors have had conversations with me and many at BlackRock about how should they think about investing in U.S. debt over the next few years. We are trying to calm them and give them a little more support. “
Mr. Fink was not alone in January 2013 in his disappointment with that Fiscal Cliff deal. As we wrote on January 5:
- “Almost everyone we heard or read was disappointed by the deal including Leon Cooperman, Jeff Gundlach and of course Nouriel Roubini who argued “US has been let down by its leadership””.
That disappointment was badly misplaced and wrongly stated. Today, we look back at that deal as successful that led to a very serious reduction in U.S. fiscal deficit. The next 3-4 months might be noisy and even repulsive. But we wonder whether they will produce another fiscal benefit that will be lauded a year from now.
For a more detailed discussion of the Fiscal wars in DC, read our adjacent article The Fiscal & Spiritual Civil War in America – A Reflection of America’s Genius?
4. U.S. Treasuries
Larry Fink seemed positive on bonds in his conversation with BTV’s Market Makers (see clip 3 below):
- “The debate about default, simultaneously with the sequester and the lack of the federal government operating, we are going to see a very, very weak fourth-quarter. You’re seeing that in the movement of the bond market. It is our view today that the Federal Reserve is probably going to delay their tapering by three to six to nine months, maybe longer, because we are now looking at an economy that is going to grow at the slowest point of this year in the fourth quarter. Until we understand how the debate goes into the first quarter, we may see a continuation of an erosion of our economy. That’s why you see a rally related to the bond market yesterday and today. …. we are going to see a lower equity market and probably see a longer period of lower rates“
Larry McDonald was much more emphatic on CNBC FM on Wednesday:
- “on the long end of the curve, some things fascinating is going on. You think about May 1, the entire street was QE infinity. Heading into fall in September, the entire street, 80% of the street was like we’re going to taper in September? Now we are back to QE infinity…”
- “If you look at the bond funds TLT & BLV , those are 15% below their May highs. That means if we are really back to QE infinity, I am hearing May, I am hearing July, late next year for QE, that means the long end of the bond curve is very very cheap; You can have them retrace 50% back to the old high which would be a 6-7% return“
- “the damage that has been done, it’s like we have been talking about consumer confidence earnings, all this has caused damage in the economy. and you also have dovish Yellen coming in.. all these combined & you are going to have further QE”
- “I think if you’re up 20% in your equities going into the fourth quarter, i think it makes sense for the rest of the year – move some of your asset allocation into bonds and you have decent risk reward; Bonds have a good chance of 5-7% in Q4″.
5. Gold & Silver
As soon as the deal was done, Gold rallied hard on Thursday. The most interesting and succinct comment came from Art Cashin on CNBC Futures Now on Thursday:
- “My colleague Paul Tichards points out that the last time they raised the debt ceiling, Gold rallied 17% in following 15 days“
Cashin added this potentially actionable comment following a longish interview of Paul Richards by Scott “Judge” Wapner of CNBC FM -1/2. How did the “Judge” miss asking Richards about gold, especially when Richards had such a juicy historical fact to relate?
Marc Faber said the following on BTV Surveillance on Monday:
- “We have a strong rally form the lows at 1180 to over 1400 and now we are backing off. I think between around 1200 and 1250 it is getting into buying range. The sentiment about gold is very negative, but if you look at everything considered – the monetization of debt, the debt ceiling, which sooner or later will be increased because both Republicans and Democrats are big spenders and the government’s debt has expanded from $1 trillion in 1980 to $5 trillion in 1999, now we are at $16 trillion. Both Democrats and Republicans have been big, big spenders because a lot of money flows through the government.”
- David Tepper on CNBC Squawk Box on Tuesday, October 15
- Leon Cooperman on CNBC Squawk Box on Tuesday, October 15
- Larry Fink on BTV Market Makers on Thursday, October 16
- Larry Fink on CNBC Squawk Box on Wednesday, October 16
- Bill Gross on CNBC Street Signs on Wednesday, October 16
1. David Tepper on CNBC Squawk Box – Tuesday, October 15
- look, I mean, they’re not tapering for a long time now, unfortunately, or fortunately depending on — and they have no choice. … it’s unfortunate what’s going on in Washington DC. that’s kind of forcing their hand. look, the government’s still shut, things are going to obviously slow down and now they have a short-term — looks like they may have a relatively short-term deal. which is going to not create the kind of confidence you would quite like. now, if you can get a big broader budget deal, that’ll be great and markets can fly. in the meantime, to know the uncertainty of three or four months may be a little tough for markets to really fly up. on the other hand, on the other hand, you know, my basic belief has been when you have this large qe, markets go up. markets go up and you have a chance for asset prices to go up.
- I think generally speaking, markets will go up. I don’t think you’re going to get ’99 because I was talking about not tapering in a world where you didn’t have politicians who have nearly lost their minds. I was talking more stable environment if they didn’t taper. So you don’t have that environment. There’s no way they can.
- They basically said what they said they actually kind of did. The economy didn’t pick up. It wasn’t just employment. People have their just one statistic but the economy was just not, you know, growing a lot. you didn’t have great jobs numbers, you had the employment rate going down but because of participation as much as anything else. I was a little surprised but not that surprised and understood exactly when they did taper why they didn’t taper. it was because the economy wasn’t at their projection.
- about the 14th amendment about what it says or doesn’t say. They should just pass something in Congress to say debt will paid always, the debt would be paid always. do it another way. They don’t have to worry about the contracts and other things in question. Do that, and that will make things much more stable and let the economy not have these issues.
- they’re doing it for China, doing it for Japan, No. you’re doing it for main street. you’re doing it for the average guy. If you let us default and interest rates go up on average 50-100 basis points on the Treasuries, everybody’s mortgage is more expensive. Everybody’s mortgage is more expensive. and that’s what matters.
- I’m talking technical default on Treasuries. It’s really bad if you don’t do social security. It’s a different issue, though, when you don’t make a payment on treasuries. If you don’t make a payment to social security and there is a week delay, it’s a week delay. That doesn’t have any implication on every single American. When you start messing around with the debt of the United States of America, which by the way has not missed debt payments when we were way over-leveraged at the time of the revolutionary war. When Hamilton made the decision to make the debt payments and you didn’t miss a debt payment during the civil war. This is the time you’re going to choose to miss a debt payment?
- what people ignore is that interest rates are also lower and will be lower. okay. so if you take both sides of the equation that should make it p/e, they both have come down, I think, perspective, not just because of the fed. I think they’re (rates) going to be lower in the future. where they might have been 5% before they’ll be 4% now. and so I think both sides will be lower. so if you take that and you believe that is a fact and, you know, a lot of people say, well, you know, interest rates are too low now and historically when you have a 4.5% multiple, 4.5% interest rate, 5% interest rate, you have 20 multiples. I think your interest rates will be more like 4% okay now. and maybe your growth instead of being historically 3.5% or 3.25% might be 2.75% going forward. both sides will be different and I think you’re going to end up with a higher multiple in the future. Not right now but in the future. I think you’re going to get more toward a normal multiple of 18 to 20 times. and historically if you had 4% interest rate to 4.5%, you’d be in the low 20s. that’s where you’d be on a multiple. So this is just a multiple question. So if you get over this nonsense in D.C. let’s say they get a deal in d.c. let’s, you know, cross our fingers, hope they get a deal and don’t put us through yearly stuff like this we’re going through right now. so you’re looking perspectively. i think you can get 18 to 20 times sort of multiple at some point
2. Leon Cooperman on CNBC Squawk Box – Tuesday, October 15
- I think the whole discussion centers around what is the appropriate multiple for the market because profits are growing very modestly so the market valuation is a functions of what multiple you want to put on the earnings..
- I choose to think in terms of 15-16 multiple. I put that on $109 in earnings. I don’t want to sound so precise because the market isn’t that precise. It gives you something like 1650-1750 range. So the market is fairly valued. I don’t think it’s overvalued, I don’t think it’s a bargain anymore. I guess if you study the history of market cycles, generally bull markets move in three phases.
- the first phase, the bull market I refer to is wow, we survived. When you’re heading down, looks like the world’s coming to an end. Nobody sees a turn, you get to turn because fiscal & monetary policies and it’s the wow, we survived and that was really from the bottom of ’09 to late ’09.
- and the second phase of the bull marke
t is reflecting that which is perspective. what I mean by that is the average economic expansion in the post war period has lasted about five years. you get four or five years of rising earnings and the market capitalizes that.
- and the third phase of bull market normally is like the exuberance phase, the silliness phase where people forget about the mistakes of the last cycle. We are not there in any broad sense; there are pockets of market valuation that are silly. … but by and large, we’ve not yet gotten into that speculative phase of the market. But I would say, as an investor, I think the market is reasonably valued and I have to kind of work hard and find stocks or macro themes that would work.
3. Larry Fink on BTV Market Makers – Thursday, October 17
This is a more detailed interview than the CNBC Closing Bell interview on Wednesday. Kudos to Stephanie Ruhle & Erik Schatzker for getting more definitive calls from Larry Fink. The detailed summary below is courtesy of Bloomberg Television PR.
Fink on the impact of the debt ceiling debate on the bond market:
- “I think we are going to see more trepidation from foreign investors in our bond market. How we play out this next round of debt ceiling negotiation will truly change the course or move the motivations of investors. So we have to see how this plays out. A brush of fire, a brush of Armageddon — these debates are unacceptable. When you are a debtor nation, you should be working with your creditors and we as a nation believe that we have the ability to talk about default. When you think about other countries that have defaulted, we look worse towards those countries. There’s only two countries in the world that have never defaulted, that is the United States and Switzerland. Switzerland never had a conversation about the potential of defaulting though. We are a standard-bearer country. We are the standard for the world. People look up to us. People look up to our type of democracy and they are seeing worldwide how our democracy is not working as well as it should, how our democracy used to work a lot better. As a result of that, many of our foreign investors have had conversations with me and many at BlackRock about how should they think about investing in U.S. debt over the next few years. We are trying to calm them and give them a little more support. Frankly, we need to see movement in the next three months towards a full resolution towards our budget and a full resolution related to this constant dialogue about the debt ceiling.”
On why the markets have continued to rally over the past two weeks:
- “The debate about default, simultaneously with the sequester and the lack of the federal government operating, we are going to see a very, very weak fourth-quarter. You’re seeing that in the movement of the bond market. It is our view today that the Federal Reserve is probably going to delay their tapering by three to six to nine months, maybe longer, because we are now looking at an economy that is going to grow at the slowest point of this year in the fourth quarter. Until we understand how the debate goes into the first quarter, we may see a continuation of an erosion of our economy. That’s why you see a rally related to the bond market yesterday and today. In the equity markets there was a relief rally yesterday and now we are giving half of it back today. I am much more worried about the United States now than I was the last time I was on your show, when I gave a very large endorsement towards the equity market. I would tell you today the equity market is fairly priced, but if the economy and corporate earnings start deteriorating, we are going to see a lower equity market and probably see a longer period of lower rates.”
On whether BlackRock has been buying or selling Treasury bills and what the firm’s plans are for the next three to four months:
- “We as a fiduciary needed to make sure across all our businesses that we would be protecting our clients’ money if there was a default. We had 12 different task teams working on — from swap agreements, collateral management, to Treasury bill maturities — we did a whole review of every component of our business. I think the media highlighted this issue related to T bills. That was a minor component of what we had to do in a review.”
On whether we’ll face another government shutdown in February:
- “I will do my best to make sure that doesn’t happen. Whatever influence, if any, I have in Washington, I will try to make sure they understand this is extremely damaging to the economy. I think the fourth-quarter results will come in negative. This is as a result of the behavior of Washington. Let’s hope the men and women who are responsible for this will understand that it is unacceptable, and we have to move on and work in a bipartisan way of making this economy strong again and let the private sector operate.”
On who in Washington he will call:
- “I’m going to call anyone who will pick up my call.”
4. Larry Fink on CNBC Closing Bell – Wednesday, October 16
- Never thought we would eventually default. I thought we would come to the edge. Here we are at the edge. From what I know about what is being discussed, they’ll be pushing out the CR to mid-January and debt ceiling to mid-February. I want to hear what the narrative is. I want to hear if there is some bipartisan cooperation between the two parties. To me that will determine the outlook in terms of the economy.
- If it feels like this is just kicking the can down the road, it’s going to have a lasting damage to consumer confidence, lasting damage to CEO behavior in terms of job creation. and, importantly, it’s going to create a marginal change in foreign investors’ behavior and investing in U.S. Treasuries. You put that all together, it probably leads to a pretty weak fourth quarter and most importantly, it may drive a weakening into the first half of next year.
- If we find that there is a cooperative process in which we can see a true resolution in terms of tax reform, we can eliminate the sequester & then we don’t have to go through this process of if they are or are not going to do something with the debt ceiling. I’ve been in this business for 37 years. the first 35 years of business, no one even heard of a debt ceiling. it was automatically passed. and to use this as an instrument, it is an instrument of destruction. and it’s not what we elected these
officials to do.
- I’ve spent a lot of time overseas in the last few weeks talking to so many people. We were
looked upon as a principled nation. we are the great democracy of the world. We’re showing the world, maybe we’re not as principled because we’re willing to have a narrative about the debt ceiling and default. we’re showing that democracy is not functioning as well as it was meant to be.
5. Bill Gross on CNBC Street Signs – Wednesday, October 16
- I would suggest that, you know, perhaps Treasury yields have gone up five to ten basis points
because of this crisis, the past crisis, the future crisis three to four months from now. who
would buy a treasury bill in three to four months from now knowing another debt ceiling
potential exists in early January and February and so, you know, yields have to come up in
terms of the Treasury bill market, they come up in terms of fives and tens and 30s and
ultimately costs the U.S. government and taxpayers money. what is five to ten basis points mean on $15 trillion worth of debt. it means about $15 billion a year.
- Does it matter that the budget can and the debt can have been kicked down the road by three or four months respectively if it shouldn’t to an astute long-term investor. dysfunctional Washington appears to be a permanent disease that ultimately should concern longer maturity treasury investors as it to the volatility of Washington’s debt and, you know, it will never default explicitly but hair cuts come in a number of form including higher volatility and inflation. Italy and Spain are good examples of dysfunctional governments and their effect on bond markets and prices and we’re beginning to see that in the United States.
Send your feedback to email@example.com Or @Macro Viewpoints on Twitter.