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. Try Again & Hope for Different Results?
Remember May 22, 2013? Bernanke wanted to cool down euphoric markets and so he engaged in verbal tapering. Then he repeated that on June 19th. That’s what the Fed did this past Wednesday. This time, the Fed engaged in vicarious verbal tapering via Jon Hilsenrath. The result was the same – yields rose sharply and stocks really didn’t care.
This Fed still believes it can verbally nudge the markets in their desired direction. The fact that Bernanke failed miserably in the summer has not dulled their arrogance. It is clear to all that the Fed wants to cool down the stock market to avoid a a run like the one in Q4 1999. Yet, they have made it abundantly clear they are petrified of a violent spike up in Treasury yields.
The Fed simply cannot have it both ways. That was the market’s message during the summer. But this Fed thinks it is smarter than Einstein.
What they might well get is the anti-Panglossian condition – a year-end euphoric run to 1800-1850 in stocks and simultaneously a vicious bear market spike in interest rates. Then they will panic again and return to September’s embarrassing back down in their December meeting with the same excuse of Washington fiscal shenanigans.
Remember a key reason for not tapering in September was the tightening of financial conditions, Fedspeak for spike in interest rates. What if the treasury market sells off sharply in the next two months while PCE deflator, Fed’s inflation gauge, remains low? Is there any chance they will then taper in December? Zero, in our opinion.
The spike in Treasury yields is almost upon us, at least according to Rick Santelli:
- “if this is going to be the great bottom I think it could be in yields, … if you get the 5 year and the 10-year [yields] above their retracements [of 1.38% in 5-yrs & 2.47% in 10-yrs], most likely we’re going to see a lot more selling. … there’s a lot of way for the yield curve to steepen, the 10-year will outrun it in a significant way.”
Well, the 10-year yield closed way higher at 2.62% and the 5-year closed exactly at 1.38%. So next week could be really crucial. This week, the Treasury market showed what Santelli calls asymmetric behavior – yields did not fall much when ADP came in weak at 130K jobs or when Jobless claims remained sluggish; but yields spiked when Friday’s ISM number came in better than expected at 56.1.
This week, Larry Fink, a powerful influential and ardent stock bull, urged the Fed to begin the taper:
- “It’s imperative that the Fed begins to taper,… We’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically….We have issues of an overzealous market again ”
His friendly competitor, Bill Gross, echoed the bubbly sentiments:
- “I think the markets are bubbly, all assets are bubbly, bond prices, stock prices. Steve Liesman has pointed out corporate profit margins are bubbly.”
On the other hand, the Fed is worried about what we described above as the anti-panglossian outcome – all is awful in their world. What could be “all awful”? That they taper just to cool down the stock market and end up slowing down the economy while simultaneously spiking up interest rates. Will they take that chance? Absolutely Not in our opinion. That is why Jeff Gundlach, George Goncalves of Nomura & Larry McDonald of NewEdge all dismissed the possibility of any taper until March 2014 at the earliest.
So a correction in stocks and a fall in interest rates is the consummation the Fed devoutly wishes for. That calls for weak economic data, especially a terrible jobs number next week. But even that may not suffice if we are to believe the new Avatar of David Tepper, Bob Doll of Nuveen:
- “I don’t want to act like I can win both ways, but in a sense I can; … If [the Fed] keeps providing all this liquidity it’s great for the stock market, and if they begin to taper it’s because the economy is doing better. Then I get a better ‘E’ on my earnings front. So I’m reasonably sanguine”
No wonder Laszlo Birinyi said he had sold his December SPY 170 calls and bought January SPY 180 calls.
Our basic message to the Fed –
- Please stop believing you can fool the markets. You cannot in the intermediate term. And, if they believe you in the short term, they will invariably react the way you don’t want them to.
- The markets know you are caught in your own trap. What you really need is the economy to strengthen significantly without somehow letting the Treasury market catch wind of that recovery. In other words, you need unemployment to drop while Treasury yields remain low. How many Treasuries would you have to buy to ensure that?
< br>2. It’s Getting Frothy, Man!
Thus spake Michael Hartnett of BAC-Merrill Lynch in his Thursday’s Flow report:
- Equity funds: 3rd straight week of big inflows ($12.4bn); YTD, equities have seen $231bn inflows vs a mere $16bn inflows to bond funds
- Global Flow Trading Rule: another $8-9bn of inflows to LO equity funds over next 2w would trigger a contrarian “sell” signal
- Crowded trades: this week investors continue to funnel money into Europe, Japan, HY and Floating-rate debt
His graph is better than all his words above:
Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
3. Frothy Schmothy!
That’s what many gurus said contemptuously this week:
Laszlo Birinyi, the man with the 1820 target in January on CNBC FM -1/2:
- “I think the one thing missing is animal spirits. we still haven’t gotten to that phase of the market. the euphoria. The euphoria, where all of a sudden the glass is half-full, but maybe three-quarters full … We still don’t have a magazine with a bull on the cover, … And again, the market hits a new high, it’s on the back pages.”
Paul Richards of UBS on CNBC FM -1/2:
- “no, I don’t [think stock market is in a bubble]. I think it’s getting a little toppish on the year, being up 20-plus-percent. but it’s a very well-managed stock recovery, as long as the Fed is involved. … But for now, I don’t think this is frothy at all.”
But Richards “wouldn’t do much in bonds and stocks, except trimming a bit into next week’s payroll number”.
Jim Cramer gave a strong empirical basis to his bullishness om Friday on Mad Money:
- “during the last 50 years there have only been four other times when the S&P 500 was up more than 20% in the first ten months of the year, . like it is this year. Do you know that all four times the S&P not only preserved those gains but rallied right into the new year. I do not normally put that much stock in monthly historical data, but I’ll admit if a pattern has been replicated 100% of the time then I have to believe there is, indeed, some that makes me want to — buy, buy, buy when we have weakness, even the minimal kind like we had for much of the day before the averages rebounded.”
Ryan Detrick of Schaffers was just as bullish with similar reasons on CNBC Closing Bell On Friday. But, he is first concerned about a dip:
- I have couple of concerns … you’re looking at sentiment polls, we have lowest number of bears in a couple of years. The put/call ratios are showing levels we saw previous peaks this year. Again, we’ve had this great run. I was on three weeks ago with bill and said, buy now because everyone hates the market. we had that 7% rally in 15 days. Now we’re getting a little excited. Nothing wrong with that but we continue to say buy the dip. We’ll have a pullback eventually. We all know September, October are usually bearish. When they’re each up over 2%, only happened 13 times over the last 100 years, November and December are usually bullish months, more bullish. Up 4% on average – 13 times & up 12 of those times. Very good rally. We would continue to buy the dips. There could be a dip coming pretty soon, in my opinion.
Jeff Saut of Raymond James is a more luke warm than Detrick but in the same basic camp:
- “last week all ten of the S&P macro sectors were two standard deviations above their 50-day moving average, way overbought, it has only happened twice since 1990. As of yesterday the price oscillator later which measures the enthusiasm with what the hot money is doing with their money, hit levels only seen four times since 1990. So the indicators are calling for some kind of a pause or pullback here. “
- “I think you gonna get will get a pullback, don’t know if it starts right here or in another couple weeks. my timing indicators actually targeted the pullback late last summer although we only got about 5% of the 10% i was looking for. targeted mid november for a pullback. Again, probably somewhere between 5 and 10%. I think we’re going to be higher by the end of the year because I unlike a lot of other people think the economy is stronger than the surface figure suggests and I continue to think the performance anxiety going into year end where portfolio managers not only have performance pressure, they have bonus pressure and ultimately they have job pressure I think it’s going to make them pay up to stocks.”
Lawrence McMillan is also short term cautious in his Friday summary:
- “Stocks can go down, and it now looks like they will. … Now stocks are taking on a more bearish tone. In summary, the market seems to need to refuel. It can probably do that by pulling back to its rising 20-day moving average at 1725“.
4. U.S. Treasuries
The Treasury bulls of past few weeks were not seen post-Fed and those we saw, like Paul Richards, have turned into non-bulls. That’s what a steep fall from resistance levels can do. The 5-year yield rose by 11bps from Tuesday’s close to Friday’s close; the 10-yr & 30-yr yields rose by 11bps & 8 bps resp.
George Goncalves of Nomura remained sanguine on Thursday on CNBC Futures Now:
- “The knee-jerk reaction that we saw yesterday in the equity market and the bond market, and the follow-t
hrough today with what’s going on with the dollar and currency markets in general” is “really more of a buying opportunity,” Goncalves said on Thursday’s “Futures Now.” The Fed “has to keep [tapering] on the table, but that doesn’t mean that they’re actually going to pull the trigger come December.”
- So while predicting that once the Fed does taper, “rates will start to rise aggressively,” Goncalves added that “the Fed will not taper this early in the cycle.”
- As a consequence, Treasury yields are going nowhere fast between Halloween and the start of 2013, in his view. “We think it’s really just a dead trade into the end of the year,” Goncalves said.
Friday was anything but a dead trade, though. Bill Gross remained bullish on short-maturity Treasuries because the Fed is steadfast on keeping the FF rate at zero. That proved a major tactical mistake during the summer. But he still argues the same this time as well:
- “… the bond market is bubbly because the policy rate of 25 basis points is artificially suppressed. investors and savers are not receiving what they have historically which in historical terms would be around 2, to 2.5%. that creates bubbles and other bond market prices. Is that bubble going to be popped? In our opinion no because that policy rate of 25 basis points will be guided forward by the Yellen Fed for the next two, three, perhaps four years and as long as they stay at 25 basis points, then, you know, these levels in terms of prices and low yields, for, fives, tens and 30s will probably be sustained.“
Next week’s payroll data will go a long way in deciding whether the bulls will be right during this verbal tapering by the Fed.
Higher taper probability is negative for Gold and that’s how Gold acted on Thursday and Friday. Gold miners acted worse because Newmont was downgraded by S&P and the massive equity offering from Barrick acted awfully after the pricing.
But smart tactical traders see an opportunity especially if the current verbal taper by the Fed proves to be just a bark and not a bite. Larry McDonald of NewEdge was trying to make a case for Gold miners on Friday but CNBC Closing Bell host Bill Griffeth cut him off in mid sentence to get back to his buy buy stocks exhortation. What’s worse Griffeth demonstrated a visible lack of class in doing so. McDonald has had a hot hand with gold this year, asking investors to buy with both hands in the last week of June and then advising selling after a huge rally in miners.
Tom McClellan remains bullish on Gold in his ETF Investors Still Hating Gold article
- “This week’s chart shows that the total combined assets in GLD and IAU (the two biggest gold bullion ETFs) peaked in late 2012, a year after gold prices. And even though gold appears to have put in a good bottom in June 2013, these ETFs’ investors continue to flee, forcing the ETF sponsoring firms to sell gold bullion to meet redemptions.”
- “Those continued redemptions may be keeping a lid on gold’s ability to rebound, but the big drop in total holdings of these ETFs also represents a big opportunity for gold prices to come back up again once ETF investors stop fleeing.”
- “Spot gold prices appear to be trying to break the declining tops line that has contained prices all during 2013. Investor sentiment toward gold remains bearish, and that is a hopeful sign that it could turn bullish.”
But will ETF investors stop fleeing when the specter of taper still hangs over their heads?
- Marc Lasry on BTV Market Makers on Monday, October 28
1. Marc Lasry on BTV Market Makers – Monday, October 28
Much of this interview was essentially socio-political. Below is a subset of the detailed summary from Bloomberg Television PR.
On whether it worries him when spreads are so low that investors have to go into illiquid products or bad covenants:
- “We are investing in deals that are two to four years ago. Those companies have hit the wall. Those covenants are a little bit stronger or a lot stronger and we are buying that debt at big discounts. We think we are getting paid for that risk. In Europe, yes.”
- “It is a proven fact that banks are deleveraging in Europe this year and next year by $2 trillion. Whatever they are telling you, they actually are deleveraging. At the end of the day, what you have under Basel III, banks are still being forced to sell. The banks that are not selling are the southern European banks because they can’t take the reserves. But banks in northern Europe whether it’s Germany, Switzerland, U.K., those banks are still selling because they want to comply with Basel III. So everyone is selling individual loans, what they are not selling is portfolios.”
On whether there is value in European equity markets the way there is in the debt markets:
- “I think it is harder in the European equity market. You have to be making a macro call. If you believe Europe will continue to do well over the next 2 years…I think Europe is fine but the problem is, Europe is growing at 1% GDP. I wouldn’t say that’s totally positive for equity markets. If you look at the U.S., we’re are growing at 1.5% GDP and we’re doing fine. We’re up 20%. A lot of that is more because of QE3 than how equities are doing.”
On who is looking after the long-term improvements in the U.S.:
- “At the end of the day, I have to make money this year and the following year. You have to have a macro view of what is happening short-term and long-term. On the short-term side, it is really beneficial for what Draghi is doing out in Europe today for one simple reason. He is giving them capital so that they are able to generate income and so they can
take more reserves. That is a five-year plan. It is going to take a while. On the U.S. side, I thought the Fed should have tapered. But when you look at the numbers that have come out and you are seeing what is happening with unemployment and then GDP is only 1.5%, then I think the Fed should continue what they are doing. The problem is you’re in a box. You need 2-3% GDP to stop and you don’t have that.”
- “I think Wall Street is always tortured. I don’t think that is an issue. I think what you have is that you have to make investments based on what will happen short- term and long-term and you try to structure your portfolio that way.”
On what point does the Federal Reserve begin to taper:
- “I don’t know. Here is an interesting fact: In 2010, 2011, 2012, the Fed has ended up saying that GDP growth would be between 3% to 4%. Each year it’s been between 1.5% to 2%. The Fed has been wrong and yet that is why you have the QE3. Even the Fed’s numbers have been off. Imagine if you and I were off 50% every time we tried to invest.”
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