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 tolerance.
1. Copper, China and Ukraine
These, we were told all week, were the reasons for the negative and somewhat scared action in the US equity market this week. And China, among these three, was by far the most important issue for global markets. But no one can tell where the 2013 Chinese growth rate will end up by year-end. So the short term attention has been focused on the fast & ugly sell off in copper as a symptom of the Chinese slowdown.
Frankly, Ukraine could end up creating serious long term damage if US & Russia let their verbal assaults get out of hand. We concur with Colonel David Hunt who bluntly told Bill O’Reilly that “we don’t have a dog in this fight”. Remember Fox is the most hawkish network in America, Bill O’Reilly is as hawkish as they come within Fox and David Hunt has been among the most hawkish of Fox guests since the invasion of Iraq in 2003. When a knowledgeable uber-hawk refuses to get hawkish, we take note.
In our opinion, Crimea is a done deal and it is simply not worth resuming a long term cold war between West & Russia. At this stage, we are more disturbed by the attitude of Chancellor Merkel than Secretary Kerry. US & EU should impose an appropriate level of sanctions that hurt some but don’t cause serious damage. Russia will protest and do little more. But if President Obama & Secretary Kerry impose highly damaging sanctions, President Putin will retaliate. At that point, what more could he lose by moving militarily into Eastern Ukraine and even into Kiev? Foreign Minister Lavrov has already invoked Kosovo as a precedent.
Russia needs a high oil price to keep its economy solvent and would need a much higher price of oil if western sanctions really hit hard. What could Putin do to move oil prices up to a higher base? What is the soft spot for America, a spot which can cause serious problems and an oil spike? Our immediate answer, though highly improbable at this time, is Bahrain. This is so symmetric to Crimea – a majority Shiite population that doesn’t want to be ruled by a Sunni minority; a tyrant-like Sunni “royal family” that has oppressed the majority far worse than Yanukovych did in Ukraine and home of the US Fifth Fleet that guards the Persian gulf. This would be our choice of a likely spot to create a spike in oil prices and cause maximum damage to US position in the Persian gulf. Of course, this way out scenario assumes a resumption of the cold war. The reality is that the West cannot destroy Russia and you don’t merely wound a bear and hope to walk away.
We assume, for this article, that both US-EU & Russia stay within theatrical actions and accept the Crimean fait accompli for greater aid to Ukraine from US & EU. That brings us back to Copper.
Copper is down about 12% in 2014 while Gold is up about 15%. What does this huge divergence between copper & gold mean? GaveKal Capital pointed out on Monday that the “Last Two Equity Corrections Started With A Plunge In The Copper To Gold Ratio“:
- “There hasn’t been a genuine oversold condition in the S&P 500 since October 2011. Coincidentally, there has not been a correction in ratio of copper to gold prices since 2011.”
- “The correction in stocks that began in August 2011 was preceded by a drop in the ratio of copper to gold. Similarly, the correction in 2010, that began in May, was preceded by a plunge in the copper to gold ratio.”
What does one have to do with the other? GaveKal says that the “copper to gold ratio has served as a tripwire for a deflationary shock”. No wonder treasury yields are falling with a fall in copper-gold ratio. GaveKal also argues that the action in metals & stocks are due to Fed’s taper template just as the 2010 & 2011 corrections were “precipitated by temporary lulls” in Fed’s QEs.
But is copper poised to rally after suffering a major breakdown? Not just yet is the verdict of Tom McClellan:
- “For copper to break an uptrend line as it just has just done, that seems to suggest a meaningful drop for copper prices. Such a drop is unfolding now.”
- “At the moment, there does not seem to be the right condition for a copper price bottom, at least not just yet. The commercial traders are presumed to be the smart money, and they are not yet at a big enough net long position to mandate an upward reversal just yet. They could easily get to such a state in another week or two, or perhaps longer. But they are not telling us now that a reversal absolutely has to happen. They are getting ready for what is coming, but it is not coming just now.”
But as we all know, charts & markets are powerless against the dominant force in markets, the US Federal Reserve. So what copper, gold & stocks do could well depend on what Fed Chair Janet Yellen does and says on Wednesday, March 19, merely two days before March options expiration. Virtually everyone expects her to taper by another $10 billion on Wednesday. But what if she alludes to Ukraine-Russia, weather & lukewarm job numbers and either does not taper or hints at reduced taper in subsequent FOMC meetings? Worth a thought & perhaps a risk-on hedge?
Louise Yamada voiced the trending call on China in her discussion with CNBC’s Brian Sullivan. Her case is easily understood from her chart below from CNBC.com:
- “The path of least resistance appears down in this case,” says Yamada.
“Any break below about 2,000 – 1,980 [and] the market could go lower”
Ms. Yamada said that US & Chinese stock markets have gone in completely different directions and it is hard to make a call on what China’s decline would have on US stock market.
The opposite call was voiced by Komal Sri Kumar to Maria Bartiromo of Fox Business (man, that sounds weird):
- “Shanghai Stock exchange is trading at levels comparable to 2009 at below 2,000 level in recent days and it is starting to look good. Irrespective of what happens in the next 6 months, if you have a strong stomach and if you are waiting for a couple of years, China will be more my bet than Japan“
Unlike Yamada, Larry McDonald was clear on how Chinese turmoil would affect US stocks. His simple view is that weakness in the credit market in the 2nd largest economy in the world has to impact US stocks. For reasons only known to CNBC webmasters, this discussion of Larry McDonald & Rick Santelli’s statement that bond markets are more right about the economy than stock market were deleted from the videoclip on CNBC.com.
Paul Richards of UBS said on CNBC FM -1/2 that whether China meets their 7.5% growth goal is of great importance to the global economy but added that Chinese leaders will meet that target.
Marc Faber was even more confident that they would not as he told CNBC Asia Squawk Box this week:
- “I think we are already at a 4 percent growth rate anyway. The figures that China publishes are figures they just take out of a drawer to make it look good,”
- “I think 4 percent growth in a world that is has no growth is actually very good,”
- “I’m not saying that 4 percent is as good as 8 percent, but it would be better to grown at 4 percent without a credit bubble than at 8 percent with a colossal credit bubble that will lead down the road to even larger problems,”
- “And I think we have to realize excessive credit growth eventually leads to a crisis; this always happens. And in the case of China we do not have a credit bubble, we have a gigantic credit bubble,”
- “If someone comes to me and says China has always managed to avoid … any credit problems [because it] has never defaulted, [that] doesn’t mean it won’t happen in future. The same was said about Japan. The Japanese also thought that way until 1989 and they lost control of it,”
Ambrose Evans-Pritchard of Telegraph tweet on Friday:
- A Evans-Pritchard @AmbroseEP – Amazing. China slowing so much that it is no longer really adding to global oil demand. This from IEA’s latest pic.twitter.com/ohXIAOqZNf
4. U.S. Treasuries
30 & 10 yr treasury yields dropped by 14 bps this week with TLT up 2.4% & EDV, zero-coupon ETF, up 3.8%. The year to date figures are drop of 39 bps in 30 & 10 yr yields with TLT up 6.6% & EDV up 10.5%. These levels are now nearly at the low levels reached on February 3 when TLT retreated from 109.
But Komal Sri Kumar is not deterred. As he told FBN’s Maria Bartiromo on Wednesday:
- “When 10 yr yield 3.03% last year, I said it is not going to 3.25% or 3.50%, I said it is going to 2.50% ; based on what happens in Russia & Ukraine, and the copper situation & China, you may be seeing 10-yr interest rate go down to 2%“
Jeffrey Rosenberg of BlackRock went the other way on BTV Surveillance on Monday:
- “we expect to see yields > 3% sometime this year”
The belly of the curve has done well this year too with the 5-year yield falling by 21bps in 2014. But Rick Rieder of BlackRock is not impressed as he told CNBC PowerLunch on Monday:
happens is then the middle, the belly, is going to be volatile and
that’s the part of the curve I think will lead interest rates higher
because people will question how long can Janet Yellen, how long can the
fed maintain their vigilance with regard to the front end of the curve.
we think very different than last year, the belly is where you could
have a rate rise move from.”
Rieder does like long dated municipals though:
- “even if rates move
moderately higher which is we think where they will, you are looking at
Muni ratios of 100%, very high quality AAA assets where if you take a
little credit risk down the long end, you are talking about yields on a
tax adjusted basis that given that long in interest rates are so much
higher because the fed’s out of the QE business or getting out, you
actually can, if you were a long term holder, even if rates move
moderately higher, the tax affected rates are very attractive in long
dated munis. “
Elliott Wave-Forecast.com signaled a bullish view on Treasuries on Thursday:
- $TNX (US 10 year note yields) – Preferred view now is that 10 year yields have completed wave ( B ) at 2.82% and have resumed the decline. Bounces should now prove corrective and as far as they stay below 2.82%, we would expect more downside in TNX. We don’t like buying into proposed bounces.
A tweet on Friday afternoon that concurs:
Robert Kelley @robertknyc – T-note yields did not make new highs last week & have also turned lower after completing an a-b-c rally last Friday. Maybe 2.4% next stop
5. U.S. Equities
The “guru” views we summarize below range from bearish to bullish. So which way do we begin? We take note when a “guru” changes his or her stripes.
Whenever we have heard or read Jeff Cooper, he has been bullish. This week, he seemingly turned bearish in his Minyanville.com article on Wednesday titled Did Yesterday Mark a Market Top? Normally, we do not refer to articles that require a subscription but this change of spots did surprise us. So we will include just a couple of excerpts sans the detailed discussion or charts:
- “So, as for the market, I think you can put a fork in it.”
- “The big picture indicates the possibility of a third leg down within the context of a 13-year Broadening or Megaphone Top formation. Theoretically, that implies lows below the March 2009 low. A third leg down could see a decline hold between 740 and 1100 S&P to carve out a major inverse right shoulder.”
CNBC FM -1/2 brought out an experienced but quiet voice in Lawrence Altman, a trader who,as he told us, puts his own money on the line by trading trades 5,000 – 50,000 contracts every day & goes home flat every day.
- “I have noticed this year that the trading patterns have changed from last year dramatically; seems to be an enormous amount of complacency, each time we have a correction, it becomes shallower and shallower and I think we are in the verge of a substantial correction; I think the S&P is going to go back and test its old high around 1575; it seems like it is starting to play itself out at the moment;
- “I think the market is going to sell off 7-10%, people are going to buy it, they are going to get their chance to get in and they are going to lose another 10% and that will probably get you to around 1575-1600 then the market will be in a lot healthier spot to go up and ay be bring in a lot more money that’s sitting on the sidelines; I think the market has shown signs of being tired.”
Jeff Saut in his email on Tuesday, March 11:
- However, the sagacious Jason Goepfert writes this, “After closing at a 52-week high four days ago, the S&P 500 is higher now than it was then, but breadth on average over the past four days has been negative. This has occurred at almost all major peaks since 1940.”
Art Cashin added the following to this observation by Jason Goepfert of SentimenTrader.com:
- “If they rally over the next couple of days, then you can forget about it. If they sell off for three or four straight days, you worry.”
Marc Faber on CNBC SOTS on Thursday, March 13:
- “Just in the last six months there has been euphoria for U.S. equities, … My view is that it’s not a good time to buy U.S. equities. … It’s a better time to get out of stocks than into stocks.”
What should individuals do? Faber says cash, T-bills cash, is the best place for next 12-24 months.
Lawrence McMillan in his Friday summary:
- “we are now seeing a chart breakdown accompanied by sell signals from some of our most trusted indicators. If the bears can’t make some hay with this environment, I would be surprised. Volatility indices ($VIX, $VXO, and $VXST) were reluctant to join in with the bearishness until they broke out Thursday. This appears to be the confirmation of a rising trend in volatility, and that is bearish for stocks.”
- “We are bearish now, but will be observant.”
Larry McDonald on CNBC Closing Bell on Wednesday, March 12:
- “we are back in 2007; back in 2007, emerging markets were flourishing & argument was that they had decoupled from US; so no matter what ha
ppened to the US in 2007, emerging markets had decoupled & they would be fine; & it was proven very very painfully that they were NOT decoupled. Now … we are saying that the US is decoupled from emerging markets pain; that is not true & weakness in EM will impact US equities very very shortly; & I think you ought to be selling developed markets & actually moving into emerging markets“
Actually, non-Japan Asia did trade much better than US or Europe this week. A rotation from Ukraine-driven Europe risk, perhaps?
Leon Cooperman on CNBC FM -1/2 on Monday, March 10
- “Is the bull market aging? Yes. Is it over? No. Is it likely to rage from here? I would be highly doubtful. I think the market’s in a zone of fair valuation, and there’s no real reason for it to rage, in my opinion,”
- “Ultimately, the stock market’s got to bear a relationship to what’s going on in the economy. If the economy’s growing 2, 2½ percent real and profits are growing, let’s say, 5, and inflation is 1½ and short rates is zero, and the 10-year government is I guess currently 2.70 there’s no basis for the market to have a 30 percent year again like it had last year. I’m kind of thinking the market’s in a zone of fair valuation.”
- Cooperman said that the proper market multiple is about 16 times earnings, with a consensus earnings estimate of about $117 per share, putting the S&P 500 around the 1,870 level.
- “And for the end of this year, the market—the economy, I should say, is looking well for 2015, and we think it should be,” he added. “Then mark it up for another 6 percent, and that gives you a number close to the mid-1,900s, and that’s kind of our central scenario. But I would be surprised if it rages. I think it’ll continue to age because most bear markets relate to recession, and it does not look like a recession is in the cards anytime soon.”
Cooperman is reputed to be a superb stock picker and below are his stock picks for CNBC FM -1/2 viewers:
- “I met recently about a week ago with the top manager of AIG. AIG sells around 80% of book value. Book value is around 60. We think over the next two or three years there’s a strong argument to be made that AIG will get to at least a 10% return on equity, which would imply earnings of well over $6 a share because book value will be growing. We think a 10% r.o.e. ought to command one times book value at a minimum. So we could see AIG going up 25% over the next 12, 18 months. The banks look attractively priced. Citicorp at 10 times, JPMorgan at 10 times, SallyMae yields 2.5% roughly. We like all those names I just mentioned“
Savita Subramanian on CNBC SOTS on Thursday, March 13
- “forecasting a 10% upside return for the year, closer to an average return; we think we are going to see leadership change pretty dramatically within S&P 500; economy is improving and investors have no better place to be than stocks in our opinion and US stocks in particular, S&P 500 offers a pretty good proxy for the global economy than just the US economy; a lot of stocks that have exposure to emerging markets are pricing in a lot of pain, so valuations may adequately reflect a lot of the risk that we are seeing in other parts of the world..”.
- “capex – what I think is different today is that the market is actually rewarding companies that are spending on growth through acquisitions, through capital expenditures whereas for the last two years companies have bought back shares had been on a tear; we have noticed that theme is starting to taper off; what that is telling us investors want growth not necessarily cash return via buybacks“.
A bullish tweet from a veteran technician:
- Walter Murphy @waltermurphy – All 10 sector SPDRs are still in a bullish P&F “X” column.
Paul Richards on CNBC FM – 1/2 on Friday, March 14:
- “S&P is going to 1900; I am very positive on risk. Be long risk over this weekend.”
Now why on earth would the webmasters on CNBC.com delete this final word from the videoclip on CNBC.com? Anchor Wapner kept this as the final word on his segment for maximum impact and CNBC.com deleted it. Why? Our only guess is that CNBC.com is under orders to keep their clips short for greater impact. So they delete calls of maximum impact just to obey orders? Guess CNBC works in mysterious ways too!
Stephen Suttmeier on CNBC FM 1/2 on Thursday, March 13
- I don’t see any major divergences in the market first off and the decline does appear to be fairly corrective ; the rally in the S&P occurred with confirmation from market breadth; to me the S&P backs and fills; it acts more jittery than toppy; that is really the takeway.
- support levels – prior resistance around 1850, spike low at 1834, as long as S&P holds that level, we are fine .. we can trend up towards 1890 or low 1900s
- semiconductors look fantastic, huge bases across the board in many semiconductor names, just emerging from big trading ranges – that’s a bullish sign
- refiners look fantastic – energy not so much; broader picture for energy doesnt look all that great… but within energy refiners look pretty strong
- Financials – tactically bullish; financials were underperforming & they went down & tested a relative price low vs S&P from last November; bounced off that; so tactically we are quite bullish on financials, esp the banks, broke out, volume confirmed the breakout,and i
f it builds on that, becomes something bigger, then I will go with it but for now tactically bullish financials, especially as long as that relative low of S&P financials vs S&P from November 2013 continues to hold
Suttmeier’s “don’t see any major divergences in the market” produced derision in the tweetosphere. He will be right if as S&P goes to new highs after this down move.
6. Commodities & Inflation
Dennis Gartman on Oil on CNBC FM on Monday, March 10
- “I’m very bearish on crude oil, egregiously bearish. I think crude oil wants to go down a long distance. … The term structure is terribly bearish, the front month is losing relatives to the back month. I think that’s going to continue. and when you see the front months of a futures contract lead on the way down, that’s telling you that that market’s heading lower.”
Richard Ross on CNBC Street Signs on Thursday, March 14
- “Gold continues to benefit from a myriad of technical and macro technical factors which continue to make it a buy..let me show why it could go as high as $1,550, It begins with a text book double bottom of $1180. In the context of a double bottom, we get a nice head and shoulders reversal. That propels us back above the 200-day moving average and key support resistance at $1350. That has set us up, once we get through this little trend line, for a test of $1,420. From there we are looking at a more compelling base breakout which could propel us all the way back up to that $1,550. That’s a 61% Fibonacci retracement of that entire decline. Keep in mind, the Russian market is on the verge of a major collapse here; it could be as much as 20% downside here. Gold is the type of place you want to be under exactly those types of macro circumstances. I think it is a trading buy at a minimum and potentially could be the start of a new bull run here.”
Tom Fitzpatrick on BTV Surveillance – Monday, March 10.
is very similar to what we saw in 1970s; 1182 is the low in Gold with
resistance at 1354-1362; most imp level is 1434;clearing that will
confirm the low at 1182. Oil has held up very well; soft commodities are
exploding again like 1970s; what is not pushing up is industrial
metals; copper is very heavy; iron ore is not doing well; so less of an
economic push but may be 1st sign that you might be getting cost plus
We remind readers what Larry McDonald said in the first week of December 2013:
- “I think overall tremendous tax law selling, tremendous capitulation. We saw this at the end of the second quarter with gold. just an absolute rush to the exits, quarter end rebalancing is a phenomenal time for investors to take advantage of capitulation. and that’s what we’re seeing with gold. I think after January 1st, there’s going to be nobody left to sell gold and, say, coal names and gold names. both of those sectors are completely decimated.”
So what is he saying now? Read his Friday afternoon tweet:
- Lawrence McDonald @Convertbond – Time to lighten up on some Gold Miners $GDX .
Two other tweets also suggested selling of gold & gold miners on Friday morning:
- Jeff Cooper @JeffCooperLive – intraday inverse $GDXJ
- Vconomics @Vconomics – Just sold my $GLD and Gold longs here. Up 15% in three months is great. I’m still bullish but I’d like to take my profits and run.
Tom Fitzpatrick of Citi said on BTV Surveillance (see above) that the outperformance of commodities sans industrial metals might be a first sign of cost-plus inflation ahead. BTV’s Tom Keene promptly pointed out that David Rosenberg made a higher inflation ahead call last year and took flack for it. This Wednesday, GaveKal also came out with a piece titled The End of Commodities’ Relative Underperformance? The chart below is from that GaveKal article:
Carter Worth of Oppenheimer & CNBC Options Action made the commodities outperform stocks in 2014 call back on December 31, 2014:
- “so it’s the spread between a major asset class equities and commodities. you know commodities spike well above equities. now we have this equally impressive spike in terms of equities above commodities. The presumption is this cannot last. here’s the tell. the most important commodity all, copper, has all the hallmarks of an important head and shoulders bottom. here’s the neckline. this looks like it’s going meaningfully higher. what that suggests is that commodities actually outperform equities in 2014.”
This is an interesting case of the forecast coming true despite the main case for the forecast proving very wrong. Carter Worth’s call was seemingly based, to a large extent, on copper having made a bottom in December 2014.
Inflation Accelerating is the call of Keith McCullough of HedgEye who published a free article titled Double Bubble Trouble on Thursday:
- Back to the call. If I boil down our entire US macro view right now to “inflation doubles, and growth gets cut in half” what does that mean?
- #InflationAccelerating – US Consumer Price Inflation (headline) goes from 1% y/y to 2%
- #GrowthSlowing – US GDP growth gets cut in half from our #GrowthAccelerating call high of +4.12% in Q314
His asset allocation model, he writes, is “basically the opposite of what it was on this day in February of 2013”:
- Long Commodities
- Long Foreign Currencies vs the US Dollar
- Long Fixed Income
- Net Long European Equities
- Net Short Japanese Equities
- Net Short US Equities
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