Editor’s Note: In this series of articles, we include important or interesting videoclips with brief comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
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.
We have noted that the action in the equity market in 2009 reminds us of 2006 because of the grinding, low-volume, relentless action that slowly squeezes volatility out of the market. We have wondered whether this action in 2009 is also due to the buying patterns of Quant funds. It has been our belief that the factor analysis used by such funds made them buy high quality stocks and short low quality stocks. We wondered whether this is the principal reason why low quality stocks have seen relentless buying as these Quant funds are forced to cover. Despite our request, our friendly CNBC Anchors ignored these issues and provided their usual clichéd answers for the stock rally.
Then we read the article The Travails of “Quant” Hedge Funds by Gregory Zuckerman in the Wall Street Journal on Friday, September 18. Zuckerman points out that large funds are down significantly in 2009. According to Zuckerman, the MAN AHL Diversified Fund was down more than 14% through August, while Renaissance Technologies’ RIEF fund dropped nearly 12%. This, according to Zuckerman, is due to the huge rally in low-quality stocks. Then Zuckerman concludes “Rather than a sign that their whizz-bang computers should be chuked, Quants’ problems could be an early warning that the stock gusher is due a break”.
Despite our parallels to 2006, we have to admit that the S&P action in the last two weeks (up 7%) is more reminiscent of 1999 or, according to CNBC’s Art Cashin & Rick Santelli, reminiscent of 1987.
But there is a major difference between 2009 & 1987 or 1999 – the action of the Treasury market.
In 1987, the Treasury market began selling off furiously in April 1987. By October 1987, the gap between the stock market rally and the Treasury market selloff had become a chasm. We recall that in October 1987, the stock-bond allocation models at major Wall Street Firms had become 99.9% Bonds and 0% stocks. In 1999, stocks and bonds diverged for much of the second half of that year. Stocks went to the moon while bonds sold off.
In contrast, the Treasury market has rallied in a spectacular fashion since June 10, 2009. In fact, the long Zero Coupon Treasury Strips have outperformed the S&P 500 since then (about 14.6% vs 12.5%). The last time stocks and bonds rallied together was in the second half of 2006.
If stocks go up another 10% or so and long term Treasury bonds sell off significantly, then we could be in for a repeat of 1999 or 1987. May be, that is what CNBC’s Cramer & Kudlow seem to desire. Jim Cramer made a call to sell Treasuries this week on his Mad Money show and Larry Kudlow, his old sidekick, fervently supported Cramer’s call. Steve Liesman, courageously and sarcastically asked Kudlow “Sell Bonds and buy Gold?” Kudos to Steve Liesman who consistently impresses us with his knowledge, sheer honesty and good humor. (See clips 5, 7 & 4 resp.)
Both Cramer and Kudlow make this call because of their suddenly discovered fears of inflation. Interestingly, this week Deutsche Bank published a report titled “Growth with little Inflation” and Goldman recommended buying 10 Year Treasuries (according to CNBC’s Bob Pisani on Wednesday, September 16) with a target yield of 3% for the 10 Year Treasury. It appears that Goldman thinks core inflation will continue to go down through 2010.
Unlike Cramer & Kudlow, Jason Trennert of Strategas understands the importance of the Treasury rally to the stock market. He told Maria Bartiromo on Friday “If long term Treasury rates back up, that might short-circuit the rally (in stocks)“. True to her CNBC Anchor* quasi-religious code, Maria ignored Jason’s comment about the importance of the Treasury market.
Look where CNBC does not
It is our experience that when CNBC gets focused on something, it proves to be either a dud or totally wrong. For example, in June 2009, CNBC overhyped inflation and they became obsessed about Treasury auctions. Then two weeks ago, CNBC trumpeted the breakout in Gold.
Usually, CNBC cares a great deal about upcoming Fed meetings. But, not this week. We did not hear a pip from CNBC about next week’s Fed meeting. However, we think next week’s Fed meeting could prove to be very important, perhaps as important as the two Fed meetings in September 2007 and October 2007.
Recall that emerging market stocks, commodities were up huge prior to the September 18, 2007 Fed meeting and the US Dollar was down. During that meeting, Bernanke surprised the markets by being much more dovish than the markets expected. In fact, as we recall, the word “inflation” was dropped from the Fed statement. The result was predictable. The US Dollar was sold viciously even though it was already grossly oversold. EM stocks and metal stocks exploded even though they had already rallied a great deal. We recall that FXI, the Chinese ETF, was up 50% from August 16 to September 20, EWZ, the Brazil ETF was up 40% and EEM, the Emerging Market ETF, was up 25%. The day after the Fed meeting, the Saudi Central Bank refused to follow the Fed’s lead and the dollar dropped vertically. Treasuries were sold with abandon and as we recall, the 30-year Treasury bonds made a bottom in the afternoon of September 20 (a higher bottom than the June 2007 big bottom). It rallied from this bond and the 30-Year Treasury Bond was up for the month of September.
Perhaps fazed by this burst of animal spirits and disturbed by the criticism about their US Dollar policy, the Bernanke Fed surprised the markets on October 31, 2007 by releasing a statement that was much more hawkish than the market expected. The US dollar rallied and the stock market responded with a 10% decline in early November 2007. Long Treasuries rallied about 6% in November 2007.
Getting back to 2009, the stock markets, especially the commodity stocks and emerging market stocks, have enjoyed a spectacular rally into next week’s Fed meeting. The US Dollar has been shorted by just about every investor or so it seems. On the other hand, Large Speculator positions in the Dow Jones Industrial Average, Euro, Gold, 2 Year Treasury Note, 30 Year Treasury Bond, all have 100% percentile rank as of Tuesday, September 15, according to the CFTC.
Will these rallies continue next week with a dovish Fed statement or will they reverse with a hawkish Fed statement. Either way, the Fed meeting might end up being very significant.
* Our August 22, 2008 article Are CNBC Anchors on a Mission Against US Treasuries – A Viewer’s Perspective has re-entered this Blog’s 10 Most Popular Articles list. This was our first article that described our perception of the bias of CNBC Anchors against US Treasuries.
This week, we feature the following clips:
- Gregg Troccoli, Director of Technical Research at Opaleque on Fast Money on Friday, September 18
- Larry Fink on Closing Bell on Wednesday, September 16
- Barton Biggs on Closing Bell on Tuesday, September 15
- John Taylor & Steve Liesman on The Kudlow Report on Thursday, September 17
- Jim Cramer with Sell Treasuries call on Mad Money on Thursday, September 17
- Bill Gross on the CNBC Back to Lehman Special on Monday, September 14
- Barry James, Stephen Wood & Ajay Rajadhyaksha on The Call on Friday, September 18
- Richard Bernstein on CNBC Fast Money on Thursday, September 17
- John Kilduff on StreetSigns on Friday, September 18
- Uday Kotak of Kotak Mahindra on Squawk on The Street on Friday, September 18
- Peter Schiff on Fast Money on Wednesday, September 16
1. Chartology: Next Week’s Outlook – Greg Troccoli on Fast Money – Friday, September 18 – 5:15 pm
Mr. Troccoli presents a chart of the Nasdaq and shows that the Nasdaq has regained about 62% of the total loss from October 2007. This makes him skittish as does the fact that it is well above its 200 day moving average. His conclusion – ‘in the next couple of weeks, we could have a pull back here and it could be meaningful”.
Before Greg spoke, Joe Terranova also predicted a selloff in the next two weeks. He has said that the 2009 market reminds him of 2003 and in 2003, there was a selloff after the September options expiration.
Later in the show, all four traders on Fast Money gave their best trades as “sells” or “shorts”. This is highly unusual and it got our attention.
Melissa Lee, Anchor of Fast Money reported on Wednesday that both Art Cashin and Doug Kass, the veteran Hedge fund manager, have pointed out that the S&P 500 is 20% higher than its 200 day moving average. According to them, this has not happened since 1983 and in 1983, this condition was followed by a significant selloff.
2. Fink On the Shape of Recovery – Larry Fink with Maria Bartiromo – Wednesday, September 16 – 4:28 pm
Larry Fink, Chairman & CEO of BlackRock, has been a prescient seer on the credit crisis. Larry says that you are being paid to take risks by the Fed. He believes that the equity market can go a little higher because there is a great deal of money sitting on the sidelines. He does not believe that the Fed is going to raise rates any time soon. He even said that putting money out on the curve, in equities is probably the right thing to do.
He also says that for the markets to do substantially better, we are going to need to see validation in the economy. But he does not think we are going to see much validation in the economy in the near term. He thinks employment will be a struggle, that state and local governments are going to have a severe shortfall in their revenues, on their balance sheets and their budgets. They are going to downsize their employment. We are going to have strains that will persist in the economy for the next year.
He thinks we are going to have a “swish” economy – it is going to grow very modestly over the next few years. It is going to be better but it is not going to be what we expect.
Larry says we could have an inflation threat but that threat is not going to be any time soon. There is so much excess capacity globally that he does not believe we are going to have any inflationary threats for the next 2-3 years.
He is worried about the US Dollar. He is worried that we do not pay enough attention to how we are positioned as a country worldwide, our competitiveness as a nation.
We like to hear every word uttered by Larry Fink. We recommend readers do the same.
3. Putting Your Portfolio To Work – Barton Biggs with Maria Bartiromo – Tuesday, September 15 – 3;45 pm
Barton Biggs tells viewers to be fully invested. He says he is “unfashionably bullish” and that we are going to 1200 on S&P 500 before we get any serious correction. He says stock market rally has lagged the rally in Credit markets. He then says that stocks are very very cheap on valuation, but it is hard to know what earnings or free cash flow valuations you should use here because the picture is changing so rapidly. But on any of the criteria he uses, stocks are very cheap compared to where they have often been in the past. He then says that he pays a lot of attention to sentiment and this market had absolutely no respect. Everybody thinks we have gone too far and cutback and lock in some gains – that is the prudent thing to do.
Then he says “It takes courage to be a pig and I am a pig here”.
That statement brought back memories of another era. It was October-November 1998. Russia had defaulted and Emerging Markets had crashed, The US Equity market had suffered a steep correction. The 30-Year Treasury Bond had shot up in price and its yield was down to about 4.875%, as we recall. At that time, Barton Biggs wrote an article titled “It takes courage to be a pig”. In that article, Barton advised readers to not sell 30-Year Treasury Bonds and lock in their gains. He said he was a pig and he would hold on for higher prices on 30-Year Treasury Bonds. He said he realized that he was being greedy to hold on to his bonds. But being greedy for higher profits took courage and that is what he meant by it takes courage to be a pig.
Unfortunately, Barton proved to be wrong at that time. The 30-Year Treasury Bond began selling off in November 1998 and the selloff persisted until late 2000.
To hear the exact words he used in late 1998 jarred our consciousness. We certainly hope he turns out to be correct on his greed of greater profits is good call of this week.
4. Did the Stimulus Work? John Taylor with Larry Kudlow & Steve Liesman – Thursday, September 17 – 7:01 pm
John Taylor is famed for inventing the Taylor Rule while he was a Treasury Undersecretary. We were delighted to see Steve Liesman being candid and politely critical of John Taylor. At the end, Larry Kudlow says Sell Treasury Bonds to which Steve Liesman replies with a little sarcasm ” Sell Bonds and Buy Gold?” Kudos to Steve Liesman, a severely underestimated talent at CNBC.
5. Jim Cramer’s Sell Block segment on Mad Money – Friday, September 18 – 6:30 pm
Jim Cramer says:
- “big run in US Treasuries has ended; they have moved up enough and it is time for you to sell 10-Year & 30-Year Treasuries……Let us go over why. First of all, I suspect the return of inflation. It is not necessarily a bad thing….It is definitely bad for those who own Treasuries… Once economic growth starts kicking in, we are bound to see some inflation. I firmly believe that we have seen the trough in Treasury yields… and the peak in prices because the economy is coming back…The recovery is real. Inflation plus recovery means sooner or later the Fed is going to have to start raising rates and that pushes Treasuries lower….I think the 30-year Treasuries which currently yield 4.2% will rapidly go to 5% or higher within the next few months because of this mountain of Federal debt and I am promising you that you will get hammered courtesy of the endless auctions that the Treasury must run to finance the deficit. 10 Year Treasuries yielding 3.4%, right here and right now, I am calling them the most over-valued security in the world. You heard me. 10-Year Treasury – the most overvalued security in the world.”
This is an interesting call. In contrast, Goldman Sachs predicted this week that the yields on the 10-Year Treasury will fall to 3% rather than going up as Cramer says. Goldman believes that core inflation will fall in the upcoming months and that would be bullish on Treasuries.
Why does Cramer think will inflation come back? Because economic recovery is real, he says. The argument that economic growth creates inflation is probably the biggest canard in investing. Interestingly, Deutsche Bank released a report this week titled Growth with little Inflation. If you doubt us or Deutsche Bank, remember the Goldilocks days of the late 1990s – that was a period of high growth without inflation. What about the huge twin bull markets in Treasuries & Stocks from 1982 to 2007? This was a 25 year period in which the economy grew and inflation fell.
In October 2003, Larry Kudlow, Cramer’s sidekick, used to rail against US Treasuries claiming that the then upcoming tightening by the Fed will cause Treasuries to plummet in price. He used to trot out economists like Michael Darda from MKM Partners and his ex-colleagues from Bear Stearns who predicted that the 10-year treasury yield would go to 6%-7%. They proved to be completely and totally wrong.
Sometimes we get angry comments from viewers when we write good things about Jim Cramer. At the risk of getting more angry comments, we state clearly that, in our opinion, Jim Cramer has a sharp investment mind. So, when he makes a call, we take it seriously.
But, we regret to opine that Cramer has not made his case apart from repeating typically tired clichéd reasons. When making a stock call, Cramer usually makes a rigorous case with fundamental facts, technical charts, historical patterns and states a trigger for his call. In this case, he merely repeated what every equity mutual fund manager says and has said for ever.
We recall that Jim Cramer was totally contemptuous of Treasury Buyers on June 10 when he said with disdain “Let them buy bonds. I am buying a building”. We are not rich like Jim Cramer. We cannot afford to buy a building. Since that day, our nickname for Jim Cramer has been JMAC, or “Jim Marie Antoinette Cramer”. After all, we did feel a bit like the French peasants when he scorned us for our relative poverty on June 10. Recall that June 10 was the day Treasury prices bottomed. Jim Cramer has completely missed the spectacular rally that began on June 10. Perhaps Jim Cramer should remember this mistake when he criticizes Roubini for missing the stock rally.
Despite Cramer’s lack of rigor, he could end up being right in the short term. Here are our reasons:
- October has been a relatively bad month for Treasuries for the past 3 years. In 2008, long Treasuries were down in price more than 4%. In October 2006, long Treasuries were only up about 0.9%.
- Large Speculators have covered the bulk of their short positions in 30-Year Treasuries and their percentile position ranking in now a full 100%.
- Next week, we have a Fed meeting and the Fed could say something that creates a sell-off in Treasuries as they did in September 2007 (see our opening comment above).
But we point out to readers that November has been a terrific month for long term Treasuries. The 25 year Zero Coupon strip rallied about 20% in November 2008, 6.85% in November 2007 and 2.95% in November 2006. In addition, October 2007 and October 2006 were both up months for long maturity Treasuries.
As we recall, long maturity Treasuries went up in price even November 2003. This was after a 6% GDP growth in the 3rd quarter of 2003 and despite fervent calls by Larry Kudlow to sell 10-Year & 30-Year Treasuries.
So, if long Treasuries do actually fall in the next few weeks, will smart Treasury investors step up to buy them to take advantage of the seasonal November rally. Time will tell.
6. Looking Back at Lehman – Bill Gross with Jim Cramer, Erin Burnett & Mark Haines – Monday, September 14 – 8:12 pm
Begin watching the clip at minute 02:45. Before that, you have rants by Jim Cramer against Prof. Stieglitz and others with Mark Haines concurring completely.
Then Bill Gross answers questions from Jim Cramer and Mark Haines. He says he expects some damage in the Municipal market. Then Erin Burnett gets in to the act.
- Burnett – Bill, last time you spoke with me was on September 2nd, you said you were beginning to explore the possibility of a double dip. Where are you in that exploration?
- Gross – Well, I think, we are along the transitional path Erin. You know, up until this point, the progress we have seen and we expect in the second half is really an inventory rebound… from this point forward, or actually from January of 2010, the problems we have are really structural problems, structural breaks, …you know to suggest that the economy is coming back to where it was several years ago is really fiction.
- Burnett – Bill always likes to leave you on a high note
- Burnett – all I got to say ..
- Cramer interrupts – I would be long zeros if I was, if that was —unintelligible couple of words
- Burnett to Cramer – If he is right, your bull market scenario, I don’t know.. we will tackle this in the next couple of hours.
During the Sept 2 double dip conversation mentioned by Erin Burnett, Bill Gross had stated that the 30-year Treasury bond at 4.12%-4.15% was attractive. This was a surprise to Erin Burnett and she spoke about it to Steve Liesman right after her conversation with Bill Gross (see our article of last week).
Nothing we saw or heard in this interview leads us to believe that Bill Gross was not bullish on 30-year Treasuries during this interview on Monday, September 14.
So we were stunned to hear Erin Burnett says on air on Wednesday (Sept 16) morning that Bill Gross expects 10-Year Treasury yields to go to 4.2%. She then repeated this statement in her exchange with CNBC’s Bob Pisani who was reporting the Goldman call that 10-Year Treasury rates would fall to 3%. Erin Burnett laughingly said to Bob Pisani that it was Pimco vs. Goldman. Bob Pisani replied that he would take Bill (Gross) over Goldman in this case. We tried to find the video clip of the Burnett-Pisani conversation on the CNBC website but we could not. So our report of this conversation is based on our recollection.
Let us assume that Erin Burnett meant to say 30-Year Treasury and not 10-Year Treasury in her report of Gross’ prediction. Even then, a target of 4.2% on the 30-Year Treasury Bond would make Bill Gross negative on the price of the 30-Year Treasury and it would suggest that Bill Gross had changed his mind on the 30-Year Treasury. That would be an important and market-moving news.
So was Erin Burnett mistaken? Did she totally forget her conversation with Bill Gross on Monday evening? Or did she have a subsequent communication from with Bill Gross in the 36 hours between Monday evening interview and her report on Wednesday morning? We do not know.
Then, a day later, Jim Cramer came out of the blue with his Sell 10-Year & 30-Year Treasuries call. This was the same Jim Cramer who spoke with Bill Gross on Monday evening and remarked “I would be long zeros”. What happened between Monday evening & Thursday afternoon to make Jim Cramer change his mind so drastically?
There was a report on Wednesday morning that a couple of Fed members were going to press for an increase in rates in next week’s Fed meeting. Did this news have anything to do with this change of heart by Erin Burnett & Jim Cramer, her best friend?
All we know is if Bill Gross changes his opinion on US Treasuries next Wednesday, the Fed day, the circle will be complete. Then all three participants in the interview on Monday, September 14 will have changed their opinion of US Treasuries. Then we would probably need to congratulate Erin Burnett on her journalistic scoop. But, will Pimco fundholders wonder why a journalist knew about Gross’ thoughts before his fundholders?
Frankly, we feel weird about this discussion. It is more suited to personalities like CNBC’s Joe Kernan. But we were intrigued by Erin Burnett’s stunning report and the sudden change of opinion by Jim Cramer. Ours became an inquiring mind and it wants to know what, if any, transpired between Bill Gross, Erin Burnett & Jim Cramer between Monday and Wednesday. Hopefully, Bill Gross will appear on Erin Burnett’s show on Fed day, Wednesday, September 23, and then we will hear directly from the Bond King himself.
7. Stocks, Bonds & Your Portfolio – Barry James, Stephen Wood & Ajay Rajadhyaksha with Larry Kudlow & Melissa Francis – Friday, September 18 – 11:02 am
Barry James is the President of James Advantage Funds, Stephen Wood is Chief Market Strategist for Russell Investments & Ajay Rajadhyaksha is Head of US Fixed Income Strategy for Barclays Capital.
Larry Kudlow opens the segment with “So our question is Stocks or Bonds?” Then he says to Stephen “Steve, let us start with you. Get out of Treasury Bonds, Stay with Stocks, is that the right trade in your judgment?” Predictably, Stephen Wood answers in the affirmative. Ajay Rajadhyaksha also dislikes US Treasuries.
Barry James disagrees and says “…I will take the other side of the picture there. I go with the Bonds. Our Bond Indicators are super strong. The risks are very high in the stock market……we are probably are going to have a correction and bonds are a better place to be. “
Barry catches some grief for his comments and Melissa says “You are the ultimate contrarian here“. Barry patiently explains that the stock sentiment levels are where they were at the peak in 2007. Then he says “we see today that the risks in stocks are pretty high and the risk in Bonds are pretty low”.
We have admired Barry James for a long time and we tend to listen when he speaks. We wish Larry Kudlow and Melissa Francis would as well.
8. Lessons from Lehman– Richard Bernstein on Fast Money – Thursday, September 17 – 5:24 pm
Richard Bernstein explains why low quality stocks always rally off a market bottom. He is surprisingly bullish on Consumer Cyclicals assuming the economic growth continues.
9. Have Nat Gas Prices Bottomed? John Kilduff & Chris Jaleka (?) with Erin Burnett – Friday, September 18 – 2:27 pm
John is bullish on natural gas prices while Chris is bearish for the next 5-6 weeks. However, Chris is bullish for the long term. Interestingly both John & Chris are bullish on Oil. John expects Oil to go to $100 by the end of this year.
10. Top Indian Banker Shares Outlook – Uday Kotak with Erin Burnett & Mark Haines – Friday, September 18 – 9:45 am
Uday Kotak is the executive vice chairman of Kotak Mahindra Bank. He gives an optimistic view of India’s outlook. Uday explains that India is primarily a domestic story because India is not as dependent on exports as other countries are. Uday provides statistics about Indian economy to make his case.
Finally Uday points out that 70% of the India’s GDP is consumption and 30% is Investment, almost opposite of that for China. Erin Burnett says to Mark “exactly the same as the United States of America”. Mark Haines concurs.
11. Senator Schiff? – Peter Schiff on Fast Money – Thursday, September 17 – 5:35 pm
Peter Schiff is a colorful speaker with extreme views of America, US Dollar & US Stock market. Peter Schiff has announced his candidacy for the Senate seat currently occupied by Chris Dodd.
Peter Schiff has argued for some time that the US Dollar would crash and the US interest rates will shoot up to very high levels. He has argued that Asian markets will do very well as US stock market collapses. In other words, the markets have proved Peter Schiff to be totally wrong and he reportedly had a terrible investment performance in 2008.
Now Peter Schiff threatens to take his message to the US Senate and “educate” other senators. He suggests that Foreign Governments should not buy US Treasury Debt, a step that would immediately end the status of the US Dollar as the world’s Reserve Currency and irrevocably destroy the economic prosperity of America.
Peter Schiff has done the impossible. He has converted us into a supporter of Chris Dodd.
Send your feedback to [email protected]