Editor’s Note: In this series of articles, we include important or interesting videoclips with our 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.
Dow 10,000 Euphoria
Our friends at CNBC were euphoric about the stock market finally closing above the 10,000 level on the Dow Jones Industrial Average on Wednesday. They were so happy that they created a Dow 10,000 special that evening. We hope that haven’t jinxed the rally as they usually do.
The rally on Wednesday was a celebration of blow-out numbers from Intel, the greatest semiconductor company in the world and a good number from JP Morgan, the best bank in the USA. Few people paid attention to the fact that Intel began selling off right at the open on Wednesday morning despite its great numbers.
Technology, Financials & Commodities have been start performers of the equity rally since March 2009. The JP Morgan numbers & the rally on Wednesday propelled the stock of Goldman Sachs to a new high on that day and even higher in the early morning on Thursday before Goldman reported. Then, GS started selling off immediately. After an initial dip, the market as a whole held and actually closed up on Thursday.
Then Thursday afternoon, Google blew away its whisper number. But a few minutes later, IBM delivered a dud, compared to its whisper numbers. IBM sold off fast and kept its decline going on Friday. The broad market sold off on Friday morning but then rallied in the final hour. Frankly, the stock market hung in well despite a couple of very high profile disappointments like GE, Bank of America.
That may be because Commodities, the 2009 secular growth candidate, performed well. Oil actually rallied on Friday and Oil stocks did well. So did Freeport McMoran, the IBM-GS counterpart in the commodities space. We are very interested in seeing the action in FCX after its earnings next week.
Is the action on Friday resilience or complacency? Despite the decline, VIX continued to fall, Put-Call ratios remain low and the sentiment levels are at peak levels seen in 2007. The declines in stocks are being restricted to companies that have reported – Alcoa, Johnson & Johnson, Intel, JP Morgan, Goldman, IBM, GE & Citigroup.
So, next week might prove crucial.
We cannot but help consider the parallel to October 2007. We remember the CNBC euphoria when Dow crossed 14,000 that month. Commodities were rallying every day, the Dollar was weak and the Emerging Markets were strong. But, after the options expiration week in October 2007, the markets began a choppy decline until the Fed meeting on October 31, 2007.
Apres that Fed meeting, the deluge in November 2007. The stock market suffered a 10% decline after a tough Fed statement and Treasuries rallied in November 2007 despite a strong employment report on November 2, 2007.
So, we wait and see what happens until the Fed meeting in early November 2009 and after.
This week, two noted observers compared this equity rally to the 1999-2000 period. One was Ken Langone, the chairman of Invemed Associates and a Wall Street veteran. The other was the 1997 Nobel Prize winner Myron Scholes (see clip 1 below).
The US Dollar
The persistent weakness of the US Dollar has begun to create talk around the world. Trichet of the European Central Bank spoke out about the need for a stronger dollar. Brazil & Asian Governments have intervened to buy the dollar to stem the relentless rise in their currencies.
If this were not enough, Niall Ferguson, the Harvard-Oxford professor proclaimed that dollar may fall 20% versus the Euro because of US Budget deficits. An academic making bold long term predictions! Is this the proverbial bell ringing?
There was talk in bond markets on Friday about a 2 pm conference call concerning Reverse Repos. This may have been a reason for the weakness in the 2-year Treasury note on Friday.
We might be naive but we do maintain our confidence in the Great Bernanke and in his ability to bring the US monetary policy to safe harbor. So, we would not be surprised if Mr. Bernanke took some steps to drain reserves to create some fear in the dollar-shorting crowd. It is just 3 weeks to the November Fed meeting.
Municipal Bonds – a canary?
Last week, we wrote about the sell-off in Municipal Bonds and the more drastic action in the Municipal Closed-End Funds. The sell-off continued this week. The pace of this price action worries us. A similar sell-off occurred in October-November 2007. The fundamental reasons revealed themselves 3-4 months later.
We hope it is simply the case of profit taking in a market that had run up too far too fast.
Research Reports of Interest
Goldman Sachs made comments about Why Core Inflation has Stopped Falling? They argue that core inflation will resume its downward path soon. Michael Hartnett, Emerging Markets Strategist at BAC-Merrill issued a report about excessive inflows into Emerging Market Funds. He pointed out that such levels of inflows have sometimes provided a Sell Signal for Emerging Markets. Tim Seymour of CNBC Fast Money referred to this sell signal and dismissed it. But Mr. Seymour did not mention Mr. Hartnett’s report. Not quite Cricket, Mr. Seymour.
These reports came to our attention this week and we bring these to the attention of our readers.
This week, we feature the following clips:
1. Myron Scholes On The Markets – Myron Scholes with CNBC’s Rebecca Quick – Friday, October 16 – 8:16 am
Dr. Myron Scholes, the 1997 Nobel Prize winner, is a familiar name to most investors. He is the Scholes of the famed Black-Scholes options pricing model. He is also well known for being a part of Nobel Laureate team of geniuses at Long Term Capital, the huge hedge fund that collapsed in October 1998.
Prof. Scholes was articulate and insightful. This was our first opportunity to hear him and we were glad we did. Watch this long (13 minutes) clip.
Prof. Scholes speaks about this year’s massive rally in junk companies and calls it Fedcalm (or is it Fedcom) to compare it with the dotcom bubble. He discusses the concept of negative convexity and how that forces Wall Street dealers to increase their leverage. He discusses how the forest fires in California kept getting bigger & more destructive with each solution implemented to put these fires out fast. He uses this example to describe some of the today’s policies that mitigate the cleansing necessary to clear the 2007 bubble.
We commend Becky Quick for an excellent interview. She let Prof Scholes speak and asked the right questions to keep the conversation on the topic.
2. Making The Most Of Macro Economics – Ken Tropin with CNBC’s Rebecca Quick – Friday, October 16 – 7:15 am
Ken Tropin the Chairman & Founder of Graham Capital, a global macro fund that manages about $6 billion of capital. According to Becky Quick, all 13 of Mr. Tropin’s strategies delivered positive returns in 2008.
Mr. Tropic talks about their risk management techniques in detail. Then he provides his outlook for the rest of 2009.
Watch this clip.
3. Stemming the Dollar’s Decline – Robert Altman with CNBC’s Maria Bartiromo – Friday, October 16 – 4;16 pm
Mr. Altman is the co-founder, Chairman & co-CEO of Evercore Partners. He served as a Deputy Treasury Secretary in the Clinton Administration. He also served as an Assistant Treasury Secretary in the Carter Administration.
The title of this clip is misleading. Mr. Altman discuses the economy, the dollar and interest rates in this interview. Then Maria Bartiromo asked him “Is America on the ascent?”. Not surprisingly Mr. Altman answered in the negative after a longish explanation.
Mr. Altman is not the first celebrity thinker to sound bearish on America. Other celebrity thinkers like Julian Robertson and Michael Steinhardt have sounded very bearish on America’s future.
We disagree. Simply put, America has the best hand in the world today and every country in the world, including China, India, Brazil, would love to exchange the cards they hold with what America holds.
Then why is it that every celebrity thinker in America feels gloomy about America’s future? We shall answer soon in an article on this topic. Hint: Think about today’s Rockefellers.
4. Housing: Another Bubble Ahead? – Robert Shiller with Maria Bartiromo – Friday, October 16 – 3:00 pm
Robert Shiller could be called America’s foremost expert on housing. He was prescient in calling the Housing Bubble. Dr. Shiller is also the co-creator of the Case-Shiller index for housing.
Succinctly speaking, Prof. Shiller does not see another bubble in housing. But, he expresses surprise and concern that house prices are moving like stock prices rather than along the old smoother path of slow gains. This short (4 minutes) clip is worth watching for Shiller’s insights.
5. Whalen Wails on Goldman – Chris Whalen on Fast Money – Friday, October 16 – 5:13 pm
Chris Whalen is a well known analyst. He was invited to appear on Fast Money to explain why he downgraded Goldman Sachs after their earnings on Thursday. Mr. Whalen is fairly negative on most large cap financials. He is eloquent in his comments. Watch this clip. We do recall that Mr. Whalen has been negative on most financials for some time.
6. Byron Wien as Guest Host on Squawk Box – Wednesday, October 14
Mr. Wien is currently the Vice Chairman of Blackstone Advisory Services. He spent many years as Morgan Stanley’s Equity strategist before moving to Pequot. CNBC describes him as a legendary investor, but as far as we know, Mr. Wien has not managed investor monies for 2-3 decades. He is however well-regarded as an equity strategist.
Every January, Mr. Wien publishes his 10 Surprises for the Year list. He calls these surprises because they are not a part of the Wall Street consensus, according to him.
Mr. Wien is a bull on equity markets. He thinks S&P 500 is going to 1200 by year-end. He is positive in Technology and Commodities. He is bullish on Emerging markets and he is negative on US Treasuries. Now you understand why CNBC celebrates him as a legendary investor.
All kidding aside, Mr. Wien is a thoughtful, insightful strategist and his views are worth a listen. His comments are in 2 clips:
7. Dubai Reports by CNBC’s Erin Burnett – Thursday, October 8
Last week, we featured Ms. Burnett’s interview with Khaldoon Khalifa Al Mubarak of Mubadala, a major Abu Dhabi based investor. We did not feature her two clips about Dubai because we ran out of space (10 clips being our soft limit for this series of articles) and because we felt these were rather ordinary clips.
Then, on Tuesday, October 13, Jim Cramer promoted these Dubai clips in his daily segment with Erin Burnett and exhorted viewers to watch these clips. So we did again.
Frankly, Jim Cramer was wrong. These clips are rather banal. Ms. Burnett airily talks about Dubai’s excess debt and its resurgence in 2009 without putting it in the context of the global credit bubble. The other clip is about the world’s tallest building that is scheduled to open in December 2009. Interesting but more of a tourism promotion clip for Dubai than a value added business clip.
We are disappointed because Ms. Burnett missed a terrific opportunity to add real investment value for CNBC’s viewers. Remember that day, Thursday, October 8? It was the day Gold broke out and GLD, the Gold ETF, reached its intra-day high of $104.15. All of CNBC was euphoric about this breakout in Gold. What a glorious opportunity for Ms. Burnett who was in Dubai? Right?
Dubai was created by the Gold trade*. The Dubai Gold Souk is famed all over the world. People come from all over the globe to buy Gold jewelery in the Dubai Souk, a shopping area with 300 retailers that deal exclusively in Gold bullion and jewelry. Reportedly, this small area often has about 10 tons of Gold. Just look at the pictures below:
Dubai gold traders understand Gold better than perhaps any one else in the world. It is their livelihood.
Ms. Burnett could have gone to the Dubai souk and interviewed jewelers about their views on Gold. That would have been a coup for her. After all, her CNBC colleagues only look at the financial ETFs like GLD or Gold mining stocks. No one in America has any knowledge about the world’s retail demand for Gold and Gold jewelry. Ms. Burnett had this amazing opportunity to cover this topic and she missed it completely.
Jim Cramer once said on air that India is Ms. Burnett’s bailiwick. This week is the Indo-Global Festival of Diwali. It is a tradition to buy Gold just before Diwali as a gift for the family. Erin Burnett, Bertha Coombs have talked about Indian demand for Gold as being the largest in the world. It is estimated that Indian families have about 15,000 tons of gold in their homes and bank vaults. Many affluent Indians travel to Dubai to buy Gold because it is cheaper in Dubai than in Mumbai.
President Obama knows about Diwali. He celebrated Diwali in the White House this week. But here is CNBC’s “India-bailiwick” anchor Erin Burnett in Dubai, a week before Diwali, and she had no clue. Her ignorance cost CNBC’s viewers a rare opportunity to hear from Dubai’s traders about the Indian demand for Gold.
Ms. Burnett is not alone in being unable to see the important story that is right in front of her. That seems typical of many CNBC anchors. But Ms. Burnett travels more and tries to be more of a global anchor. So her lack of insight or knowledge becomes more evident even to average CNBC viewers like us.
Gold was not the only Dubai story Ms. Burnett missed. Today, Dubai is at the center of many demographic and geo-strategic cross currents. We could write about at least 2 other critical issues facing Dubai. But, Ms. Burnett chose to focus on the trivial.
We really appreciate Ms. Burnett’s interest in covering global business issues and we admire her passion. But, before she ventures overseas, she needs to educate herself in macro thinking and spend some time researching the place she plans to visit. When she does, her efforts would result in business coverage rather than a tourist’s coverage.
While we are on the subject of Gold, we urge CNBC Management to assign one of their mideast reporters to the Dubai Gold souk. That reporter can then tell us American viewers what smart Dubai traders think about the price of Gold. Since India is the biggest consumer of Gold Jewelry, they should also assign a smart CNBC reporter in Mumbai to cover the large Gold Jewelers in Mumbai. CNBC USA Anchors could then discuss the retail demand for Gold in addition to the financial trading of gold ETFs or gold futures.
The website of the Dubai Gold souk is www.dubai-livethedream.com/gold-souk. If the name does not tell you about the importance of Gold to Dubai, perhaps the videoclip below would. Watch a smart Dubai gold trader make a good call on the price of gold in this clip.
This you-tube clip is titled Wander through Dubai’s Gold Souk. We wish Ms. Burnett had.
* Dubai was a sleepy trading outpost in the 1960s. Then in mid-late sixties, Morarji Desai, India’s puritan Finance Minister banned buying of Gold in India because he wanted to force Indians to invest in financial instruments. What a moronic decision that was? Virtually overnight Dubai became the center of the Gold smuggling trade. Small rounded boats would leave Dubai full of gold bars and traverse the placid Arabian sea to land on the long western coastline near Mumbai. The gold ban & resulting smuggling created massive corruption in India and made Dubai rich. Remember Dubai does not have any oil. Its cousin Abu Dhabi does. Dubai is brilliant at opportunistic trading on leverage.
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Interesting Videoclips of the Week (October 11 – October 17)
