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.
Should equity bulls hope for a loss of 500,000 jobs in October? If a horrific report of losing 260,000 jobs in September can be a trigger for a 4% rally in stocks this week, shouldn’t the report of a loss of 500,000 jobs on November 6 lead to a 8% rally during the week of November 9?
We jest, of course. After all, behavior of crowds is not linear. But, we must admit to a sense of stupidity. We should have seen this rally coming. Because the stock markets were clearly on edge about the semi-tough rhetoric from the Fed. This fear had caused a key reversal in the stock market on September 23, fed day. The next two weeks had seen a choppy decline in US Stocks.
These Fed fears evaporated with the release of the horrible employment report on October 2. The markets realized that there was no way the Bernanke Fed would drain liquidity from the markets when the US economy was shedding so many jobs. This created another reversal when stocks rallied from the initial decline in the morning of Friday, October 2. We should have noted the importance of this reversal last Friday and the end of Fed fears. Our bad!
On Monday, the Reserve Bank of Australia raised their rates by 0.25% in a surprise move. The Australian dollar rallied and the rout in the US Dollar was on. Commodities rallied ferociously as they should have. This is the perfect Jim Rogers song: – US Dollar is destined for semi-oblivion, Commodities are the Amrut or Ambrose for the 21st century, Gold is for today’s aspiring Midases, Treasuries are for masochistic idiots and all sensible people should move to China.
As we have remarked before, the only factor that is different from 1999 is the steady and massive rally in Treasuries since June 10, 2009. Then, as luck and Jim Rogers would have it, US Treasuries sold off hard on Thursday & Friday after a tepid 30-year auction.
So, the Jim Rogers story appeared complete. His CNBC Anchor friends celebrated his return to CNBC with abandon. All week, they heralded the breakout in Gold. Several CNBC Anchors sang their favorite transnational anthem Are Treasuries the Next Bubble? Maria Bartiromo participated in this celebration but she was the only anchor who asked whether Gold is the Next Bubble? (see clip 5). And Maria was the one who actually interviewed Jim Rogers (see clip 3). Kudos to her.
Two great investors seemed unmoved by the euphoria. Carl Icahn worried that the US Economy was on the edge of a precipice and investors could face a “bloodbath”. (see clip 1). Mohamed El-Erian expressed caution about the rally in corporate bonds (see clip 4).
On this note, we point out that Municipal Bonds began declining this week even before Treasuries sold off. The RSI (Relative Strength Index) of several Muni closed end funds dropped from near 90 to near 50 in the last 3 days of this week. We remind readers that the Muni closed end funds started selling off in October-November 2007, about 3-4 months before the crisis in Municipal Bonds became front page news in February-March 2008. Today, the fundamentals of state and local economies are in a bad shape and the rally in Muni Bonds has been phenomenal. Is this simply profit-taking or is it a signal of impending trouble in Muni land?
We have noted on more than one occasion that October has been a fairly negative month for long maturity Treasuries. After all, they declined by about 4% in October 2008. The rally in long maturity Treasuries has been massive, with EDV being up 20% from June 10 to October 7. CFTC data reveals that Large Speculators had covered most of their shorts by Tuesday, October 6. During this rally that many investors had no doubt climbed aboard the Treasury bandwagon without any conviction. In other words, the Treasury market was ripe for a sharp selloff.
A bond trader had said to us many years ago that “stock trading is for sissies and trading 30-year bonds is for real men”. Regardless of the chauvinist tenor of this statement (which we totally deplore, of course), the 30-Year Bond proved this adage when it fell over 3% in a day and half after a tepid auction. EDV, the zero coupon Treasury ETF, fell by almost 6%. Did this violence shake out the weak hands that had bought Treasuries during the rally? We will find out in the next week or so.
We believe that the rally in Treasuries was the foundation for the spectacular rally in Corporate Bonds, Municipal Bonds and High Yield Bonds. A decline in Treasuries could create a real selloff in these spread-products (bonds that are valued by their yield spreads over Treasury yields). Of course, CNBC trotted out strategists like Zane Brown (of Lord Abbett) who advised viewers to buy High Yield Bonds and Sell Treasuries. A word to the wise reader, listen to Mohamed El-Erian of Pimco (see clip 4) before listening to sell-side semi-strategists like Mr. Brown.
If you watched the stock market on Thursday, you saw that the stock market fell vertically as soon as the bad results of the 30-year Bond auction were reported. It has been our belief that the rally in the stock market was safe as long as the rally in Treasuries was in tact. After all, the lower the 30-year Treasury yield, the higher multiple stocks can command based on the Dividend Discount Models.
It is very rare that stocks can keep rising as 30-year Treasuries keep selling off. The two most vivid examples are 1987 and 1999. The chances of a 1999 repeat are fairly high in our estimation. The allure of commodities is as high today as the allure of technology in 1999, both hailed as secular growers in a new, new world.
Getting back to the now totally forgotten payroll report of October 2, we wonder whether Carl Icahn and Bill Gross have a serious point. We do not know why Carl Icahn worries about the economy being on the edge of a precipice and why Bill Gross worries about potential deflationary trends.
The last time we heard these worries was in October 2007. The markets were ebullient and had reached an all time high. Commodities were in full bloom and Gold was the currency of investment heaven. China was the source of limitless growth. But that was in October 2007. Surely, October 2009 is totally different. We have been to the worst of darkness in 2008 and now we are back into the light of 2009.
We hope so.
Independence of Central Banks – Australia & India
Kudos to the Reserve Bank of Australia for raising their interest rates partly to stem asset inflation. We wonder whether Canada would follow.
But India seems to disapprove of central bank independence. According to a Bloomberg article, India’s Finance Minister said publicly this week that “while inflation is an “important factor,” the central bank shouldn’t “compromise” on the nation’s economic growth. The meeting of the Reserve Bank of India is scheduled for October 27. Mr. Mukherjee is scheduled to meet with the RBI Governor in mid-October, before the meeting. The article points out that inflation is accelerating in India while the growth is slowing.
We point out that Indian Banks avoided the credit bubble because the previous RBI Governor, Dr. Reddy, prohibited Banks from making additional real estate loans in 2006. Dr. Reddy was not re-appointed by Mr. Chidambaram, the then Finance Minister. He appointed the current governor Dr. Subbarao.
The current Finance Minister is a veteran minister who has held numerous portfolios including Foreign Affairs. Investors in India may need to watch out for political pressures on the Reserve bank of India. The Finance Minister is a faithful & long-term supporter of the ruling Gandhi family. His pressuring the RBI is sort of like Mr. Joe Biden instructing Dr. Bernanke about the “appropriate” level of interest rates.
This week we feature the following clips:
1. Carl Icahn on Squawk Box – Friday, October 8
This interview is in three parts:
The summary of his comments can be found on the CNBC website titled Icahn: Risk of Double Dip, Investor ‘Bloodbath’
We include some excerpts below:
Read the summary and watch the clips.
2. The “BRIC” Builder – Jim O’Neill on Squawk Box – Thursday, October 8 – 7:17 am
Mr. O’Neill is Goldman’s Global Head of Research and a widely followed voice on Emerging Markets. He is reputed to have coined the phrase “BRIC”. We follow his views closely and recommend readers to watch this clip.
Mr. O’Neill is very bullish on the Chinese consumer, which he calls the biggest story of our time. According to him, this huge story is actually in its early stages. He also explains that the 2008 crisis has been good for China. It forced them to change their focus from exports to domestic consumer spending. He also provides insights about Chinese plans for social security for its citizens.
As we said, watch this clip.
3. Checking Out Hot Commodities – Jim Rogers with Maria Bartiromo – Wednesday, October 7 – 3:45 pm
Jim Rogers is always entertaining but seldom right in his bombastic pronouncements. His headline-making predictions, we believe, are seldom implemented by him in his investments. For example, when you hear him, you would feel that the US Dollar is semi-worthless and heading towards oblivion. But, if you listen closely, you will hear that Mr. Rogers is actually long the US Dollar in his accounts right now. You will also hear that Jim Rogers would NOT buy Gold at this time even though he is bullish on Gold for the longer term.
Jim Rogers visited CNBC on June 4, 2009 and expressed his contempt for people who were “stupid” to buy Treasury Bonds. He even called Howard Lutnick, CEO of Cantor Fitzgerald, stupid because Mr. Lutnick liked Treasury Bonds. Rogers was joined by CNBC’s Larry Kudlow in this wild & crazy interview. Mr. Kudlow said in that interview ““why any one would want to buy treasury bonds right now is beyond me”.
Of course, within a week of this zany meeting of Rogers-Kudlow minds, Treasuries began a spectacular rally that is still ongoing. Whether you believe us or not, you should watch the clip titled Cantor Fitzgerald CEO Speaks Out . When you watch it, you will understand why we call this a CNBC Hall Of Memories videoclip.
CNBC’s Joe Kernen has said several times that Jim Rogers told him that the 30-year Treasury Bond would never yield less than 6%. The famed analyst Meredith Whitney almost always made fun of Rogers’ views on Neil Cavuto’s show on Saturday on Fox Business. More often than not, Ms. Whitney was proved correct and Mr. Rogers wrong.
The reality is that Jim Rogers is a great investor. What is also true that he makes his returns from smart investments that are very different from his bombastic views. Jim Rogers was absent from CNBC for a long time because he was bearish on stocks. Now is he made welcome and heralded at CNBC because he is anti-Treasuries?
We are disappointed that Maria Bartiromo did not ask Jim Rogers why he was so wrong on Treasuries in June 2009. Instead, she repeated his views about Treasuries being a bubble for the rest of the week. Erin Burnett joined her (shall we say!) friend Maria Bartiromo and repeated the Rogers view about Treasuries bubble. It seems that against a common enemy, even Erin & Maria can become allies.
4. Corporate Bond Rally – Mohamed El-Erian with Michelle Caruso Cabrera – Tuesday, October 6 – 3:13 pm
Mohamed El-Erian is always a must listen. He is thoughtful and candid. Watch this clip. Mr. El-Erian explains why this is a good time to cut back on risk assets. While we respect Mr. El-Erian, we must point out that he has been wrong in his calls since July 2009.
5. Is Gold The Next Bubble? – Walter Zimmerman of United-ICAP with Maria Bartiromo – Thursday, October 8 – 4:38 pm
We had never heard of Mr. Zimmerman, ignorant neophytes that we are, until we watched him on Maria’s show in September. We have come to respect his views, even though he was wrong in September.
Mr. Zimmerman states his views that Gold can go up in the short term but the intermediate term looks negative for Gold. He thinks the US Dollar could be near a major bottom. We could call him the anti-Rogers if we knew him better.
We thank Maria Bartiromo for bringing Mr. Zimmerman to our attention. She has a talent for picking smart guests and she makes it a point to bring new and fresh experts on her show.
Watch this clip.
6. Equity Markets’ Major Change – Henry McVey of Morgan Stanley with Maria Bartiromo – Thursday, October 8 – 4:21 pm
Henry McVey is the Head of Global Macro and Asset Allocation at Morgan Stanley. He used to be the US Strategist at Morgan Stanley before leaving to run a hedge fund at Fortress (if our recollection is correct).
Mr. McVey expresses the views held by the majority of Global Macro Hedge Funds. He is bullish on Emerging Markets, bullish on the Australian currency and feels equities are a better value than fixed income. He is negative on the dollar and wishes he had more Gold in his portfolios. He is amazed by the run in Treasuries but feels there is little value left in Treasuries.
7. Oil Prices & Outlook on Energy – T. Boone Pickens on Squawk Box – Tuesday, October 6
This interview is in two parts:
8. BlackRock Unveils Quarterly Strategy – Bob Doll & Curtis Arledge on Squawk Box – Tuesday, October 6 – 8:05 am
In an unusual move, BlackRock unveiled its quarterly strategy on CNBC’s Squawk Box before releasing it to the Firm’s clients. What do BlackRock’s clients think about this unusual move? We are not privileged to be clients of this great firm. But, had we been a client, we would not liked being treated in this second class manner.
The strategy itself is more like a traditional Merrill strategy, the firm that Bob Doll came from.
9. Khaldoon Khalifa Al Mubarak – CEO of Mubadala with Erin Burnett – Friday, October 9 – 2:30 PM
Rarely do we get a chance to hear the views of a large investor from Abu Dhabi, that fabled little land with 10% of the world’s oil. We were surprised to hear that only 30% of Abu Dhabi’s GDP comes from energy. This is a good clip that provides much needed information about a smart investor from Abu Dhabi.
10. Apartment Vacancies Surge – Diana Olick on PowerLunch – Tuesday, October 6 – 12:05 pm
This is an excellent report from a knowledgeable reporter that shows that the rental sector is getting hit hard. A must watch for a reit investor and a renter.
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