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.
The Most Despised Bull Market Ever?
The story of the week was the relentless rise in long maturity Treasury Prices and the steady drop in their yields. The yield of the 30-Year Treasury Bond dropped below 4% on Thursday. Yet, virtually all TV Anchors & their Guests looked at this rally with bewilderment at best and with disdain at worst.
But this has been so during the last 28 years of this massive secular bull market. This amazing bull run began, as we are told, in 1981 when the 30-year Treasury Bond was yielding above 14%. The bull run began when the Bond market realized that Fed Chairman Paul Volcker had killed the inflation virus of the 1970s. This secular bull market in Treasuries continues to this day, as this week demonstrated.
We have heard so many TV Anchors and their chosen “Experts” talk about the impending death of this bull market. They should recall the famous quote of Mark Twain. Their favorite canard is that economic recovery is bound to create a bear market in Treasuries. Conversely they argue that a rally in Treasuries signals economic weakness. If this were true, how did the US Economy grow from 1982 to the beginning of this current recession?
The reality is that the yield of the 30-Year Treasury Bond is influenced most by inflation. The Bond market is the world’s best indicator of future inflation. That is why the Bond market typically bottoms when the fear of inflation pervades the media. With its leadership position in financial news, CNBC has been the best contrary indicator for us. On June 10, 2009, the hype about inflation, the fear of Treasury supply and trash talk about US Treasuries reached its zenith on CNBC. We wondered then whether this climax of anti-Treasury hype would end up signaling a bottom in Treasury Prices.
Did it ever? Just look at the performance of the 20-30 year Zero Coupon Treasury securities compared to stocks & gold from June 10 to October 2:
This is not something CNBC Anchors highlight. But, our friendly CNBC Anchors did a good job this week of inviting true experts like Bill Gross & Tony Crescenzi of Pimco to explain why they are bullish on Treasuries (see clips 1& 2).
Tony Crescenzi explained the difference between “real” yield and “nominal” yield on CNBC’s Fast Money, that haven of the anti-Treasury faithful. We tried to make the same point in our Videoclips Article for September 5 – September 12 and CNBC’s Steve Liesman has tried bravely to make this point to his Anchor colleagues. Perhaps, Mr. Crescenzi will have better luck.
Bill Gross began the week speaking about the rise of Deflation fears in the bond market. But frankly, our own readers were ahead of the Bond King. A few weeks ago, our readers began reading our October 2008 article about Deflation. Thanks to this renewed readership, this article titled, Mo-Force is On Board the Deflation Wagon entered this Blog’s all time Top 10 Most Popular Articles list last week.
It seems our readers were prescient. The data released this week got progressively weaker and culminated in the ugly Employment Report on Friday. If this report does not create deflation fears, then nothing will.
Conflicting Fed Comments?
Last week, we articulated our view that Ben Bernanke has learned from his ill-fated “transparency” initiative in 2006-2007 and that he has adopted the “Speech was given to man to conceal his thoughts” approach. This week’s FedSpeak certainly gave credence to this view, at least in our opinion.
We believe the Fed realizes that it faces a historical challenge and opportunity. If Ben & his merry band can lead to monetary safe harbor, then this Fed may end up being described as the Greatest Fed and Bernanke might end up hailed as the Greatest Fed Chairman. More importantly, the fate of the US Economy rests on Bernanke’s shoulders.
This is because, the Bernanke Fed is totally alone in this mission. The Treasury, completely under the control of the Obama Political Machine, has very little role to play. The Fiscal situation is bad and getting terrible. The stimulus is being wasted without helping the average American family or the average American small business in any meaningful way. You see that from the horrible income statistics in Friday’s employment report. The US Economy is becoming The Case of Missing Jobs & Evaporating Incomes.
It is clear that Bernanke has to keep interest rates at zero for some time. But, in our opinion, Bernanke has realized that the Dollar may end up being his worst enemy. A steep fall in the US Dollar could undo everything the Fed is trying to do. He recognizes that the big macro performance money is hellbent on shorting the US Dollar and using his liquidity as a carry for their non-US investments.
Certainty is speculation’s greatest ally. Greenspan signaled his determination to raise rates in steady increments of 25 basis points in each Fed meeting. This certainty was the fuel for the credit bubble.
Nothing curbs speculation as Fear. Bernanke has learned this lesson, we think. That is why we are seeing different signals from the Fed – Warsh writes tough editorials while Kohn takes away some of the sting. Then Bernanke himself said that the US Macro story has to improve for the long term stability of the dollar. More than one Fed speaker has said that the Bernanke Fed is ready to take raise rates before unemployment turns. We think they will if forced to.
In the meantime, they will jawbone and perhaps do a reverse repo or two just to send a signal when necessary. The action in the US Dollar may end up deciding the timing of these steps.
This week, we feature the following clips:
1. Gross on Jobs Data – William Gross with Joe Kernen – Friday, October 2 – 8:42 am
This conversation took place right after the release of the horrific Employment Report at 8:30 am. At the time of this interview, the Dollar had rallied, the Dow Jones futures were down 100 points and the yields on Treasuries were collapsing. In fact, this video shows the 10-year Treasury yield at 3.135%.
Bill Gross patiently explained his view on the economy and inflation. CNBC’s Steve Liesman asked Mr. Gross his opinion about the “real” yield (meaning market yield minus inflation) on the 10-year Treasury. Bill Gross said that he expects core inflation to get down to 0%, yes zero and that this would make the “real” yield on the 10-year Treasury to be 3%. This would be high, in fact onerous for the economy, Gross explained.
Anchor Joe Kernen tried to bait Bill Gross by saying that Pimco folks keep talking about Treasuries being attractive because they want more money to flow into their bond funds. This is of course Kernen’s style.
We wonder whether Mr. Kernen ever looks inwards at himself or his network. After all, the data is clear. Americans are moving their monies into Bond Funds rather than Equity Funds. Would CNBC ratings rise if their anchors actually talk more about what their viewers are doing and help their viewers invest in Bonds? Perhaps Mr. Kernen should so ponder, to use a favorite word of his colleague Bill Griffeth.
Or is Joe Kernen really doing the bidding of CNBC’s brokerage advertisers who make much more money selling stocks than Treasuries? On whose side are you really on, Mr. Kernen? Your audience’s or your advertisers’?
2. Take Your Position – Tony Crescenzi on Fast Money – Wednesday, September 30 – 5:42 pm
This is a good clip. Pimco’s Tony Crescenzi explains patiently to the Fast Money gang the difference between “nominal” yields (market yields) and “real” yields. This short clip should be watched by any one who wishes to invest in Bonds.
This is not an easy lesson to comprehend as Fast Money Trader Karen Finerman demonstrates. After Crescenzi’s patient explanation, Ms. Finerman asks a circular question (the description “circular” is Mr. Crescenzi’s as the clip would show). Ms. Finerman, like so many inexperienced bond investors, believes that growth in economy is bad for Treasury bonds. Please wake up, Ms. Finerman and remember 1995-1998 period or the past 28 year period 1981-2009. These were periods of disinflationary growth. Inflation is the enemy of bonds, not growth and growth does not, by itself, cause inflation.
A day later, Ms. Finerman said that she has been short Treasuries (via TBT, the double short Treasury ETF) through out this entire rally. Wow! What a tolerance for pain? Every hedge fund manager we know practices strict stop-loss disciplines. Apparently, Ms. Finerman does not. Is this a good lesson for Fast Money viewers? We doubt it.
3. Bull Market or BS? – Dennis Gartman on Fast Money – Monday, September 28 – 5:20 pm
Dennis Gartman is the Founder and the Voice of the well-regarded, widely read The Gartman Letter. He makes an interesting point & prediction in this short clip. Mr. Gartman says that Hedge Fund Managers need to get paid this year and so they will rally stocks until September 30, the month-end & quarter-end date. Then, Gartman suggests that hedge fund managers will sell their favorite stocks to book their profits.
The month of October has certainly begun the way Dennis Gartman predicted on September 28.
4. What’s Moving Markets Now? Steven Leuthold & Hugh Whelen with Maria Bartiromo – Wednesday, September 30 – 4:07 pm
Most investors approach the month of October with fear. Steven Leuthold calls this fear “Octophobia”. Mr. Leuthold is bullish and expects an year-end rally in the stock market. So he thinks that a decline this October would provide an opportunity to buy stocks for an year-end rally. Mr. Leuthold is a highly regarded veteran investor and his views are worth a listen.
5. Inflation Debate – Steve Cortes on Fast Money – Thursday, October 1 – 5:40 pm
When Rick Santelli was the guest anchor of Fast Money in late August, Steve Cortes was included in the Fast Money Trader Team. During that week, Steve Cortes had predicted that TLT, the Treasury ETF, would rise in price and SPY, the S&P 500 ETF, would decline. Mr. Cortes had further predicted that these two would meet at $100. (TLT was at 95-96 at that time and SPY was at 105-106 at that time). This week, TLT did touch 100 but SPY has not.
In this segment, Steve Cortes says Wall Street has been beating the drum of inflation recently. Mr. Cortes does not concur. He says that in the 4th quarter, the US Dollar and Bonds should do very well. He is negative on China. He recommends buying the US Dollar via UUP, the Dollar ETF and buying the TLT. He says he has shorted FXI, the China ETF, against SPY.
6. Chartology – Carter Worth on Fast Money – Thursday, October 1 – 5:27 pm
Carter Worth, a well-regarded technician, discusses current market condition and argues that it is similar to the 2004 market. Essentially, he feels that the market will meander in a 975-1000 range for some time. The charts are interesting .
7. BlackRock – 10 Year Anniversary – Larry Fink & BlackRock Team with Maria Bartiromo – Thursday, October 1
October 1, 2009 was the ten-year anniversary of the BlackRock IPO. Maria Bartiromo visited the BlackRock trading floor and had a series of interviews with the BlackRock senior executives. These are interesting clips:
8. Stocks Lose Ground – Paul McCulley & Larry Kantor with Maria Bartiromo – Tuesday, September 29 – 4:04 pm
Larry Kantor, Head of Research at Barclays, likes US Stocks and hates 10-year US Treasuries. Like the average CNBC guest, he says stay away from Treasuries. He says that when you see a 10-year Treasury at 3.3% or 3.4%, that is not a recovery yield. He adds he does not want to be buying Treasuries at that yield. Equities are the place to be, Kantor says.
The comments of Paul McCulley, Portfolio Manager at Pimco, are interesting. His comments on Treasuries are cautious and he says that a lot of value has been wrung out of the Treasury market in the rally. This seems at odds with the bullish view expressed by Bill Gross, co-CEO of Pimco (see clip 1 above). Does McCulley disagree with Gross?
The clip also shows that McCulley thinks Equities & Treasuries will both do well in the next few months. In contrast, Mohamed El-Erian, Pimco’s co-CEO, has described the post-July rally in Equities as a sugar-high. Does McCulley disagree with El-Erian?
In our experience, the senior people at Pimco tend to speak with one mind if not in one voice. Have things changed? Or is there a strategy disagreement within Pimco?
9. Wall Street Feeling The Burn – CNBC Reporter Charlie Gasparino on PowerLunch – Tuesday, September 29 – 1:34 pm
Mr. Gasparino points out that all Wall Street CEOs (except John Thain, he says) were pretty much supporters of Candidate Obama. Then he goes on to report that now these CEOs have serious doubts about his program. In his words, they are expressing great skepticism with the President. He compares the CEO opinions of President Obama & of President Clinton. Mr. Gasparino is both interesting and opinionated. This clip is both. Watch it.
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