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.
Federal Reserve Meeting on Wednesday, December 16
We cannot recall another week in which the Fed meeting and the Fed statement were not the major topic. The Fed statement was important because the Fed clearly stated its resolve to end its liquidity programs in early 2010. That was a positive for the U.S. Dollar. Gold and other commodities, that had rallied during the morning of the Fed meeting, sold off after the Fed statement.
But the real story of the week was the continuous stream of negative news about sovereign credits of southern Europe.
Sovereign Debt & The U.S. Dollar
S&P downgraded the Sovereign Debt of Greece to BBB+. Worse was their decision to keep Greece on negative credit watch. This spooked the European markets and the U.S. Dollar was the main beneficiary.
The day after the Fed meeting, Moody’s downgraded Spanish mortgage bonds and slashed the ratings of Catalunia & many other regions with ballooning state deficits. Moody’s downgraded 1/3rd of the entire stock of “cedulas”, Spanish mortgage covered bonds. These are largely owned by German & French Banks and pension funds. The scale of this downgrade was huge, roughly equal to trillion dollar downgrade in US terms.
The Dollar spiked up and the Euro fell in a violent move on Friday morning that is rarely seen in FX markets. On a short term basis, the Euro is oversold and could manage a bounce if we see a couple of days without bad news.
But the damage done to the Euro is huge and one has to wonder whether the U.S. Dollar is beginning a cyclical bull market. If it is, the consequences for the carry trade could be very negative.
Despite the fall in Gold, many smart investors remain committed to Gold as a must own asset, albeit at lower prices. This includes Steven Leuthold (see clip 2 below) and of course, the star hedge fund manager John Paulson who is launching a Gold Hedge Fund reportedly seeded with $250 million of his personal money.
Equities
The action in the stock market remains weak and lackluster. Increasingly we hear smart investors and technicians calling for a correction. Steven Leuthold can see a 8%-10% correction in January (see clip 2 below). But Mr. Leuthold calls for the S&P to rise to 1300-1350 in the first half of 2010. He thinks the second half of 2010 will be a difficult period.
Michael Hartnett of BAC – Merrill Lynch, a bull all year in 2009, predicted a “Valentine’s Day Massacre“. His prediction is consistent with the Decennial pattern described by Mary Ann Bartels, the BAC-Merrill Lynch technical analyst. as we described in our article last week. This pattern calls for a decline into mid-year 2010 and then a rally into the year-end 2010.
Jordan Kotick of Barclays also predicts a difficult time for the equity market in early 2010. But he thinks that the S&P 500 will rise by 10% next year.
In contrast, you have macro technicians calling for a repeat of 2008, some slowly over 2010-2012 like Walter Zimmerman of United-ICAP (see clip 6 below) and some in a fast, furious, crisis mode in 2008 like Robert Prechter of Elliott Wave International (see clip 4 of our article last week).
Another highlight of the week was the sloppy, almost pathetic, secondary offering of Citigroup. The stock which traded at $3.95 before the news of the offering was offered to investors at $3.15, a huge discount. What no CNBC anchor told viewers that this offering made money for any one who bought it. This is often the case in huge, sloppy secondaries which get priced so cheap that they end up making money.
Now that the U.S. Dollar has begun a rally and Gold has fallen, what is the most crowded concept in investing? It is the certainty of high inflation due to the huge issuance of Treasuries.
Treasuries
Speaking of sloppy actions, we remind readers that the 30-Year Treasury auction was rated “F” by CNBC’s Rick Santelli. But as he himself admitted later, “F” rated auctions can make money for investors who buy in the auction. As of Friday, investors who bought the 30-Year auction at 3.52% were happy to see their bonds trade at 4.45%.
This week we saw a consensus emerge that 2010 would be very unpleasant for the long end of the yield curve. Not a day went by without some expert calling for a sharp fall in the prices of 10-30 year Treasuries. May be they were emboldened by the bearish comments of Bond King Bill Gross on December 7 (see clip 1 below) or they were convinced by the Morgan Stanley report that was issued last week.
CNBC Fast Money kept telling us about the Morgan Stanley report that calls for the yield on the 10-year Treasury to rise to 4.5% by mid-year 2010. Then on Friday, December 18, Greg Peters of Morgan Stanley raised the ante on CNBC by predicting 5.5% yield on the 10-year Treasury by year-end 2010. This would be a very severe bear markets in Bonds. But, amazingly, Greg Peters remains complacent about High Yield Bonds. We have not seen such a confident “decoupling” prediction since the confident decoupling prediction of 2007 that emerging markets would continue to rally even if the US stock market crashed.
Last week, Jim Rogers had predicted an emerging bubble in Treasuries in his interviews with CNBC’s Maria Bartiromo and Bloomberg’s Betty Liu (see clip 3 of our article last week). This week, Jim Cramer virtually begged his viewers to Sell Treasuries and Buy Stocks because investing in Treasuries is now “reckless” (see clip 5 below).
On Friday, Byron Wien, the ex-Morgan Stanley Strategist, remarked that treasury yields have to go up due to the issuance. It seems Byron has forgotten his old adage at Morgan Stanley that “the consensus in the bond market is always wrong“.
All this was too much for Maria Bartiromo. This week she became a full convert. She kept insisting in every interview that Treasuries have become a bubble. Maria Bartiromo is our most reliable media indicator. When she gets ebullient about stocks or China, it proves to be a short term top. At least that is how it has turned out in the past. Today, Maria is as convinced of rates going higher as she has been in the past about the Chinese market, US equity markets and commodities going higher. Will the reliable Maria Indicator in stocks work just as well in interest rates? We shall see.
Also this week, her colleague Erin Burnett pointed out that the inflation implied by TIPS is the highest since August 2008. Perhaps Erin Burnett does not remember what happened to inflation and Treasuries after August 2008. Treasuries mounted an explosive rally and inflation expectations plummeted. Ms. Burnett’s comment reminded us of similar pronouncements of Dylan Ratigan in June 2006, 2007 & 2008. In every case, Dylan’s high inflation pronouncements proved to be the top of inflation fears.
Is that all we have as indicators on the bullish side? Well, the JP Morgan Treasury Client Survey as of December 14 showed that Net Longs in US Treasuries fell to Zero the week before. CFTC data showed that the Treasury sell-off in the past two weeks has prompted investors to behave as they usually do during selloffs – Large Speculators increased their shorts to 100,345 contracts in the 30-Year Treasuries and Commercials increased their longs to 91,258 contracts.
Then there is the almost insignificant fact – Goldman Sachs issued a report last week predicting that the yield on the 10-Year Treasury will fall to 3% in the first half of 2010. This is not worth a mention on CNBC, is it?
Morgan vs. Goldman at CNBC
Here we have a battle of giants. Goldman predicts that the yield on 10-year Treasuries will fall to 3% by first half of 2010 while Morgan predicts that the yield of 10-year Treasuries will rise to 4.5% by then. One is a bull market call and the other is a bear market call. Both of these are out-of-consensus calls on Treasuries.
We recall that on June 10, 2009, Morgan Stanley issued a similar negative call on Treasuries while Goldman was bullish on Treasuries. On that occasion, Goldman proved to be spectacularly right and Morgan Stanley wrong.
Who will prove to be right this time? Time will soon tell.
You would have thought that CNBC Anchors would have fun with the Morgan vs. Goldman contest about Treasuries. But No! CNBC gave very wide coverage to the Morgan Stanley call but we did not hear a single word about the Goldman call on CNBC. This was true of every CNBC show and not just CNBC Fast Money.
Since inception, CNBC Fast Money has indulged in hero worship of Goldman Sachs. In fact, you could have named the show “FastMoney loves Goldman“. As recently as Thursday, December 17, CNBC Fast Money Half-Time Report indulged in a love fest about Goldman Sachs. But CNBC Fast Money refused to even acknowledge the existence of Goldman’s bullish call on Treasuries while they talked about the Morgan Stanley call in at least 3 different segments.
Could their hate of US Treasuries be so much greater than their love for Goldman?
Our article on December 5 about CNBC Fast Money
We received a note from Dennis Gartman which said verbatim “I am a regular on CNBC’s Fast Money, and I can assure you, with out equivocation…absolutely without equivocation…that I have never been censored nor asked to speak bullishly. Fast is done live; there is no rehearsal; questions are asked of guests on the spot and there is NO…NO…absolutely NO …censoring . You may quote me on that.”
We have very high regard for Dennis Gartman and his word we accept without question. We do point out that Dennis Gartman is a legend in his world and his name is a brand. No one can ever hope to censor or even direct him. In our opinion, CNBC Fast Money needs Dennis Gartman far more than Gartman needs Fast Money.
We would, without any doubt, think the same of other eminent guests like Carl Icahn and Peter Schiff. But, in our opinion, the reality is that most money managers would be thrilled at the exposure an appearance on Fast Money would give them. So are they likely to make sure that their views on the Fast Money show do not go against deeply held beliefs of the Fast Money show? We would think so.
Fast Money has been both bullish and bearish on stocks, on Gold, on Oil and even on China as this week’s interview with James Chanos demonstrates. But, we do not recall a single bullish call about US Treasuries on Fast Money since the show’s inception in 2006. This is despite 2 huge bull runs in Treasuries from June 2007 – December 2008 & from June 2009 – October 2009.
So how does a guest who wants to remain on good terms with Fast Money dare to express any positive views about US Treasuries? When Fast Money can “censor” a mention of a Goldman Sachs report, what chance does the average guest have?
We would also remark that Dennis Gartman, Carl Icahn & Peter Schiff have not been bullish on Treasuries and so their comments would not go against Fast Money’s deeply held views.
Finally, we point out that recently a website devoted to investing did not give us permission to quote from one of their own articles, an article that was bullish on Treasury Bonds. This website had allowed us to quote from another article on an earlier occasion. Did this website fear that giving permission to us might look bad given their existing relationship with CNBC? We did ask this question of CNBC Fast Money.
Let us say it again. We do not wish to be unfair to CNBC Fast Money. We would appreciate the opportunity to discuss our questions with them and we would greatly welcome their views. We do wish to express our gratitude to Dennis Gartman for speaking up for the Fast Money show. We watch the show often and enjoy it. Our attempts are simply to improve the show and to encourage more coverage to the needs of individual investors.
On a final humorous note, we state for the record that we were not invited to the CNBC Holiday party that, (as Guy Adami of Fast Money informed viewers), took place on Thursday, December 17. All week we heard Bill O’Reilly of Fox tell his viewers that President Obama invited him to the White House Christmas Party despite his scathing criticism of the Obama Administration. Bill O’Reilly dismissed the flak from some of his viewers and praised the Obama Administration as a class act.
Was a single individual investor viewer invited to the CNBC Holiday party? We wonder.
This week, we feature the following clips:
- Bill Gross on Monday, December 7 – a follow-up
Steven Leuthold on Friday, December 18
- James Chanos of Tuesday, December 15
- Greg Peters of Morgan Stanley on Friday, December 18
- Jim Cramer on Mad Money on Wednesday, December 16
- Walter Zimmerman of United-ICAP & Ira Jersey of RBC on Wednesday, December 16
- James Chanos of Tuesday, December 15
1. Pimco’s Economic Outlook – Bill Gross with CNBC’s Erin Burnett – Monday, December 7
This is a follow up to our discussion in clip 1 of our article last week . During this interview on December 7, Bill Gross essentially made a Sell Treasuries recommendation by stating that rates on 10-30 year Treasuries could rise by 100 basis points.
The Pimco Total Return Fund, managed by Bill Gross, is the largest bond fund in the world. The last information (per Bloomberg news) on the Fund stated that 63% of this $192.6 billion fund was in government debt, the same debt on which Mr. Gross put an implicit sell recommendation for CNBC’s viewers.
We were simply shocked and wrote “We do not recall any other Fund Manager making such a statement of profound significance to his own fund“.
Then we wrote “We think the statement from Bill Gross could have major implications for the bond market depending on how he chooses to act on his own call unless he acted on his call before making the call publicly on CNBC. (emphasis today’s) .”
We thought that Erin Burnett, as a journalist, would have asked Mr. Gross several questions among which was “Have you already sold the massive amounts of Treasuries you have in your fund?”
Now, we do not have to depend on Erin Burnett to ask the question. Bloomberg News gave us the answer in their article Pimco’s Gross Boosts Cash to Most Since Lehman Failed dated December 18.
This bloomberg article states:
- Gross increased cash in the $199.4 billion Total Return Fund’s to 7 percent in November from negative 7 percent in October, according to Pimco’s Web site. The fund can have a so- called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October.
So when Bill Gross made his implied “Sell” recommendation on December 7, it appears that he had already sold his positions and was making an after-the-fact recommendation to CNBC’s viewers. We wish Bill Gross had made it clear to CNBC’s viewers that he had already sold and, of course, we wished Erin Burnett had demanded this explanation as most journalists would have.
For example, see clip 2 below to note that Betty Liu directly asked Steven Leuthold and Steven Leuthold candidly told Betty Liu that he had already sold many of his large-cap technology funds prior to the interview.
Why can’t a Burnett-Gross interview be more like a Liu-Leuthold interview?
This is a serious issue for viewers. When viewers hear the Bond King speak so negatively about long maturity Treasuries, their most common and understandable reaction is to sell their own Treasuries or to not buy new Treasury positions. Now we see that this might not be the sensible decision. The market impact from the massive transactions of Bill Gross had already happened by the time Bill Gross spoke publicly on CNBC. So if individual investors follow Bill Gross after the market has been impacted, they could suffer an investing whiplash.
Last week, we gave two examples of such a whiplash effect and how the Bond market bottomed within a couple of weeks of similar public negative comments about Treasuries by Bill Gross. Will this phenomenon repeat in the next few weeks? Time will tell soon.
We still have one question left. Did Bill Gross buy in the 10-Year and/or the 30-Year Treasury auctions late last week, about 3-4 days after his negative call on CNBC? If he did, he is to be congratulated for a great tactical trade of buying his positions cheaper because of his own negative call 3 days prior. But CNBC viewers who stayed away from the auctions because of Mr. Gross’ comments may not feel quite as charitable towards Bill Gross as we do. Why? Because buying these auctions has made money for those who bought.
It appears that Bloomberg news asked more questions than Erin Burnett did. Because the Bloomberg article says “ Mark Porterfield, a spokesman at Pimco’s main office in Newport Beach, California, has said the company doesn’t comment on fund holdings.”
As we opined last week, Caveat Viewer seems to cover the situation.
2. Steven Leuthold with Bloomberg’s Betty Liu, Adam Johnson, Jon Ehrlichman – Friday, December 18
Steven Leuthold, Chairman of Leuthold Weeden Capital Management, is a very well-known and highly respected investor. Watch this interview by visiting the editor’s picks section of bloomberg.com before Monday morning. Below are a few points Mr. Leuthold made:
- He has gone from 70% maximum overweight position in equities to about 65% because he does not really like the market action. He is concerned that we are going to get the 8%-10% correction that people have been waiting for. He would not be surprised to see that develop in January 2010.
- He expects new highs in stocks in first half of 2010 and then expects the market to run into trouble in the second half of 2010.
- He was in big cap technology stocks but has gone out of them into smaller technology stocks
- He is positive on gold. He has a 3% weighting currently and expects to raise this to 10% as Gold goes down to around $1000 – $1020.
- He is getting positive on financials and has a 4-5% weighting in diversified financials.
At this point, a Bloomberg anchor asked a great question “What about worse than the 10% correction? Do you sell if it is down more than 8-10%/”
Leuthold explained that every week they calculate a trend index and as long as it has more positives than negatives, that is a cyclical bull market. If that tips over, then they could take their weighting down to as low as 30% but he does not expect that to occur.
3. James Chanos on CNBC Fast Money Half Report – Tuesday, December 15
Mr. Chanos, President and Founder of Kynikos Associates, is a veteran hedge fund investor who is famed for his shorting capabilities. He was the among the very first investors to begin shorting Enron in 2000 at a time when the market consensus was unequivocally bullish on Enron.
This short clip is very good and should be watched. For a quick synopsis, read the CNBC summary titled HALFTIME REPORT – Jim Chanos: China is a Bubble Waiting to Burst. A couple of excerpts from this summary:
- In a recent report, Chanos’ firm has been very pessimistic about China, and his firm has even gone as far as to speculate that China could be “Dubai times 1000, or worse.”
- He points out that “bubbles are best identified by credit excesses, not valuations… there is no bigger credit excess right now than China.” But how do you play this?
- Chanos himself is actively shorting this area, and is “looking for plays on the China investment pool, which we think will burst at some point… Demand in China is over-inflated, that is clear.”
Read the summary and then watch the clip. Access to investors like Jim Chanos is what makes CNBC a must watch.
4. Bullish on Credit for 2010 – Greg Peters of Morgan Stanley with CNBC’s Becky Quick – Friday, December 18
Greg Peters, global head of fixed income research at Morgan Stanley, spoke in detail about his outlook on High Yield Bonds, Treasuries and Municipals.
As Becky Quick said, his outlook is to keep calm and carry on because the fundamentals & technicals are quite strong and valuations are attractive, the holy trinity in his words. This is a good clip in which Peters gives his views, the guest host Byron Wien and Becky Quick ask good questions. Some excerpts are below:
- Peters – high-yield in my view is still very attractive; we want to own the junkiest of junk because we see this organic deleveraging and we still high yield returns anywhere from 8.5% – 17.5%,
- Quick – what’s the biggest looming risk in your opinion?
- Peters – the biggest risk really is the looming maturities; so there are $4 trillion dollars of commercial real estate levered loans and high yield bonds coming due until 2014, that is an extremely large number, so ultimately the bet we are making is that the financing markets will remain open…
- Wien – What do you think about the Treasury market? Strikes me that 3.5% yield is way too low for the amount of borrowing we are doing; don’t you think that has to go up?
- Peters – in fact, end of 2010 = 5.5% which is our call the 10-year. very much out of consensus; rates seem too low for the earnings strength, issuance that has to come;
- Quick – What about the 30-year? You have an estimate of the end of 2010 of what it will be yielding?
- Peters – No, and explained that they really focus on the 10-year
- Wien – Is there a decoupling between treasuries & corporates? If the 10 year goes up to 5.5%, what’s gonna happen to corporate yields?*
- Peters – corporate yields would also move up, but then …credit spreads will continue to tighten in…credit continues to does well in that environment, particularly high yield credit which doesn’t really have an interest rate risk attached to it
- Quick – what about all the trouble we have seen facing municipalities? California, New York State, New York City? How many problems do you see propping up because of strains on municipal finances?
- Peters – Well, that is another risk, that is a big risk..what we are worried about is that sector actually contaminating the entire corporate sector market as well. So that’s something we are very focused on, I think, things will have to come to head in 2010, once again the bet we are making is that investors will be able to isolate the risk in corporate America vs. the Muni risk.
So let us understand the bet:
- the issuance of about $1.5 trillion Treasuries, the safest & most liquid bonds in the world, will be so large for investors that yields on 10-year treasuries will shoot from 3.5% to 5.5% in a grizzly of a bond bear market.
- But, in this grizzly market of rates shooting higher, investors will still gobble up $4 trillion issuance of junkiest of junk loans-bonds with such gusto that credit spreads will actually go down?
We hope Mr. Peters is right. Because if he is not and rates shoot up, the scenario painted by Robert Prechter on December 10 might actually come true (see clip 4 of our last week’s article). And what does Mr. Prechter fear? We quote “2010 will be a very very big year of credit defaults and people need to be careful where they invest the money – they are putting their money in dangerous places like junk bonds, munis & corporates. I think you want the safest possible debt you can find.”.
This is a good interview and we thank Becky Quick for making it possible for us viewers. We wonder whether she would invite the Goldman Sachs counterparts who have a totally opposite view of interest rates. As we understand, Goldman issued a report this week and this report predicts that the yield on the 10-year will go down to 3% from today’s yield of 3.5% by the first half of 2010 and then rise slowly to 3.25%-3.30% by the end of 2010.
We think viewers would like to hear both arguments, don’t you Ms. Quick?
* We were glad to see Byron Wien ask a question about decoupling of rates rather than state it as a fact. Perhaps he remembered the scathing comments by Doug Dachille on Squawk Box in the first week of January 2009 when Byron tried to make a similar decoupling argument.
5. Jim Cramer with Sell Treasuries, Buy Stocks call on Mad Money – December 15
Jim Cramer begins in his inimitable style ” May be Mad Money is not getting to you; May be Getting Back to Even, my new book is not getting to you“. Then Jim Cramer makes a plaintive appeal to his viewers to not invest in bond funds.
“Investing in U.S. Treasuries isn’t prudent, it’s reckless” Jim Cramer told his viewers and warned them that investors in Treasuries will never recover the losses incurred during the crash of Treasuries that he , along with all his CNBC colleagues, predicts.
Watch the clip.
6. Inflation’s Idle Threat? – Walter Zimmerman & Ira Jersey with CNBC’s Maria Bartiromo – Wednesday, December 16
Walter Zimmerman, Chief Technical Analyst at United-ICAP & Ira Jersey, Head of Interest Rates Strategy at RBC Capital Markets discussed inflation, deflation, commodities with Maria Bartiromo. This interview took place 2 hours after the Fed statement about the FOMC meeting. Recall that the Fed said that inflation remains subdued and will remain so.
Maria notes this and asks “Does that mean that Deflation could be the greater threat?” Mr. Jersey thinks that going forward you will have muted inflation at the consumer level but it would not be deflation. His forecast for next year is 2.8% inflation, year over year, well below the long term average.
Mr. Zimmerman says that they “…are very worried about deflation. We don’t see inflation as a factor here. The Fed has revived economic expectations but not economic activity… M1, M2 velocity is still contracting, credit growth is still negative, ..there are a lot of mortgage problems out there, commercial, residential, unemployment..it is not possible to get inflation with those kinds of factors still very much alive..”
Then, Maria asks for the implications. Zimmerman says that “2010, 2011, 2012 will be a slow motion version of 2008 – the erosion in prices of commodities and equities you won’t have the same rate of descent because you don’t have the same leverage on the long side.”
Maria then asks “how do I want to look at it from an investment point of view – stocks, commodities, bonds, real estate in 2010?“
Zimmerman says if the US Dollar continues to go up as they think it will, it will be a big drag on commodity prices and equity prices. Jersey says “you can buy corporate bonds and if Zimmerman happens to be right, you will do great with the fact that Treasuries will rally significantly. We do not see Treasuries doing much of anything next year.”
Maria concluded “lot of people think that there has been a big bubble in Fixed Income in fact”.
Now her concluding statement reflects the real Maria Bartiromo. But she still allows a free discussion of opposing viewpoints. That makes Maria relatively unique among CNBC anchors.
Send your feedback to [email protected]
