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.
Stocks
The action in stocks this week was unrelenting. Stocks went up every day in pathetic volume. It became clear during brief periods of intra-day stepbacks that there was a steady bid underneath the market. To us, this is reminiscent of the action in summer & fall of 2009 and of the action in 2006 when Quant managers were putting monies to work.
In our September 13-19 article, we had written that “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″. Both of these conditions have been met. The stocks are up 10% or higher since early-September and Treasury Bonds have suffered a steep sell-off in December 2009.
The parallel to 1999 might still work. Today’s quasi-religious conviction in endless, secular growth in China and the unidirectional trade in Commodities remind us of the new technology religion of the 1999-Q12000 period.
The 1987 parallel could still work next year if the stock market explodes upwards in 2010 and Treasury Bonds keep selling off to 5.5% as Morgan Stanley’s Greg Peters suggested last week.
But, as we recall, there were no dark clouds on the horizon in December 1999. Today, there is a sinister cloud looming in the skies over Europe, not that far away from our shores, the cloud of sovereign debt problems. But the year-end action in all stock markets is all about seeking new highs and the forecast by equity managers.
Sovereign Debt
This week’s action in the Sovereign Bond Market suggests that worries about government debt are increasing. The worries are not restricted to peripheral developed markets like PIIGS anymore.
Italian Government Bonds have been mocked for as long as we can recall. But this week, the yield on 10-Year Gilts (British Govies) spiked to 4% or close to the yields on Italian 10-Year Government Bonds.
An article in the Telegraph reported that “Britain is vulnerable to a “gilts strike” because foreign investors own £217bn of UK debt, or 28pc of the total. These are footloose funds and likely to sell large holdings if Britain loses its AAA rating.”
The article quotes Julian Callow, Europe economist at Barclays Capital, as saying “Britain is nearing the eye of the storm as the Bank of England starts to unwind quantitative easing.” Further, according to Mr. Callow:
- “The Bank has bought more gilts over the last nine months than the Government has issued. It has magically eradicated the cost of financing the deficits, but this is going twist dramatically the other way in early 2010. Markets know this. They are demanding a risk premium on sterling.”
- “On top of this you have all the uncertainty over the election. We have the highest deficit in the EU as a share of GDP after Latvia and Ireland. It is not clear whether the next government will have the nerve to push through the tremendous fiscal tightening we need,”
The action in the UK Government Bond market is of substantial significance to the US Treasuries market. As the Bond King told CNBC on May 21, 2009 “..the market views those two countries, the U.K. and the U.S., as relative twins.“
Again, the Bond King was right. The action in the Treasuries this week was a relative twin of the sell off in British gilts.
Treasuries
The sell-off in Treasuries began on Monday morning because of comments of Zhu Min, deputy governor of the People’s Bank of China, the largest holder of US Treasuries. The comments of Zhu Min reported in the Shanghai Daily are self-explanatory:
- “The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,”
- “The world does not have so much money to buy more US Treasuries.”
- “The United States cannot force foreign governments to increase their holdings of Treasuries,” (Zhu said, according to an audio recording of his remarks)“Double the holdings? It is definitely impossible.“
You ask any trader, investor or the average economist and they will all tell you that Treasury Issuance would be impossible without Chinese buying. So, the sell-off in Treasuries this week was only to be expected.
However, true experts like Jim Bianco of Bianco Research point out that the bulk of Treasury purchases in 2009 have come from US domestic sources, including US Banks and that the Chinese purchases have been less significant. But then facts are completely ignored during a Treasury market sell off.
The Large Speculators & Hedge Funds love shorting long maturity Treasuries and they are no doubt at it again. To them, shorting the 10-Year & 30-Year Treasuries is like free money, or so it always seems to them until they get blown up in the next rally. On Monday, BAC-Merrill Lynch technical guru remarked that the Hedge Fund short position in 10-Year Treasuries had become “crowded“. The week’s action suggests that the position got even more “crowded” this week.
The yield on the 10-Year Treasury Note rose to 3.80% this week, am increase of 60 basis points from the November 30 yield of 3.20%. Now that’s a sell off, as Crocodile Dundee might say.
Normally, after such a sell-off in stocks or commodities, CNBC Anchors would ask whether the sell-off could signal a buying opportunity. Witness, the number of times CNBC Anchors have asked their guests whether this month’s sell off in Gold is a buying opportunity?
But, not a single CNBC Anchor asked whether the big sell off in Treasuries was a buying opportunity. Instead, virtually every CNBC show pointed to the Treasury sell off and told its viewers about the dangers of investing in Treasuries.
It seems Treasuries are never a buy according to CNBC Anchors. During a rally, CNBC Anchors ask whether Treasuries are a bubble? During a sell off, CNBC Anchors ask whether Treasury yields will spike up due to hyper inflation they know is coming. They make it seem as if they acting in a CNBC version of Waiting for Godot.
It is such behavior that led us to ask in August 2008 Are CNBC Anchors on a Mission Against US Treasuries? – A Viewer’s Perspective and then again in May 2009 Are CNBC Anchors on a Mission Against US Treasuries – A Viewer’s Update
Are Geithner & the Treasury Department Arrogant?
The week between Christmas & New Year is a dead week. Almost every single senior trader & investor is on vacation.
Who in their right mind would issue any security during such a week? The U.S. Treasury Department, of course. In their infinite wisdom, or arrogance, the Treasury Department has scheduled 3 auctions for next week to raise in excess of $100 billion.
Will this arrogant stupidity finally drive the 10-Year Treasury yield to 4%? We shall see.
The 20 Surprises for 2010 from Doug Kass
Doug Kass, the veteran Hedge Fund Manager, has published his 20 Surprises for 2010 on www.theStreet.com free website. We have a great deal of respect for Mr. Kass. For the record, we have no association with Mr. Kass, except as a viewer of CNBC and we have never spoken with him. His TV appearances & writings have led us to believe that Mr. Kass is not dogmatic but flexible in his outlook and approach.
It was our impression that Mr. Kass was bearish on US Treasuries all through summer and fall. So we were stunned to read his surprise number 11 titled “Treasury Yields fall“. Mr. Kass predicts that the yield of the 10-Year Treasury will fall to 3% by the summer of 2010 and end that year at approximately 3%. He also predicts that “Bonds surprisingly outperform Stocks in 2010.” He goes on to predict that 2010 will set the stage for a “vast speculative top in bond prices” by late 2011.
If this is not enough of a surprise for you, the fact that Doug Kass has been invited to guest-host CNBC’s Squawk Box next week should surprise you. It sure surprised the heck out of us. Is it possible that Squawk Box honchos did not read the Kass surprises? Having invited him, will they actually allow Mr. Kass to speak bullishly on Treasuries on Squawk Box. Now, that is not a mischievous question. Remember that Squawk Box did not allow David Rosenberg or Richard Bernstein to give their bullish views on Treasuries during their appearances on Squawk Box earlier this year.
But maybe, just may be, could CNBC Squawk Box demonstrate that it is not as “jihadi” as CNBC Fast Money?
CNBC Fast Money on Treasuries
We were also surprised to read that Barton Biggs was positive on 10-Year Treasuries calling them “decent value with 3.5% yield and inflation at 1-2%” in his Newsweek article “What New Normal?“.
Last week, Barron’s pointed out that the vast majority of predictors on Wall Street were bearish on US Treasuries. According to Barron’s, Goldman Sachs & David Rosenberg of Gluskin Sheff were the solitary bulls with 3% as their prediction for the 10-Year Treasury yield by summer 2010. When asked about his outlier forecast, Barron’s says Rosenberg “cites Rule No. 8 of Bob Farrell, the former Merrill Lynch market analyst:”When all forecasts and experts agree, something else is going to happen.“
Did CNBC Fast Money mention these bullish comments about US Treasuries from any of these gentlemen? Of course Not. Is this “censorship“? Yes, we would argue. Remember that Doug Kass & Barton Biggs are highly respected at CNBC Fast Money, judging from the accolades from Fast Money Traders about these two gentlemen. If their comments can be so “censored“, is it any wonder that other guests do not dare speak bullishly about US Treasuries on CNBC Fast Money?
In contrast, CNBC Fast Money spent all week gloating about the rise in 10-Year & 30-Year Treasury Yields with Anchor Melissa Lee leading the cheer. If that were not enough, they invited Peter Schiff, the most intense of anti-Treasuries Bears, to share in their joy (see clip 2 below). Then, in response to a viewer’s rational question, Fast Money Trader Karen Finerman said she agreed with Peter Schiff and not with Tim Seymour, her co-trader on Fast Money. Then she gratuitously recommended shorting TLT, the 20-year Treasury ETF, to the viewer. Guy Adami, her colleague congratulated Karen Finerman on recommending the short trade and the anchor Melissa Lee gloated “That’s exactly what we do here on Fast Money” (see clip 3 below).
Later in the show in the Pops & Darts segment, Karen Finerman again said “you got to be short the TLT” and a colleague clapped. We are not kidding. A Fast Money team member actually clapped on air after when Finerman suggested shorting TLT, the 20-year Treasury ETF. We do not recall any other instance of a fellow trader clapping on air after a recommendation on the Fast Money show – not one single instance since the inception of the show.
Listen to clip 4 below and hear the clap. Then wonder as we do why CNBC Fast Money hates Treasuries with such vehemence and passion? We just don’t get it. But then, we have never understood the concept of “Jihad“.
Stress in Municipals
This week, Bloomberg published an excellent article on this topic titled “N.J. Leads Municipal Bond Downgrades as Aid Shrinks“.This is a must-read article in our opinion.
According to this article, the problems of New Jersey are a harbinger of things to come. The article quotes Richard Ciccarone, chief research officer at McDonnell Investment Management in Oak Brook, Illinois:
- “In many of the large states, this is going to become the norm: California, New York, New Jersey and Illinois,” said Ciccarone, whose firm oversees $6.8 billion in municipal bonds,including New Jersey debt. “The stress levels have got to be very high right now for municipal fiscal officials.”
Yet, the Municipal Bond market does not seem to care or even notice. Is this resilience or sheer complacency?
We are encouraged to see smart CNBC anchors like Maria Bartiromo and Becky Quick discuss Muni concerns with their guests. Maria, in particular, seems to have begun a series of segments about bonds on her show Closing Bell. So far, her guests have been salespeople or marketers of Muni ETFs or Preferred Stocks rather than credit experts. But she is making an effort and for that we thank her.
Videoclips
This week was a fairly barren week for interesting videoclips. Below are the most interesting of what we saw:
- Charlie Evans, Chicago Federal Reserve President on Monday, December 21
A Viewer’s question on Fast Money on Tuesday, December 22
Stocks Pops & Darts on CNBC Fast Money on Tuesday, December 22
Jim Cramer on Mad Money all week
1. The Fed Agenda – Charlie Evans, Chicago Fed President with CNBC’s Steve Liesman – Monday, December 21
Mr. Evans sees a better 2010 than 2009 but sees unemployment ticking up slightly. But Mr. Evans says that the Fed could keep rates low for sometime to come because he sees inflation coming down. Mr. Evans also points out that there is tremendous slack in the economy and that could lead to a lower trajectory for inflation for next couple of years. He also says that there is an active debate within the Fed about exit strategies.
2. Treasury Prices Fall Again – Peter Schiff of CNBC Fast Money – Tuesday, December 22
Peter Schiff said that the GDP growth in the USA is a mirage but inflation is real. In answer to a leading question by Joe Terranova of Fast Money, Mr. Schiff said that hyperinflation is not just possible but inevitable if current policies are pursued. Guy Adami asked Mr. Schiff whether the sell off in Gold has made it even more attractive to Mr. Schiff? Peter Schiff replied that there is a lot of support at or just below $1,000 and if Gold gets there, he would buy all the Gold he can get his hands on.
- Then Joe Terranova asked a dumb question “you truly believe that hyperinflation is coming in 2010?“
- Peter Schiff scoffed at this question and said “it is not going to hit in 2010 but it is gonna hit eventually if we don’t change policies..there is still time to do the right things, there is still time to significantly raise interest rates to let a lot of these phony financial companies fail..to let housing market complete its correction…..we are marching down the road to hyperinflation because we are pursuing the very policies that every other nation pursued that eventually had hyperinflation….“
Peter Schiff vs. these Fast Money people is such a mismatch. Schiff makes mincemeat of them even though he has been provably dead wrong on most of his outlandish predictions. It is like watching a Pro Basketball star playing against an elementary school players.
3. Fast Message – A Viewer’s Question on Fast Money – Tuesday, December 21
This segment follows the above interview with Peter Schiff. Anchor Melissa Lee said their email box became “en fuego” thanks to Peter Schiff and she highlighted a question from a viewer:
- Richard in Plano, TX asked “Yesterday Tim Seymour said there is no inflation, today Peter Schiff implied there is inflation. Who’s right?”
- Melissa asked Karen Finerman “Karen, Are you going to defend our colleague Tim or are you going to side with Peter Schiff?”
- Karen Finerman replied “I am actually leaning towards Mr. Schiff, I am unclear at the moment if there is inflation but there is the expectation of inflation which is almost the same as having inflation, so I would be leaning towards inflation which would make me short the 30-year, which we are”
- Guy Adami then pops in “she gave a trade on the back of it, look at that” and gives a smile full of rapt adulation.
Not be outdone, Anchor Melissa Lee said “yeah, that’s amazing, that’s exactly what we do here on Fast Money“.
Folks, how we wish we had the talent and the resources of Jon Stewart, the truly amazing host of The Daily Show! Only he could justice to this clip.
4. Stock Pops and Darts – Fast Money – Tuesday, December 21
If two segments about shorting Treasuries were not enough for one show, Anchor Melissa brings up the TLT topic at minute 01:43 of this Pops & Darts segment and throws a soft lob to Karen Finerman. Karen responds “if you believe in Peter Schiff and inflation, you gotta be short the TLT, going down“.
Listen carefully, you will hear a clap immediately after Karen’s comments (approx. minute 01:53). You got to hand it to the Fast Money gang – They love to flaunt their hate of US Treasuries!
5. Jim Cramer on CNBC Mad Money – All Week Long Series
On December 15, Jim Cramer began his mission to persuade his viewers from owning Bonds or CDs and to buy stocks instead. He continued this mission this week by telling his viewers every day that investing in bonds or bond funds is reckless, not prudent. This week, he gave his viewers a daily list of stocks with high dividend yields to buy. In his own inimitable style, he said to his viewers they can never get back to even in bonds “let alone make loads & loads of dough“.
We could not but help recall his series in late summer of 2007 when he came up with the rationale about stocks that break $80 in price keep going up until they reach $100. This did not prove to be a money making series for his viewers as we recall.
Of course, investing in dividend-yielding stocks is a time honored concept. There is historical evidence to show that over time a large portion of return from stocks comes from dividend payments.
But comparing dividend paying stocks to bonds is not appropriate. People buy bonds for income but really for income PLUS capital preservation. Any one who invested in high dividend paying bank stocks in 2007 realizes today that dividends do not protect investors from large capital losses. That has also been true for high dividend payers like Altria (MO) and Pfizer (PFE) for the past few years.
But there is another fallacy and investor risk that Cramer does not share with his viewers. Cramer has made it clear that, in his opinion, Treasury yields are way too low and are likely to go much higher in the next year or so.
How do dividend-yielding stocks fare in such a rising interest rate environment? If rates rise after you bought your dividend paying stocks, the dividends go down in value as rates rise. After all, a 4% dividend is more attractive when rates are 2% than when rates are 5%.
Mr. Cramer, isn’t it a reality that as rates rise sharply, dividend yielding stocks tend to underperform or even go down in price? If they do, would you still consider such stocks as better alternatives to Bonds that guarantee principal?
Jim Cramer is a smart investor. He knows all about the history of dividend paying stocks in periods of sharply rising rates. So we wonder, why did he not alert his viewers to this risk in his series?
Finally, it is important to make the point that investing in individual bonds can protect your capital but not investing in Bond Funds. But why should we make this point when the terrific Suzy Orman makes it so well. See the next clip.
6. Suze on Bonds– Suzy Orman with Larry Kudlow – Monday, December 21
This is a must watch clip for any bond investor. Suzy Orman clearly and concisely tells you the risks of investing in Bond funds and the difference between Bonds & Bond Funds in terms of getting your capital back.
She also describes her views of investing in quality bonds such as Pre-refunded Municipal Bonds. As we said, watch this clip.
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