Interesting Videoclips of the Week (November 29 – December 5)

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.


Employment, Jobs & Commodities

What a week this has been! Monday began with a selloff based on the the previous week’s Dubai news. The selloff promptly reversed and Monday reverted to form with a typical Mutual Fund Monday rally (the name comes from the belief that individuals add money to their mutual funds over the weekend). After all, the vast majority of the past dozen Mondays have featured a strong rally in stocks and commodities.

On Friday, the stunning surprise of a much stronger than expected jobs report created a enthusiastic burst in stocks. By 10:00 am, this 150 point rally began selling off and the Dow went negative in the afternoon before closing up about 20 odd points. 

But the real story of Friday was the vertical drop in Gold. Gold prices dropped about $60 dollars by mid-afternoon. The US dollar rallied 1% and many components of the risk trade lost on Friday. This validated the cautious stand of Laszlo Birinyi on commodities (see clip 3 below) and made fun of David Rosenberg’s target of $2000 plus for Gold (see clip 4 below). But, to be fair, Rosenberg was short term tactically bearish on gold and bullish on dollar in his comments. But we have praised Rosenberg so effusively in the past that we feel we are entitled to poke some fun at his expense.

We point out that Rosenberg’s ex-colleague Richard Bernstein is not so enamored of Gold. Score one for Bernstein over Rosi, as he called by his friends & acquaintances. We, of course, are neither. In full disclosure, we have never met or spoken with either Bernstein or Rosenberg. Our “association”  is entirely as viewers of shows produced by the “friends & fun” CNBC anchors. Of course, these “friendly” CNBC anchors do not speak with us either. 

The most accurate economic firm is supposed to be ECRI, the Economic Cycle Research Institute. These folks use their own proprietary indicators to forecast economic cycles. We have featured videoclips of Lakshman Achuthan of ECRI a few times in this series of articles. Mr. Achuthan is a frequent guest on financial TV and on CNBC, in particular. ECRI has been unswervingly bullish on the economy for the past 6 months. They have called for a powerful rebound from last year’s downturn and they have been right.  

We expected ECRI to be bullish after the stunning jobs surprise. To our surprise, they do not seem to be. ECRI distinguishes between the short-term secular rebound and the long term “dire news” in unemployment. ECRI’s duo of Achuthan & Banerji (The “A& B Team”?*) argue that “business cycles are back with a vengeance” and that “The “great moderation” of business cycles once extolled by many economists, including Federal Reserve Chairman Ben Bernanke, is history.“

The A & B Team further states that “The trend rate of growth is shriveling….The real risk is of more frequent recessions repeatedly aborting cyclical downswings in unemployment in coming years. “

Again for full disclosure, we do not know either Achuthan or Banerji and subscription to ECRI is far beyond our pay grade. In any case, we have made cheapness into a virtue as well as a competitive advantage. Readers who desire free but excellent research should read the complete article on Analysis: Good News On Jobs, But Will It Last? on NPR’s website. 

When we read this free but superb article, we feel like rushing into 30-Year Treasuries. 

* We apologize to the ECRI duo if our A&B Team nickname offends them. We mean it as a compliment. We used to be fans of The A Team, simplistic that we are. During our travels last week, we watched reruns of The A Team on London TV. Why would London TV show reruns of The A-Team? You got us!


Treasuries 

We continue to be astounded by the resilience of the long end of the Treasury curve. Look what it has endured. A steep melt up in the stock market, a parabolic rise in Gold, a strengthening economy, a “who cares about Dubai” reaction and now a stunning upward surprise in employment. Why would any one want to invest in the long end of the Treasury market? There we go trying to endear ourselves to CNBC Anchors who are friendly to every asset class except US Treasuries.

To find an answer to this perplexing question, we found ourself going to Bloomberg.com to watch the interview of Tony Crescenzi of Pimco. Mr. Crescenzi says that Pimco likes US Treasuries and explains why in a simple, understandable and detailed explanation (see clip 2 below).


Friday’s Action in Financials & Goldman

The stock of Goldman Sachs has been acting terribly for the past couple of weeks. This week, it continued to trade down until Thursday. Many market seers wondered whether the action in Goldman and financials in general was the proverbial canary in the coal mine for the market.

On Friday, the financial stocks and Goldman rallied very strongly in the afternoon. Was this the halo effect of the successful equity offering by Bank of America after its TARP repayment or was it simply a bounce from a oversold condition? Or was it a signal of rotation of money fleeing from overcrowded commodity stocks into Goldman & the financials?   

Ours is an inquiring mind and it wants to know.


The Dubai Eruption*

The beginning of this week and the last weekend was dominated by the stunning news of Dubai World’s restructuring of its debt. The message of the markets is that the Dubai problem is a transient, one-time eruption. We are not so sure.

Emerging Market Debt has had a spectacular rally this year, especially the Sovereign & Semi-Sovereign debt sector. And why shouldn
‘t it? When 2009 began, every government in the world was engaged in bailing out every corporate & financial entity in their country with infusion of government’s money. This made investing in such debt a surefire bet. 

Now it feels as if Governments are slowly pulling out their support and investors are being forced to examine what they bought and why. The why was easy in Dubai, because that emirate was the envy of the world with its turbo charged growth backed by oil money of its cousin, Abu Dhabi. 

That is why the Dubai World news was such a shock. Dubai serenely (or perhaps not so serenely) announced to the world that Dubai World was an independent corporate entity and the Dubai regime was merely a shareholder in that company. In other words, you lent money to Dubai World at your own peril. Dubai itself was fed the same medicine by its older and richer cousin, Abu Dhabi.

The markets do believe that in a few months, Abu Dhabi will bail oit Dubai and Dubai will, in some way, bail out Dubai World and its troubled entities like Nakheel. We shall found soon. A whopping 3.5 billion of Nakheel debt comes due on December 14. 

CNBC’s Erin Burnett did a good job covering the Dubai Eruption. She also explained the basic nature of the Islamic or Sukuk bonds. She disclosed that about 40% of the money invested in Sukuks was Middle Eastern money and about 38% was European money (see clip 5 below).

For once, CNBC did a thorough job of relating the Dubai crisis to other areas, especially China. CNBC’s Joe Kernen was fairly vocal on this topic (see clip 6 below) in his conversation with Mohamed El-Erian of Pimco. Joe Kernen made the connection to the long term call of James Chanos who has argued that the biggest asset bubble in the world today is China’s fixed asset investment program. We featured  the Chanos interview in clip 3 of our November 15 article.

Whether Dubai is a solitary event or whether it is the first of many cockroaches in the Emerging Market Debt space should become clearer in the next few months.

* We struggled for the right word to describe the Dubai situation. It is not a contagion because nothing else has been affected. It is not a crisis because markets have told you it is not. It seems like an eruption – a short, intense spasm that erupted and seems spent. The word eruption also allows us to follow the Robert Ludlum style, simplistic that we are.


The Quant Bubble

During the relentless rally this summer, we wondered in this series of articles whether large Quantitatively managed funds were responsible for the market action. It seemed as if there was an invisible bid under the markets, a quiet but steady hand that supported the stock market whenever the market tried to fall. Through out the summer, the volatility of the equity market continued to fall steadily and the stock market continued to rise. Veteran CNBC trader analysts like Art Cashin continued to proved wrong.

The last time we had seen this action was in 2006 and later were told by experts that the action then was dominated by Quant Funds. We asked CNBC Equity reporters publicly in these series of article to check this out with their sources. This needed deep sources we felt because the bulk of the trading was being done outside NYSE on electronic platforms.

We were wrong to ask CNBC. We should have asked TheStreet.Com instead. Why? Because The Street.com has a smart, knowledgeable and highly connected analyst-manager called Doug Kass. Mr. Kass is, we understand, the chief of Seebreeze Partners and a senior contributor to TheStreet.com’s RealMoney Silver subscription Web site.

On November 17, Mr. Kass wrote an article titled The Quant Bubble on RealMoney Silver. We feature a few excerpts below:

• For now, though, let’s throw away the fundamentals,……as there might be an outside influence that is playing an increasingly more influential role and could help to explain some of the persistency of the market’s advance since the summer. 
  
• A portion of the sharp rise in several asset classes over the past few months could be the dominance of quant funds that worship at the altar of price momentum (and the self-fulfilling prophecy of the fund flows that follow the price momentum induced by the quants!). 
  
• Over the course of the past few weeks, I have investigated the increased role of momentum-based and high-frequency trading quant funds. Though hard to “quantify,” I believe that the disproportionate role of these funds, which use algorithmic formulas in their directional trading strategy, is shockingly influential in the current momentum-based climate and is serving as an “invisible hand.” 
  
• By some estimates, this price-momentum-based quant trading now has doubled in significance since early in the year, to more than two-thirds of the average day’s trading. 
  
• If you don’t believe me about the growing quant fund influence, speak to any prominent institutional trader or salesman: They will tell you that their business with plain vanilla institutions is weak and that the quant funds are the ever growing whales of trading. 
  
• The pattern is all-too familiar as a new marginal buyer of an asset class dominates the market until they don’t.
  
• Remember, it is some of the same momentum-based quant funds that sold in March 2009 that have been buying over the past few months.
  
• I have seen many bubbles in my 30-plus years in the investment business. There is a giant bubble in quant funds, and their outsized influence in buying stocks, bonds and commodities might soon be approaching the height its of popularity.