If you watch the clip, you will hear Faber say that he sees a chance of a 10-20% downward trade in equities at some point in 2010 (minute 02:09 of the clip). But the summary of his views published by cnbc.com omits this juicy detail. A deliberate omission or an inadvertent one? Will CNBC.com enlighten us?
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.
The Surprise of 2010 – America outperforms the Emerging Markets?
On December 31, Guest Fast Money Trader Steve Cortez said “My bombshell is gonna be American outperformance next year. You know, America can fail, adapt and recover unlike any country in the world and I think we have done that in our financials. We have acknowledged the problems, we are fixing the problems and moving on. The rest of the world has not – China, Europe, Persian Gulf, they are yet to really address their entrenched banking problems and because of that the US outperforms in 2010.”
We were astounded to hear this sacrilege on CNBC Fast Money, a show that has devoted itself all year to sing the praises of China, its leadership, its stimulus and to sing the dirge of the US Dollar, US Treasuries and US competitiveness. The show’s invite to Steve Cortez gives us hope that may be, just may be, Fast Money is capable of redemption.
Of course, Steve Cortez is not alone in his views. Other celebrity investors like Marc Faber and Richard Bernstein have made similar predictions.
Marc Faber, the editor of the famous Gloom, Doom & Boom report, argues that the US Dollar will rally in 2010, US Treasuries will rebound for a couple of months and the US stock market will outperform emerging markets, either in a rally or in a 10-20% downdraft (see clip 2 below).
Richard Bernstein in an earlier appearance had predicted that the US stock market will rally and outperform Emerging Markets in 2010. Bernstein also predicted that US Dollar will rally and that Treasuries will deliver positive returns but that US stocks will outperform US Treasuries.
The positive return predicted by Bernstein will come as a welcome relief for Treasury Investors after a horrendous 2009.
Worst Year for US Treasuries since 1927
According to experts who track these things, 2009 has been the worst year in history, or since 1927 (based on Ibbotson data) for long duration Treasuries. In 2009, the 10-Year Treasury was down 10.2% and the 30-Year Treasury was down 24% on a total return basis.
This shows that buy and hold does not work for US Treasuries either. Those who held on to Treasuries all year lost a great deal of money. Those who sold Treasuries in January 2009 and then bought Treasuries after the violent sell off in June 2009 made money in Treasuries this year.
Is now the time to buy low after a serious sell off in the month of December? Or is the time to sell and get out because a waterfall decline is ahead?
This is frankly the most important question for 2010. As Jordan Kotick of Barclays said last week it will be a rate centric world in 2010 (see clip 3 below).
As we reported last week, Barron’s has published interest rate forecasts of several brokerage firms. Most of the economists are bearish on Treasuries and expect rates to go up. In fact, one prominent firm thinks the 10-Year Treasury yield will go to 5.5% by 2010. But two prominent economists predict just the opposite. They think the 10-Year Treasury yield will drop to 3% or 3.25% .
Perhaps the most outlier prediction comes from veteran investor Doug Kass who says that Bonds will outperform Stocks in 2010 and that we will see a speculative top in Bond prices (or absurdly low interest rates in plain English) by 2011. We concur with Mr. Kass.
Our Faith in Redemption – CNBC Fast Money allows bullish comments on US Treasuries
This week, we saw the wonder of wonders, a week long bullish commentary on US Treasuries by a CNBC Fast Money Trader. It was pretty zany stuff too. We felt as if our faith in redemption was restored, at least temporarily.
Steve Cortez of Veracruz LLC was a surprise guest trader on the Fast Money show. His views have been generally contrary to the prevailing quasi-religious tenets held by Melissa Lee, Joe Terranova, Karen Finerman and others on CNBC Fast Money.
Steve did not disappoint. All week he expressed his bullish views on US Treasuries. He kept repeating his viewpoint that commodities are an extremely crowded trade and that commodities will fall the way Gold did in December 2009. Steve Cortez is bullish on the US Dollar as well and recommended shorting the Australian Dollar.
His most interesting comment was on Wednesday, December 30 when he said:
Wow, Treasuries are like Lawyers! That was a new one for us.
Our own view is that the 30-Year Treasury Bond is the best insurance against bubbles. When bubbles burst, the only asset that outperforms is long duration Treasuries and the longest duration bond is the 30-Year Treasury Bond. And no CNBC Anchors, you do not have to own or hold the 30-Year Treasury for 30 years. You can trade these as often as you can trade stocks.
A friendly word of warning for Steve Cortez. He may want to tone it down a little. The regular anchor Melissa Lee is back next week and she is not going to tolerate this sort of behavior.
We are not being mischievous. When Melissa Lee was on vacation during the labor day week, guest anchor Rick Santelli invited Steve Cortez for that whole week. Steve Cortez made positive comments about US Dollar and negative comments about Commodities and China. When Melissa Lee returned the following week, Steve Cortez was no longer seen on the CNBC Fast Money desk. The ban on Steve Cortez continued until this week when Melissa Lee went on vacation and Bob Pisani acted as the guest anchor of Fast Money.
Already this week, Steve Cortez was accused of being a “debbie downer” by Joe Terranova, the champion of China & Commodities for Fast Money and an ally of Melissa Lee.
Will Steve Cortez be banned again until Melissa Lee goes on her next vacation? We will know soon.
This week, we feature the following clips:
1. Financial Innovation of the Decade – Scott Burns of Morningstar with Bob Pisani on CNBC Fast Money – Thursday, December 31
This clip has the potential to become a CNBC Hall of Memories Clip. It presents the current consensus as wisdom and offers warped advise that has proved to be historically dangerous. If the clip proves to be right, you will be a up little with the recommendations in this clip and if the clip proves to be wrong, you might lose a bundle.
CNBC’s Bob Pisani called ETFs (exchange traded funds) the Financial Innovation of the decade and introduced Scott Burns as the Director of ETF Analysis at Morningstar. Mr. Pisani got right into it:
We were dumbfounded to hear this. History demonstrates that when Treasury yields rise steeply, every fixed income instrument in the world goes down in price. This is because every fixed income instrument in the world is valued on the basis of the spread or the difference in that instrument’s yield and the corresponding Treasury yield. So when treasury yields rise steeply, the yields on utility stocks and financial preferreds rise even more steeply causing a sharp fall in their prices. This is the definition of interest rate risk.
Then there is credit risk. Utilities and Financials are called interest rate sensitive stocks for a reason. When Treasury rates rise steeply, the credit condition of utilities and financials deteriorates. And when the underlying credit condition of a company deteriorates, smart investors get out of the company’s preferreds, bonds and stocks.
Scott Burns says he is terrified of Treasuries because he is presumably afraid that interest rates are going to spike up sharply. If he right, the utilities and financial preferreds he touts are going to be slammed with a double whammy of interest rate risk and severe credit risk.
Scott Burns says “these financial preferreds have definitely had some action this year“. Yes they did. Recall that Citibank preferreds dropped from $25 to $2 and Bank of America preferreds dropped from $25 to about $8. Is this the type of action Scott Burns wants for CNBC Viewers?
Scott Burns clearly does not listen to Meredith Whitney, the brilliant analyst of financial companies. She has told CNBC on a couple of occasions that now she as bearish on Banks & Financials as she has been all year. Does CNBC’s Bob Pisani watch his own network? We expected Bob Pisani to ask Scott Burns about his opinion of the credit risk of the financial preferreds. Did he? Let us listen.
Now you have a CNBC Stock reporter offering investment advise on Fixed Income? Does Fast Money have a compliance officer? Does CNBC even have an editorial department? Bob Pisani spends every day wandering the NYSE floor talking to traders and stock investors. What makes him qualified to even discuss fixed income let alone make recommendations about Fixed Income to CNBC’s viewers?
These editors and Bob Pisani should look at the chart below of PGF vs, TLT, the Treasury ETF, since the inception of PGF. This chart may remind them a very high dividend yield is often an indicator of risk. 
(PGF – Black color; TLT – Yellow color)
Scott Burns also recommended WIP, the International Inflation Protected ETF. This would work if the US Dollar goes down. But if the US Dollar rallies in 2010 as many experts predict, then WIP would not do so well.
Scott Burns is right about TIP, the domestic inflation protected ETF, if, as he says, you are an inflation hawk. But as he says, TIP does not offer much yield. If inflation remains benign, then TIP will underperform Treasuries as it has done over the past 10 years.
Ironically, if Scott Burns proves to be terribly wrong about his basic theme, then his recommendations would actually do well. In other words, if Treasury yields fall in 2010 instead of rising steeply as he fears, then the utility stocks and financial preferreds and WIP might provide nice capital gains in addition to the current high income.
In other words, if you invest in his recommendations, you better pray that Scott Burns proves to be totally wrong in his central theme.
If you watch the clip, you will notice that Bob Pisani did not ask Fast Money trader Steve Cortez for his opinion of what Burns said. Was it because he knew that Steve Cortez would disagree with Scott Burns? Was that why Pisani only allowed Joe Terranova to comment?
As we said, this clip could end up being a CNBC Hall of Memories clip.
2. Gloom, Doom & Chances of a Boom – Marc Faber with Joe Kernen on CNBC Squawk Box – Wednesday, December 30
Marc Faber is the editor of the Gloom, Doom & Boom report. He is regarded as an insightful observer of the global investment scene. He is also fun to listen to. This clip is no exception. Watch it.
A summary of his comments can be found at Volatility Will Increase, US Will Lead in 2010: Marc Faber on the CNBC website. A couple of excerpts are below:
3. Technical Themes for 2010 – Jordan Kotick with Michelle Caruso Cabrera on CNBC Closing Bell – Wednesday, December 30
Jordan Kotick is the Global Head of Technical Strategy at Barclays, He usually has interesting points to make and this clip is no exception.
Jordan is focusing on Greek CDS Swap rates as a key indicator for Germany’s Dax and for other European stock markets. He thinks that the US stock market will trade in a range for another couple of years. He thinks that interest rates are going higher. In fact, he said that when investors return next week, they will look at the charts he shows in the clip and take interest rates higher. In this environment, he thinks that European Bonds will outperform US Bonds and that it would be good for the US Dollar. He thinks Gold will trade in a range for the next 6 months or so and then go higher, as high as $1,500 by end of next year.
Interesting Videoclips of the Week (December 27 – December 31)
