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.
A Dark Prophesy
This week reminded us of the comments Robert Prechter made in his December interview on Bloomberg (see clip 4 of our December 6 – December 12 Videoclips article). We hope that Mr. Prechter proves to be wrong but ignoring these comments might prove to be foolhardy.
- “We are in a deflationary environment in which debt is repaid or defaulted & we will see more and more of this as the year progresses..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…”
Prophetic Comments of the Week?
The old definition of a prophet is someone who speaks and things happen. That was the case on Thursday when Mohamed El-Erian spoke at 1:05 pm. He was the first to clearly state on TV that the problem with Greece was now a problem with Europe’s Banking system and that European banks were getting hesitant to make loans to each other (see clip 1 below). His exact words were chilling:
- ….what we are seeing today is what we saw in Lehman, not as bad, but same characteristic which is European Bank A says to European Bank B, “I don’t know how much PIGGS exposure you have and until I figure that out I am going to step back .. European Bank B says that’s ok because I don’t know how much exposure you have” .. so what you see is the system slowly starting to have cascading failures, its like pipe you need to be free flowing, it starts getting clogged…
The markets heard “Lehman”, “European Banking Crisis” and began selling off. Memories of the US banking crisis are still raw and the market, already weak, went down another 100 points or more with US Banks leading the downdraft. For example, Bank of America closed down 7% on Thursday. Not only did Bank stocks fall but preferred shares of banks fell more than the common in some cases.
Does Credit still lead?
Through out the 2007-2009 period, credit led stocks, In 2007, the fall in US credit markets led the fall in stock markets and in 2009, the rally in credit led the rally in stocks.
If this pattern holds, the prospects for stocks are dim for the near term. Because, this week European credit got crunched. Spreads have gone back to the level of last summer, we are told. The selloff in US credit was not as bad but bad enough.
The rally in credit has been more euphoric than the rally in stocks. On an institutional level we had seen buyers ignore credit risk as they had in the first quarter of 2007. On the small money manager level (typical CNBC guest), we had heard manager after manager advise investors to buy high yield corporate bonds but sell Treasuries.
The war cry of 2010 has been embrace credit risk but shun interest rate risk because “treasury rates had no place to go but up“.
The Waterfall Decline on Thursday afternoon
Next to Monday, October 19, 1987, the 20 minutes between 2:35 pm and 2:55 pm were the most dramatic in our memory. The Dow fell about 640 points in this 20-25 minute period. For the rest of the day, we heard CNBC folks and their experts discuss how someone pressed the billion button rather than the million button. We have never seen a trading keyboard with these buttons but then we don’t have the access CNBC Anchors have.
In our humble perception, the action smelled like liquidation, a Quant selling program operating under sell at any price mandate. If we had merchandize that had to be sold in an afternoon, we would call the first broker and unload the amount that broker was ready to buy. Then we would call the next broker and sell what they were ready to buy regardless of the price they quoted. And so on. The action in the markets suggested a similar selling program that looked for bids everywhere and then hit the bids regardless of the bid price. This continued until the program was done and then the market snapped back.
This selling began at 2:30 pm, sort of the time when margin clerks issue liquidation orders. Was a fund in trouble and did they have to liquidate? The selling action on Friday in large cap technology stocks, drug stocks seemed to suggest that someone had to get out. Microsoft was down over 5% at one point Friday morning.
We have written before that the rally in 2010 reminded us of the first half of 2007 with factor-driven Quant type buying dominating the exchanges. Recall August 2007 when Quants were forced to sell? This week’s meteoric rise in VIX suggested a similar forced reversal of quant positions.
The rally may have been exacerbated because the much-maligned High Frequency Traders stepped away on Thursday afternoon. Their models fail when volatility rises. When they stepped away, there were no other buyers and prices cascaded down.
It would be ironic if the selloff was ignited by long term Quant managers and the blame fell on tiny-duration HFT Quant Managers.
Treasuries
CNBC bombarded its viewers with glowing coverage of the rise in Gold. The rally in Gold was terrific and the charts of Gold in Euro, Pound etc. look awesome. But the talk of Gold as the new reserve currency seem a little dumb to us. The Gold market is a small market. How much money does it take to move Gold up by 5%?
The Treasury market is a huge market. Yet, the 30-year Treasury bond traded this week as if it were a small stock. The bond was up 5 points during the waterfall decline on Thursday afternoon and closed up 3 points.
Mohamed El-Erian uttered the D-word , deflation, in his comments on Thursday and we hear that Bill Gross told Bloomberg radio that he was buying 30-Year Treasuries on Thursday.
If Treasuries can rally so much when people worry about deflation in Europe, what would happen when:
- Global investors become afraid of a banking problem in China and Chinese deflation (see clip 2 below),
- American investors run away municipal bonds because of state & local government risks (see clip 2 below) or when
- Investors fear a double dip in housing and new writeoffs at US Banks (Whitney on Bloomberg)?
Is that when the 30-Treasury Bond would rally to yield 3% as Gary Shilling predicts (see clip 8 of our Videoclips of April 12 – April 17 article)?
CNBC Anchors & Rick Santelli – A pearl greater than all his tribe?
Yet, CNBC Anchors treated Treasuries with disdain or indifference all week. When a brave guest like Barry James told Sue Herrera that his funds were loaded with Treasuries, Ms. Herrera ignored the comment. Her partner Tyler Mathisen kept asking guests about Gold and completely ignored the Treasury rally. These are the anchors who have hated Treasuries all year and pushed high yield bonds on their viewers. Maria Bartiromo was even worse. She did not challenge her stock manager guests. Instead, she mumbled her own conviction about how Treasuries are getting to be a bubble. CNBC Fast Money went back to its 2009 ways. They invited David Rosenberg on Fast Money but refused to ask him about Treasury Bonds. Instead, they let Joe Terranova explain how he hates Treasuries. And they get upset when we wonder about their soft “censorship“?
We remind readers that on Thursday, March 11, Rick Santelli told CNBC’s viewers that the spread between the 30-Year Treasury and the 10-Year Treasury yields had exceeded 1% and added that he had only seen this occur on two prior occasions in his 30-year career. We discussed this observation in our Interesting Videoclips of March 7 – March 13 article.
In that article we showed the graph of the 30-year-10-year yield spread and asked whether Rick had made an actionable call ? It is now clear that Rick made an exceptional call that day. Rick made that call well before the 30-year Treasury bond auction of that morning. So CNBC Viewers had the opportunity to hear Rick and buy the auction if they chose. Those who did are up more than 8% in price. A nice return in 2 months, eh!
This is why our nick name for Rick is REF or Rick EF, because like the old EF Hutton commercial, viewers listen when he speaks and because like a good Ref, Santelli often makes great calls.
This is why we have mixed feelings about CNBC. On one hand the network offers Santelli and great interviews like the one with Mohamed El-Erian. On the other hand, we have to listen to CNBC Anchors who proactively hurt individual investor viewers with their “stock-jockey” mindset.
Finally, we must thank Larry Kudlow and Jim Cramer for calling people like us “Individual Investors” rather than the dismissive, derogatory term “retail investors“. Most of the other CNBC anchors and reporters kept using this insulting term all week. We hope it was only due to the stress of the week.
Featured Videoclips
This week we feature the following clips:
- Mohamed El-Erian on CNBC Power Lunch on Thursday, May 6
- James Chanos on CNBC Squawk Box on Thursday, May 6
- Matt Simmons & Wayne Zimmerman on CNBC Closing Bell on Tuesday, May 4
- Rick Bensignor & Larry Cantor on CNBC Closing Bell on Tuesday, May 4
- Cramer on his own Mad Money show on Thursday, May 6
1. El-Erian on the Markets – Mohamed El-Erian on CNBC Power Lunch – Thursday, May 6
Mr. El-Erian reiterated his belief that 2010 is the year of sovereign risk. His main point is that this is deflationary shock to Europe and what we should worry going forward is the risk to the European banking system.
He said that the only solution for Greece is to deal with its debt stock and there were only two ways to do so:
- European Union gives Greece very concessional money, like at zero percent interest rate or
- Greece restructures
When discussing the future of the Euro, Mohamed said that Germany has 3 choices:
- Support the existing choice but better be ready to write very large checks,
- Pursue a narrow Eurozone or,
- Pursue national interests.
He suspected that Germany would move from choice 1 to choice 2.
A summary of the interview can be read at Greek Debt Crisis On Verge Of ‘Going Global’ on cnbc.com
2. Chanos’ Parting Shots – James Chanos on CNBC Squawk Box – Thursday, May 6
Mr. Chanos of Kynikos Associates is a well known Hedge Fund Manager. He is a smart guy and he makes a point in this interview that every Individual Investor should hear.
In his final segment of the morning, Mr. Chanos discussed municipal bonds. He told Becky Quick:
- your viewers need to be careful about their Municipal Bond Holdings…and don’t count on the Federal Government to bail you out as your backstop…if anybody gets into a problem at the state and local level, there are going to be 3 people at the bargaining table in effect – the taxpayers of that state, the state employees and the bondholders..and there are going to be a set of negotiations..guess which group is probably the least politically connected of those three..and what kinds of people own those bonds, Becky..wealthy people…you may lose you tax advantage..there are all kinds of ways for you to …lose value.and still the State saves face..
- I am concerned that the political dynamics of the municipal bond market.do not bode well for the people who own the bonds..who tend to be the wealthiest people and we are going to get some financial populism in order to restructure the states. it is a simpler way to increase the taxes on the people..this is one way the debt crisis on the state and local level might play out..before you get a federal guarantee…
Then Becky Quick asked “you are not telling people to NOT buy municipal bonds, you are just saying use caution“. Chanos answered “I am saying use a lot of caution, a lot of caution and don’t count on municipal bond insurers to help you and don’t count on federal government to help you..they may but I wouldn’t want to count on it“.
Mr. Chanos is a billionaire according to media reports. After listening to him, we wondered how does James Chanos invest his own money? We assume he does not own tons of New York Munis. Does he own Treasuries? Does he own corporates? In what maturity? Does he invest in stocks or in real estate? Or does he put all his money in his own fund or other hedge funds?
As a viewer, answers to these questions would be far more interesting than his theoretical discussion about global events. We are fairly new to the populism game. But even as naive budding populists, we feel we should campaign with the FCC & SEC to mandate full disclosure of how CNBC expert guests invest their own monies? And we should demand that any CNBC anchor who does not ask questions about the personal portfolios of the guest should be suspended.
Would any of our readers join us in this fair quest?
3. Oil Outlook on BP Spill – Matthew Simmons and Walter Zimmerman with CNBC’s Maria Bartiromo – Tuesday, May 4
Matthew Simmons, Chairman Emeritus of Simmons & Co, International, is a noted proponent of theory that says the world is past peak oil production while oil demand continues to increase. Walter Zimmerman is the chief Technical Analyst at United-ICAP.
This is an interesting and enjoyable clip. Rarely have seen two people take down the other’s opinion in such a polite but hard manner. This is also a contest between a fundamentalist and a technician.
Mr. Simmons described his peak theory views and said about the oil leak:
- “…if the towers don’t work and the odds are of that happening are may be 10%, probably being generous and if the slant hole well doesn’t work, what they are talking about doing is drilling down 35,000 feet vertical for a 7 inch target so this is really high risk, then I think we just have to wait until the reservoir depletes itself and it could be a billion dollar oil field..so if that’s the case, we will poison the entire gulf of Mexico and turn it into a dead sea…..it is probably the worst environmental catastrophe we have ever had..”
Our reaction like Maria’s was “Oh My God”. Then Maria turned to Mr. Zimmerman and asked “Walter, you are not worried about peak oil, you do not think this is a near term concern“. Mr. Zimmerman replied:
- “Absolutely not. We found that the interest of peak oil coincides with the peaking action in peak oil..its popularity was a great assist to the sell signal in crude oil back in 2008..now we are again in May.. the old proverb sell in May and then go away applies to the S&P 500 also applies to crude oil, applies to gasoline..
- here we are ..right in the peaking window, the seasonal time for concern with peak oil which tells me oil is about to take a nose dive.. we think crude oil could easily pull back to the $55 area later this year..
- there are two factors we seeing here conspiring against Oil ..one is we are still ultra bullish on the US dollar..it could go to 93 (on the DXY) easily ..if not parity with the Euro..
- secondly we are very bearish on the stock market.. the real risk in the stock market is not we are going to get a correction but did the correction just end? the whole move from last year’s lows had the shape of a bear market correction…it stopped where a bear market correction should have..
- now either stock market weakness or US dollar strength..are poison to crude oil prices..you get them both at the same time, it is fatal to crude oil prices..this is the most dangerous time of the year to be long crude oil..late April – early May.. it is a seasonal peaking window…”
Then the discussion moved to Chinese demand and Simmons said demand is now becoming a run away train to which Mr. Zimmerman replied “China is at risk of being a bubble itself“.
As we said, this is one of the more interesting interviews we have seen. Maria did a good job of feeding the two guests with questions intended to provoke stronger opinions.
4. Investing Amid Market Fear – Rick Bensignor and Larry Cantor with CNBC’s Maria Bartiromo – Tuesday, May 4
We have said before that, in our opinion, Maria Bartiromo is one of the best contra indicators we have seen. Usually she is polite and affable to her guests. But there are times she is so convinced about her opinion that she is rudely dismissive of her guests. This is rare for her and that actually makes our Maria indicator more reliable in our view.
We recall her conversation with a money manager during the heat of the Merck-Vioxx controversy a couple of years ago. A money manager was advocating buying Merck shares but Maria was very concerned about Merck’s legal exposure. Finally, Maria asked her guest about the fundamentals of Merck. The money manager began describing how cheap Merck was at that time. Maria cut him dead by snapping “that’s valuation, not fundamentals” and moved on. This was the quintessential Maria being utterly dismissive and saying with her manner “don’t waste my time“. To be sure, Maria proved to be totally wrong. The money manager was right. Merck at $26 proved to be very cheap and it rallied to mid-40s as we recall.
This memory came to us like a flash when we heard Maria dismiss Rick Bensignor by saying “That’s a trade!” and adding she was not sure how sustainable it was with deficits in the USA. Maria made this comment after Bensignor said “The Dollar is close to a major structural breakout to the upside and it could measure to 93 (on the DXY); 83-93 in percentage terms is a huge move”.
To be fair, Maria was not as contemptuous of Bensignor as she was of the other money manager we cited above. But she was at about 75% of the peak Maria contempt. So based on our own Maria indicator, we are inclined to bet on Bensignor’s viewpoint about a structural breakout of the US Dollar .
We can also say that Maria is not comfortable with technical analysis or a quantitative discussion. She is much more at ease in talking at a theoretical level and expounding views for the long term. That may be why she likes speaking with the other guest, Larry Cantor of Barclays. She seemed to accept from him what seemed to us fairly common and stock-jockey type consensus views. Some of these views were:
- “I don’t think this (Tuesday’s correction) has much to do with Greece.. I don’t think Greece is so bad for the stock market..however we are due for a correction…I like buying the short end in Greece… we still think corporate bonds look pretty good…. we are short on Treasuries”.
We have heard Mr. Cantor a few times because he is a favorite guest of Maria. We do not get his research but based on what he says to Maria, he seems to be a fairly low-quality or repeat the consensus type analyst to us. Perhaps, Maria invites him because he says what Maria wants to hear. The Costanzian in us says, she could do better!
5. Mayhem Manifesto – Jim Cramer on his Mad Money Show – Thursday, May 6
Some readers complain when we write anything positive about Jim Cramer. We have maintained that underneath the mad manner lies a sharp, rigorous mind and a sense of market’s historical patterns. He is also more honest than many CNBC Anchors who faithfully follow the “stock-jockey” script.
Cramer is a unique CNBC Anchor in that he will tell his viewers to NOT buy stocks when he thinks the stock market is dangerous. This is what Jim Cramer did in this segment. He described the swoosh decline of 640 points in his own manner. But then he said this market is not done going down and it is too crazy for even a madman like him. This honesty and concern for the individual investor is what makes Jim Cramer special.
We also appreciate the fact that Jim Cramer calls us Individual Investors rather than diss us as “retail” as his journalistic colleagues do.
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