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.
Is Bullard the next Bernanke?
The major investment story of the week was the paper released by James Bullard, President of the St.Louis Fed. The title of the paper is Seven Faces of “The Peril” . Mr. Bullard used to be considered as an inflation hawk and he calls himself one. But in this paper, Mr. Bullard suggests that the US Economy might face a deflation like Japan and calls for another Quantitative Easing program, this time focused on buying US Treasuries.
This reminded us of the “drop money from helicopters” phrase that Ben Bernanke used in 2003, a phrase that has stuck to him since then. If the markets really believe that the Fed is about to embark on another QE, then what would happen to long duration Treasury yields? There is an old adage that when the Fed panics, the markets stop panicking. So in 2003, the “helicopter” phrase of Bernanke ended up marking the end of the rates decline.
We do not believe that the Bullard talk of this week is similar in stature or market effect to the Bernanke helicopter comment in 2003. Further, we are in a very different global economy than in 2003. But, we would not dismiss another sharp rally in August on top the July rally in risk assets.
Parallels to 2002
We discusses this theme last in our Videoclips for June 28 – July 2 Article. In that article, we wrote:
- The market action in 2010 resembles the action in 2002 in some ways. Recall that the stock market made a major bottom in July 2002 and then rallied into fall of 2002. October 2002 was the next significant bottom. Then the real rally began in March 2003 with a real but job-less recovery. Is this possible in 2010? Well, we shall find out soon enough whether the stock market makes a bottom in July 2010.
There is no doubt that the stock market made a bottom in July 2010. Will the rest of 2010 follow the course of 2002? We shall find out together.
Global Economic Data
As we enter August, the stock market appears overbought and the risk trade seems on. Next week is packed with data. We get the China PMI on Sunday and on Friday, we get the July Non Farm Payroll number. In between, we get a series of numbers about both US Manufacturing and the US Service sector.
It would be deliciously ironic to get stronger than expected numbers in most of the above cases, extend this risk rally until it gets spectacularly overbought and then, just after the markets pandits (same guys who were bearish in early July) get on CNBC and predict smooth sailing ahead, to have the stock markets swoon and reassert the downtrend into October.
This would fit with the predictions made by Mary Ann Bartels of BAC-Merrill Lynch and Charles Nenner on CNBC (see clips 2 & 3 of our Videoclips of July 10 – July 16 article).
Treasuries
Our Ref Rick Santelli made a point of telling viewers that the spread between 30-year & 10-Year Treasury yields has widened to levels seen very rarely. On Friday, this spread closed at 108 basis points.
The last time Rick discussed this spread, it was at 100 basis points on March 11, 2010. At that time, we felt it was a big call and featured it in our March 7 – March 13 Videoclips article. It proved to be a very big call because the wide spread turned out to be a terrific buying opportunity. Within about 2-3 weeks of this wide spread, the 30-Year Bond began rallying hard.
Will this signal work again? We shall know within 3-4 weeks.
The other interesting factor is the steady decline in MOVE, the Merrill Lynch index of Fixed Income Volatility. This has now reached levels that have been seen very rarely. Is this an indicator of corporate credit or of interest rates? We hope to be educated by our intelligent readers.
Astrological Predictions
A serious sell -off would fulfill the Astrological prophecy of the “Cardinal Climax“, according to Arch Crawford, Publisher of Crawford Perspectives. We are not subscribers to the Crawford Perspectives. So we recommend reading Mr. Crawford’s interview on Hewitt Heiserman’s blog on Seeking Alpha.
A personal note is in order here. Astronomical Science or Jyoti-Shastra has been a study in Indian civilization for a very long time (which means at least 1,200 years to Indian-origin folks). This science may not be as advanced today as it used to be. But it is still a tradition to get a child’s Patrika (very roughly, a charted horoscope) after the child’s birth.
Our own Patrika was charted and written down at the tender age of 2 years. After the astronomical charts, the Jyoti-Shastra Pandit wrote his observations and his probabilistic predictions about our life events. These included the areas we would study, the level of education that we would get to, the type of career we would embrace including approximate time periods of career success and career pitfalls – all events that were to take place about 10-40 years after the Patrika was written.
Today, when we read this Patrika, we are astounded at the percentile accuracy of the predictions. It beats the heck out of any technical chartist predictions we have ever read. In full disclosure, we have no idea how Mr. Crawford’s Astrology study stands in relation to Indian Jyoti-Shastra (literally, Astronomical Science).
Are you listening Melissa Lee of CNBC Fast Money? Why don’t you invite Arch Crawford to discuss his thoughts and show us his charts on your show?
Investment Bets made this week
Every trade or investment is a bet. That is what we prefer to do. But there are famous personalities that sometimes feel tempted to bet in public. The bet that made news this week was the bet on Bloomberg between David Rosenberg and Marc Faber . Faber bet that the yield on the 10-Year Treasury will NOT go below the 2008 low of 2.08% and Rosenberg bet that the yield will break the 2% support and trade with a 1-handle.
If Faber wins, Rosenberg will buy him a bottle of Cutty Sark and if Rosenberg wins, Faber will buy him a bottle of Dalwhinnie. Both these people are smart and successful investors. We would not get in between their bet. Our only regret is that they did not consult us about the vintage and pedigree of scotch that should be the reward. Cutty Sark and Dalwhinnie, why bother?
A less publicized bet was made by Joe Terranova & Jon Najarian of CNBC Fast Money. The bet is whether PFE, the Pfizer stock, outperforms S&P from Thursday, July 29, 2010 until December 31, 2010. Terranova is betting PFE will outperform and Najarian is taking the other side. Melissa Lee, the show’s anchor, pooh-poohed this bet on air saying “I have had enough of these dinner bets, I never see any meal“.
We hear you, Sister Melissa and we raise You! Remember we made a dinner bet with you and your regular quartet on June 10, 2009 that Treasuries will mount a rally from that day until Thanksgiving 2009. We won that bet handily. But you and your quartet have not paid off that bet yet. So we haven’t seen any meal from you either. May be if you start paying off the bets you lose, you might start seeing some dinners from the bets of your traders.
Best Question and Answer of the Week on CNBC
The best question was the one Erin Burnett asked Congressman Barney Frank on Thursday, July 29. She asked
- Question with this Bullard comment that the market is so focused on – Is there a will or way for Congress to do anything else for the US Economy or its up to the Fed and Ben Bernanke period.
Great question in our opinion. Erin should have added the Obama Administration to the question. This question has been the story of the 20-22 months.
The entire load of rescuing the US economy has fallen on the Bernanke Fed. They have done almost a herculean job of preventing a deep recession and now they are being forced to nurture a stalled economy. The Congress and the Obama Adminsitration is out playing politics of class warfare and fighting quixotic wars.
Even in this stalled economy that perches on the edge of another downturn, the Obama Administration is stressing its commitment to letting the Bush tax cuts expire. In another era, this behavior would have been described as bordering on treason. Congressman Frank stressed this commitment in his interview with Erin Burnett and made the misleading comparison with President Clinton’s tax hike in late 1994.
We call this misleading (out of our inherent politeness) because the Clinton tax hikes came when the economy was growing strongly and after the Greenspan Fed had raised interest rates faster and higher than he had ever done before. Today, we have a weak, stalled economy and the Bernanke Fed is promising to leave rates at Zero for an extended, extended period.
So we think it is intellectually downright dishonest (to heck with politeness) to compare the tax increases by President Clinton to the proposed tax cut eliminations by President Obama. If President Obama succeeds in making the US economy grow at 4% in the near future, we would celebrate his plan to raise taxes at that time. But to do so now might prove to be suicidal for the US Economy and hasten the US Economy on its road to Japanese status.
CNBC’s Joe Kernen had the courage to ask this question to St.Louis President James Bullard on Friday morning. (Yes Joe, yours was a good question too, but Erin’s was a bit better!). To our astonishment, Mr. Bullard asnwered it succinctly and clearly:
- INCREASING TAXES WHEN YOU’RE TRYING TO GET THE ECONOMY TO RECOVER IS NOT A GOOD PLAN
Other Interesting Moments of the Week
Erin Burnett & Mark Haines (or CNBC’s on-air married couple, per Bob Pisani) hosted a segment by Jane Wells about America’s most popular CEO as rated by the employees. Lloyd Blankfein of Goldman Sachs won the award with an unprecedented 97% rating (see clip 5 below).
The other interesting (or strange) clip was between the other CNBC couple of Erin Burnett and Jim Cramer. This was actually a two-part segment, the first on Thursday featuring a discussion of toe-cleavage and the second on Friday featuring a demonstration of the toe-cleavage concept by Erin Burnett with 5-inch heel shoes accompanied by rather interesting (we dare not use any other adjective) comments by her partner, Jim Cramer. Well, Bob Pisani, if Burnett-Haines strike you as a married couple, how does the Burnett-Cramer pair strike you? We just think of our cult favorite Bollywood song & dance item from the 1960s that is such a perfect fit for the Burnett-Cramer-Haines threesome.
We saved the best for the last. We owe our thanks to Sue Herrera for introducing us to the show Jersey Shore. Yes, we admit we had not heard of this show until Sue Herera discused it on Power Lunch. We have watched Sue Herera on CNBC for a long time. We have never seen Sue so deeply engaged in any topic or show before. When Sue talks about Jersey Shore, she gets emotionally involved. Her eyes sparkle, her gestures get animated, her voice rises, and her body undulates in her chair. We did not see her so moved even when Will Farrell stepped up to her and kissed her on air a few years ago. It is almost as if Sue Herera is dying for a role on Jersey Shore.
CNBC Management, help her out won’t you! Get Sue Herera a guest apperance on Jersey Shore. We would help you with creative ideas if we could. But Jersey Shore is sort of foreign to us (Seinfeld would be a different story).
See Ms. Herera, we may criticize at times, but we are looking out for you.
Featured Videoclips:
- James Bullard on CNBC Squawk Box on Friday, July 30
- David Levy on CNBC Fast Money on Wednesday, July 28
- Phillipa Malmgren on CNBC Closing Bell on Monday July 26
- CNBC’s Eamon Javers on Cash for Fraud on CNBC Street Signs on Monday July 26
- CNBC’s Jane Wells on Most Popular CEO on CNBC Squawk on the Street on Friday, July 30
1. James Bullard on CNBC Squawk Box – Friday, July 30
The best way to begin is to read the CNBC Transcript of this two-hour apperance by President James Bullard of the St. Louis Fed. We include a couple of excerpts below:
- Bullard on Japanese Outcome – THE OTHER POSSIBILITY IS YOU GO TO THE JAPANESE OUTCOME AND YOU’RE JUST STUCK AND INFLATION — YOU GET A MILD DEFLATION AND INTEREST RATES STAY AT ZERO. IF WE PROMISE TO STAY AT ZERO FOR TEN YEARS, IT’S JAPAN;
- Bullard on Being Worried – I’M WORRIED THAT THE EXTENDED PERIOD LANGUAGE MIGHT BE FEEDING IN TO THE POSSIBILITY OF DEFLATIONARY OUTCOME FOR THE U.S.;
- Bullard on Inflation Drift Down – SO, IF THOSE (inflation expectations) CONTINUE TO DRIFT DOWN, ACTUAL INFLATION CONTINUES TO DRIFT DOWN, WE COULD GET TO A STICKY PROBLEM HERE;
- Bullard on Shock – INFLATION EXPECTATIONS GO DOWN, YOU CONTINUE THE PROMISE TO KEEP RATES AT 0.4, LONGER PERIOD OF TIME. INFLATION IS TRENDING DOWN, REAL RATES ARE GOING UP. THE ECONOMY SLOWS FURTHER. WE PROMISE TO STAY AT 0% EVEN LONGER — EXPECTATIONS OF INFLATION GO DOWN EVEN FURTHER. PRETTY SOON, YOU’RE IN THE JAPANESE SITUATION.
This interview spans across 4 clips:
- St. Louis Fed Head on Inflation,
- Risk of Deflation?,
- Assessing Deflation Signals, and
- Final Thoughts
2. Bull Market or BS? – David Levy on CNBC Fast Money – Wednesday, July 28
Is this CNBC Fast Money? For a show that has hated US Treasuries with a religious passion since its inception, this segment is a radical departure. David Levy of the Jerome Levy Forecasting Center discussed his views about interest rates.
This may shock many readers but according to the anchor Melissa Lee, Mr. Levy believes that the US is in for a period of prosperity but after this decade is over.
- Melissa Lee – “So where do you see bonds going then?”
- David Levy – “I think we are gonna see Treasury Bond yields at about half of current levels. In other words, the 4% plus on the 30-Year would eventually get down to 2% or less and I think we would go to under 1.50% on the 10-Year. These numbers may sound shocking but every major bond rally we have had in the last 25 years..we have been told the same thing, gee rates are shockingly low..what is happening is we are moving away from stability and we are moving into disinflation and now we are very close to deflation..which the next recession is gonna bring.”
Later in the segment, Mr. Levy explained:
- “look we got to notice that core CPI is already down, running less than 1% in the last 6-8 months; its going to be probably half-percent for calendar year 2010 and profits, it looks to us, peaked in the second quarter…we break down the component of cost, and the key factor in long term inflation is labor cost, we have a significant disinflation in compensation rates going, look at employment costs index….there are clear downtrends and that is not going to change until the unemployment rate is much lower than it is now and much lower than we are likely to see for some time… so we are under a lot of pressure and that is a very dangerous point when you have people starting to take home less and less on a widespread basis,(emphasis ours), that is what happened to Japan”.
So, Mr. Levy agrees with our daring forecast of 2% yield on the 30-Year Treasury made on July 3, 2010. It was discussed in the section Parallels to 2008 section of our June 28 – July 2 Videoclips Article.
3. Economic Outlook – Phillipa Malmgren with CNBC’s Maria Bartiromo – Monday, July 26
Phillipa Malmgren, an economic advisor to President George Bush, is now the President of the Canonbury Group and the Co-Founder of Principallis Asset Management. She thinks the US manufacturing will grow more than most other places in the second half of the year. Her key points;
- In the USA, the cost base of drilling is going to go up..the rising cost base of drilling for oil is a very important development that has huge implications across the board…a lot more focus on turning energy usage towards something that is just a lot cheaper…now you need infrastructure for that..but that is exactly what most international investors want to be in, particularly in the US – US infrastrcuture.
- I have a very strong view about manufacturing, especially value-added manufacturing which is really a story about the middle of the States, the middle of the United Kingdom, Japan and the middle of Germany. These areas are winning back business from China like crazy because people are not prepared to spend money on things they know will not work or will break, these things come off ships and half of them are broken..
- They are turning to the US local manufacturers saying I need help getting the product I need; Because in a credit crunch you can’t borrow easily, you need whatever you are going to invest in to actually work..So I think there is a restoration of business in manufacturing… I want to watch margins and I want to watch rising prices and both of these I see occuring in the US and in manufacuring, especially in areas where we are getting capacity reduction..people get upset when they see companies going bust..it means that the excess capacity is being removed….for example trucking in the US, 15% destruction of the excess capacity, now everybody is raising their prices..raising their margins, I like that story, I want to invest in that…
- I have to admit, I still really like commodities, they are so volatile, but fundamentally, they seem to be on an upward trend, we see commodity prices rising, particularly food related, agriculture, that is why the emerging markets are getting inflation..but even the US, we just had the biggest jump in US food prices..in 26 years and nobody noticed because we don’t count that in the CPI.
4. Cash for Fraud – CNBC’s Eamon Javers with Erin Burnett – Monday, July 26
This is a very interesting segment. It descibes a little known piece of the recetly passed Financial Regulation Bill. It provides financial incentives to prospective whistleblowers for turning in Wall Street Fraud. Under this law, Wall Whistleblowers:
- Can Collect 10-30% of fines, settlements
- Can remain anonymous – even to the federal government
- Must present “original information” – that sparks an investigation.
As Stephen Kohn of the National Whistleblower Center said in this clip:
- Any one sitting in the room with you can become a multi-millionaire by turning in your fraud. The beauty of this law is that it essentially uses greed to fight greed.
Eamon Javers told Erin Burnett that he has already talked to lawyers who say that they already have Wall Street fraud cases in the pipeline .and “they are going to bring these cases right away and start reaping some of these dollars“.
5. CEOS: Who Do You Love? – Jane Wells with CNBC’s Mark Haines & Erin Burnett – Friday, July 30
Glassdoor.com released its survey of the CEO most beloved by company employees. Jane Wells presents this information as only she can. Who came in first with an unprecedented 97% approval rating – Lloyd Blankfein of Goldman Sachs. Watch this clip. It has some very interesting information about other CEOs.
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