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.
China PMI and US Non Farm Payroll Report
The China PMI came in weaker than expected but above 50 on Sunday night. The world’s risk markets took this as a sign that Chinese tightening will soon be replaced by a softer policy. The US stock market celebrated this news with a near 200 point up day.
The US Payroll report came in weaker than expected on Friday morning. This number was much worse than the markets expected. The Dow Jones fell about 160 points by mid-morning and then began recovering. It closed marginally down, a loss of about 25 points.
What does this tell us? That performance money is still underinvested? Is the belief in resource rally still strong? The strength in resource stocks this week was impressive. The brigade in lead consisted of Ag stocks, Potash. Mosaic. Agrium and their cohorts.
The rally this week in wheat was something to behold. Then on Friday, Russian Boss Putin announced a ban on wheat exports from August 15 to year-end. What is the saying? When Governments begin panicking, the markets stop panicking! True to form, wheat closed limit down on Friday according to CNBC Fast Money commodities guru, Joe Terranova. How strong are the hands of recent buyers of POT and MOS? We shall know next week.
We must say that the action in the stock market was impressive. But the rally is getting extended and the market is getting overbought. This is similar to the action in risk assets in August-September 2007 when a soft Bernanke statement sent already overbought risk assets to a spectacularly overbought condition.
The expectations are that Chairman Bernanke will announce a mini-QE or more precisely that he will announce asset purchases, probably Treasuries, up to $1 trillion. This is what Goldman’s smart economist Jan Hatzius opined on Friday.
Treasuries
What does it do to the 30-Year Treasury Bond? As CNBC’s Rick Santelli pointed out all week, the spread between the 30-Year Treasury yield and the 10-Year Treasury yield has spent more time above 100 basis points than ever before. On Monday, this spread was 112 basis points. On Friday, it closed at 118 basis points, a level Santelli said he has never seen.
The 30-Year yield is not high because large speculators don’t like the Bond. Au contraire! The latest CFTC data shows that Large Speculator Net Position ranking in the 30-Year Treasury is 97%, an increase from 88% the prior week while the Hedger/Commercial position ranking is 0%. In contrast, the large speculator ranking for the 10-Year Treasury is only 31% while that of the Hedger/Commercials is 58%.
We don’t get it. Unless the 30-Year Bond is being held back due to QE concerns!
Difficult Times ahead for Multinationals
This is getting to be a secular concern for us. Almost every equity-fee-collector that comes on CNBC tells us that multinational stocks are very cheap relative to their past history. First as David Gerstenhaber points out (see clip 2 below), the PE history of these multinationals goes back to times of demographic expansion in the USA and to a period of secular commodity deflation. We are not sure how relevant that history is today.
But the trend that worries us is that consumption is shifting away from the USA to global economies. We have maintained that as long as USA was the world’s dominant consumer market, every economy and its companies had to kow-tow to American views and sensitivities. As America saves more and consumes less, the less sensitive foreign economies have to be to American views. The economies with greater consumption will deliver more growth to their own companies at the expense of US multinationals.
One case in point is this week’s pressure on RIMM by UAE and Saudi Arabia followed by rising pressures from India & other countries. These countries are getting less tolerant of companies like RIMM operating in their countries and shielding their traffic from their governments. This is especially troublesome given the potential use by terrorists of a secure RIMM network. In the past, a quick word from Hillary Clinton or the Canadian Government would have ended the matter. But not now. This is also a result of democratization. People in UAE, Saudi Arabia are less inclined to accept the statement that America has a right to RIMM’s data to protect Americans but other countries don’t have the same right to protect their own citizens.
This is but one example of what we think will become a secular trend of governments putting pressure on US Multinationals to toe the line. Google in China was merely the first in our opinion.
USA-China relations getting worse?
The last week was a tense one for US-China relations. The Obama Administration, to its credit, is getting tougher with Chinese aggression. Our feeling is that China is getting too obvious and too aggressive about its desire to be considered as a world power. We also believe that the People’s Liberation Army ( or “PLA” – China’s military) is the one that is pushing around China’s civilian leaders on such issues.
Last Saturday, the PLA declared that China has “indisputable sovereignty” over the South China Sea. This was after Secretary Clinton called freedom of navigation on high seas a U.S. “national interest“. These are not cheap words from either side. Ms. Clinton went much farther when she said “Legitimate claims to maritime space in the South China Sea should be derived solely from legitimate claims to land features.” Translation – China’s claims to the whole sea were ‘invalid” because it does not have any people living on the islands claimed by China. All this was well described in the Washington Post.
But a major new initiative was not featured in either the Washington Post or the New York Times. The USA is in advanced talks with Vietnam to share nuclear fuel and technology in a deal that would allow Vietnam to enrich its own uranium. The deal is expected to be finalized by year-end. A US Official said that China was not briefed on these negotiations, according to Stratfor.
The Times of India in a recent article wrote that China has been shaken by this US move. The ToI article quotes Teng Jianqun, Deputy Director of the China Arms Control and Disarmament Association as saying “The US is used to employing double standards when dealing with different countries….as a global power that promoted denuclearization, it has challenged its own reputation and disturbed the preset international order.“
The last two military conflicts of China have been with Vietnam & India. The USA signed a landmark nuclear deal with India in 2008 and now it will sign a deal with Vietnam. In addition, USA has begun working with the Indonesian army recently.
Is this a containment of China or pressure on China to cut down its own nuclear exports to Pakistan or both? Whatever the scenario, this is not a positive for US multinationals in China.
As we have pointed out before, these moves are similar to those in the 1930s with another aggressive authoritarian mercantile power, Japan. We know how that turned out. If the situation gets worse with China as it did with Japan in the 1930s, the color of that Swan would have to be blacker than black.
Featured Videoclips:
This week we feature the following videoclips:
- Bill Gross on Bloomberg on Friday, August 6
- David Gerstenhaber on CNBC on Wednesday, August 4
- Richard Cookson on CNBC on Thursday, August 5
- Meredith Whitney on CNBC on Tuesday, August 3
- Week-long Series on GM IPO by CNBC’s Erin Burnett
1. Bill Gross on Bloomberg – Friday, August 6
The Non-Farm Payroll report was the defining event of the week even though the Chinese PMI on Sunday night had a greater impact on the stock market. The report was bad. This affirmed Pimco’s concept of the “New Normal” according to Bill Gross. He described America’s new structural unemployment problem and opined that the America’s long term unemployment rate, at its lowest, will be 7%. He contrasted this with the old normal long unemployment rate of 4%.
This is a startling statement and bodes ill for America’s other structural problem of lack of income. In fact, Gross adds the caveat that the rate will drop to 7% if the US is able to reflate successfully.
What to do? Tom Keene of Bloomberg asked Bill Gross “Bill, 2.85% – 2 year – 0.5056%; when does Bill Gross sell full faith and credit paper?” Bill Gross answered:
- “Well, when you get down to 50 basis points on 2 years, that is basically, giving you a signal that there is not left on the table and so the extension out on the yield curve is what we have been attempting over the past several weeks and months and what to do? You buy 4 & 5 year paper for now at the low yield of 1.51% and roll that down and hopefully as long as the curve stays steep and as long as the Fed stays where it is, you produce 2-2.5% returns as opposed to 50 basis points.”
Is it any wonder that the Large Speculator Net Position percentile ranking in 5-Year Treasuries is 100% and the Hedger/Commercials Net Position percentile ranking is 0%.
2. David Gerstenhaber on CNBC Squawk Box – Wednesday, August 4
According to his introduction by Becky Quick “David Gerstenhaber is the President of Argonaut Capital Management and the former Managing Director at Tiger Management. David created and led Tiger’s highly successful Macro Investment Group.” His interview is in 4 different clips.
We think this is one of the most thoughtful interviews we have heard on CNBC for awhile. We confess we might think so because Mr. Gerstenhaber’s thoughts match our own opinions.
The first clip is titled Macro View on the markets.
- Industries that created jobs over the last several decades are the Industries that were part of the over consumption in the United States and we are taking that apart right now….Housing, Real Estate, Finance under pressure, excess consumer spending, discretionary consumer things, retail.
- Manufacturing is not big enough that even if we had a massive revival there, you could create a meaningful amount of jobs…we have lost roughly 8 million jobs, and to put it simply, the process of recessions shocks de-industrialization, we don’t get those jobs back, we export them in each case, to someplace different, be it to Japan, Korea, China, in the most recent decade..the question is what is going to drive job growth?…If you are consistently running deficits, you are exporting jobs…
- We have had a massive multi-decade period of leveraging up and this de-leveraging is going to take time and creating more debt to solve the debt problem is probably a mistake. What we need is to revitalize business, we need to revitalize income..If the Government is going to run a deficit, I would rather see them do it in a different fashion, I would rather see a payroll tax holiday for example, which is deficit spending but it is going to create jobs faster than this sort of targeted, maybe this works, maybe this doesn’t spending that we are seeing. Get the Government out of the way, facilitate, rather than by higher taxation, by lower taxation the revival of the private sector, an investment tax credit like we had in the days of Reagan Administration makes complete sense in this environment; businesses are flush with cash but they are not investing., right…
- Because they (corporations) are petrified, about the economic outlook, they are petrified about what is going on in Washington as well..they perceive the Obama Administration is very anti-business, and so the most you are really seeing out of the Corporate sector is reluctant replacement investment, as stuff wears out, they have to do and token acquisitions that allow them to cut people, cut factories, and rationalize….
- We have disinflated to the level where there is certainly the risk that if there is a shock to the system given all the excess capacity that we slip into a deflationary environment..This isn’t Japan, this is a different society, it is much more dynamic, more entrepreneurial, it is diverse, it is not homogeneous but we have not succeeded in creating any money supply growth, all we have done is create base money growth and the money multiplier is broken, we have the consumer savings rate going up and very very low rates of inflation right now..when you annualize them you have deflation..the question is what’s gonna get you enough demand to life that up and if you don’t have enough demand you get price cutting for competitive reasons and that’s what Bullard is concerned about..
- The thing that has me concerned and I think people don’t understand is the impact of the baby boom generation on both capital flows and spending & savings rates. You think about this; the peak birth years were 1956-1964 and if you think about where these people were decades ago they were accumulating financial assets, they were accumulating wealth in their homes and they were seeing their incomes go up, retirement wasn’t on the horizon and everything looked great..
- ….They were the guys who were consuming every three year lease BMWs, something of that sort, and now you look at what is happening to these guys and the guys who are the leading edge of that, guys who are 54 years old now, they got to put their kids to college, more expensive than secondary schools etc., they have lost half their net worth more or less, they may have negative equity in their housing and they understand as well that the Job market for people over 50 isn’t that good either…so they are not looking forward to seeing increase in their real wages..and the idea that they could retire at 60-65 or at 70, is starting to slip away…
- But this is changing behavior and the behavior this changes is a lot of these people cannot afford to take equity risk anymore, there is a lot of discussion about how money keeps flowing into Bonds & Bond funds even though stocks look cheap…..these guys can’t afford to lose any more …and the other problem that is for these guys is very similar to what happens and is happening at the defined benefit pension plans is that fixed income yields are so low that they can’t make much on that either..and so the ability to rebuild their financial net worth is severely constrained..and the constrains activity in terms of consumption and things of that sort…
- one of my favorite statistics to put this in comparison in 1989, Japan had a vibrant economy, it didn’t have an immediate demographic problem, 49% of household networth was in stocks..now it is roughly 8%..and it has never bounced from on the way from 49 to 8….what gets you back to 3.5% growth as opposed to 2-2.5% growth, I think thats the piece of the puzzle that is missing right now and I think that the idea that demographics are adverse is something people are not focusing on enough right now..
- Quick – On this inflation-deflation argument, how soon do you think this is going to be settled in one direction or the other?
- Gerstenhaber – Oh, I think this is something we will be dealing with over the next couple of years…you are looking at low inflation in the developed world; it is very much a global phenomenon...
- Liesman – Is it unavoidable? If the Fed came out and said we are implementing a forceful program here to combat deflation, we will do what it takes to keep the price levels up, would that change your investment thesis?
- Gerstenhaber – Oh, I think that was Bullard’s point. He wants to change the signalling
- Liesman – If they adapted it, does it change your investment thesis?
- Gerstenhaber – If it was believable, sure..
- Liesman – You would then become bullish if the Fed were to come in and combat deflation in a big way?
- Gerstenhaber – If I believe that they could that, sure and if I believe they could change the incentives then that would absolutely force us to alter our perspective on things; to say that you are concerned about deflation does not necessarily connote bearishness, it connotes that it is going to be very difficult to make money..look, when you have an environment where prices aren’t going up, that means no real top line growth for the corporate sector, it is also difficult to get margin, and the problem of this very low inflation environment is that it is also consistent with low returns on risk assets..which is the other thing that people aren’t used to.So its not an issue of going down a lot or going up a lot, it could be a very frustrating environment where if you have this low nominal low real growth it is very difficult to generate meaningful gains in profitability..
- Quick – Aside from the 10-Year, what’s a good way to play this? The 10-year is something people look at and say hey, this is just not worth even dropping my money into it
- Gerstenhaber – You know, the two anti-risk assets are the Bond and Gold.
- Quick – Is there anything that can give you a stronger return?
- Gerstenhaber – I think, high yield gets you better return. The flip side of the corporate sector not spending money is that they are flush with cash, right? The corporate sector, they stopped everything; they really circled the wagons, and so look high yield gets you higher yield than you are gonna get out of Treasuries, you have already had the round of defaults, and so the prospective return profile is I think relatively attractive. The over all problem is that the prospective return profile of financial assets and real assets right now just isn’t attractive as it used to be because you have to have good growth for that and we don’t have good growth. High Yield I think makes sense.
- Quick – If we get a stronger than expected jobs number on Friday, is there anything that would change in your outlook or what would actually take for you to say maybe its not bad as I worried about..
- Gerstenhaber – listen, we could, you could easily see sentiment catalyzing improvement here; but that cuts both ways if you have one of the known unknowns, something that happened in the middle east where tension seems to be increasing, scared people and consumers pulled in a little bit and corporations pulled in you could easily see the economy drift towards weaker. on the other hand if the public decides that we have seen the worst out of politics and out of Government and policy is going to improve from here..and sentiment improves a little bit you could easily catalyze an improvement in activity from here..and to the extent that corporate sector hasn’t hired and they are tight as a drum, you have that capability, got potentially pent up demand out there..my central thesis is its just going to be dull and the markets are gonna waver (makes a sine curve motion with his hand).
- Quick – All right, David thank you.
We say Thank you Becky Quick and Steve Liesman. Only Squawk Box has the luxury and the franchise to have such a thoughtful, leisurely interview. Why don’t you guys do more of these than the political interviews you do these days? Or is Joe Kernen’s competition with Morning Joe Scarborough that important?
3. Slowdown or Slow Patch? – Richard Cookson on CNBC PowerLunch on Thursday, August 5
Mr. Cookson is a new face and voice to us. CNBC tells us that he is the global CIO at Citi Private Bank.
Mr. Cookson said that the developing world is already in the midst of a Japan like deflationary slowdown or a malaise. He said a year ago, there were 2 scenarios – either the policy would work or not. If it worked, then by now you would have seen higher inflation, higher bond prices, higher rate expectations, lower unemployment If it didn’t work, then as soon as the effect of that massive monetary and fiscal stimulus starts wearing off, the economy comes down again and the mechanism is exactly the same- private savings vs. public spending.
Mr. Cookson wants to invest in markets that have already priced in the deflationary malaise in the developed world. This rules out Emerging Markets in his judgement. The only two markets that have factored in the reality are Europe (Germany & France) and Japan. He said Japan is as cheap as it has ever been but not a buy because Japanese stock market is acutely sensitive to the global cycle.
In his view, there is no discussion between Corporate Bonds vs Equities. You buy corporate debt. According to him there is only one month in the last 24 in which you would have been better off buying corporate equity rather than corporate debt. Finally he said of corporate bonds, “in sleep-adjusted terms, it has been so much a better trade”. Well put, Mr. Cookson.
4. The Bottom Line on Financials – Meredith Whitney with CNBC’s Maria Bartiromo – Tuesday, August 3
A Meredith Whitney clip near the end of our weekly videoclips list! Markets sure are cyclical and so is the market impact of analysts.
A summary of her comments can be read at Banks Continue to Suffer From Lackluster Revenue on cnbc.com. A few excerpts are below:
- “It was a quarter of real revenue shortfalls, real revenue weakness, and I think that is a persistent theme that we’re going to see throughout the next several quarters,”
- “Wall Street didn’t make a lot of head count changes and I think what you’re’ seeing now is the revenues don’t support the expense structure.”
- “The stress tests (in Europe) did a lot to tell you the obvious, a lot was not taken under consideration,”
- “There are parts of South America, parts of the world, that are really growing and are new fresh markets….they carry a lot of risk.”
5. GM – An IPO for the People – Week long series by CNBC’s Erin Burnett
We appreciate journalists for their commitment to a good cause, their initiative, their tenacity, their courage. CNBC’s Erin Burnett demonstrated all of these qualities last week in her week long campaign to make the hot upcoming GM IPO avaliable to the average American investor.
First we applaud the concept and her intiative. American taxpayers paid for GM’s bailout. It is eminently fair that they should benefit from GM’s IPO. IPOs that have provided access to all investors have been successful, the most notable being Google. Wall Street did everything it could to change the minds of Google founders. CNBC’s own David Faber bashed this IPO on CNBC at that time (a real journalist Mr. Faber – always loyal to his sources than to his viewers). But Google insisted and every American investor had the freedom to get shares in this great IPO.
Having launched this idea, Erin Burnett was tenacious. Every day, this week she covered a different angle of this IPO. She invited Bill Hambrecht, a pioneer of technology investment banking, to tell viewers how easily this could be done. Then on Friday, she covered the Union angle. Even when President Obama washed his hands off this great idea. Erin did not lose her courage.
The clip we feature here is the segment that describes reaction of viewers to Erin’s idea. Watch this clip and if you agree with us, applaud Erin Burnett for her initiative, tenacity and courage.
A note to the CNBC webmaster – your search function stinks. You should have found a way to highlight this series of clips when people search for GM or GM IPO. On a lighter note, we recall that when we searched for Julian Robertson last year, the search results included the CNBC videoclip about Hustler Magazine. So keep your sense of humor when you search for your favorite videoclip on cnbc.com.
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