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.
Seasonality Turned Upside Down?
August is usually a good month for the stock market. Not this August which turned out to be one of the worst. September is reputed to be the worst month of all for the stock market. But the first 3 days of September produced a 5% rally in the S&P 500.
The fireworks began on Wednesday morning with China PMI spelling relief for investors. Then at 10:00 am, the ISM delivered an upside surprise. That sounded the charge of the risk brigade. From that point on, it was Risk-On for the entire week. The Hindenburg Omen was forgotten. In fact, the creator of the Omen himself wondered whether the low for the fall was reached on August 31 (see clip 3 below). The most intriguing comment came from Rick Bensignor , formerly chief technician at Morgan Stanley, on August 31:
- Actually I think we are at a very interesting point, possibly the most important juncture since the March 2009 low was made, you have the 3rd time that we have drawn an uptrend line at March 2009 line potentially breaking while at the same time, you have countertrend signals that are saying we are probably within 2% of an important low. So within the next couple of percent, I think we really have the point at which this market is gonna bottom and move higher or we break for a 100-150 S&P points.
We know what happened in the next 3 days. So does that mean we have made an important low? Rick Bensignor, the man who made the comment above, said a few minutes later “one bad headline and this thing topples“. He also said that by the end of the year, stocks would be below the August 31 close. In that case, how can this be the most important juncture since the March 2009 low. We are confused.
US Economy, US Dollar & US Treasuries
The ISM number on Wednesday beat expectations and so did the Non-Farm Payroll number on Friday. But in the celebration, people ignored the weaker than expected Service Sector ISM number. Not quite true. The morning rally did fade after the Non-Mfg ISM release at 10 am. The fade lasted for about an hour. The Service sector is 80% plus of the US economy and its ISM number should carry more weight. But that shows the market wanted to go up.
There were rumors of asset allocation shifts by macro fund from bonds to stocks. We do not dismiss the deep desire for an up year and the ability of large macro funds to drive the indices to higher levels if they get a little tail wind. So we will know soon whether this week was a short covering rally or the start of a powerful upward stampede.
The US Dollar should have benefited from a stronger Payroll number. The payroll number also seemed to negate the need for another Quantitative Easing. That should have been positive for the Dollar. But the Dollar did not rally on Friday. Does this show that the Dollar is governed more by risk appetite than by the state of the economy?
Treasuries had a bad week. The 10 year yield backed up from 2.49% to 2.70% in 3 days and the 30-Year yield rallied back to 3.78%. But, Friday was not a rout. The 30-year Bond rebounded by a point from the lows after the payroll number and the 10-year yield bounced lower after crossing 2.75%.
Featured Videoclips
This week, we feature the following videoclips:
- Whitney Tilson on CNBC Squawk Box on Wednesday, September 1
- David Rosenberg on CNBC Fast Money on Thursday, September 2
- Jim Kiekka on CNBC Closing Bell on Friday, September 3
- Azim Premji on CNBC StreetSigns on Friday, September 3
- Robert Kaplan on Fareed Zakaria GPS on Sunday, August 29
1. The Value of Value Investing – Whitney Tilson on CNBC Squawk Box (09:34 minute) – Wednesday, September 1
Whitney Tilson is a Managing Partner with T2 Partners and a co-founder of the Value Investing Congress. He has been a sensible, thoughtful guest on CNBC and has made excellent calls for viewers, the most notable of which was buying BP at around $30. Mr. Tilson does not mince words here. He begins with his a direct call:
- Tilson – I can tell you we are seeing some of the best opportunities we have ever seen in big-cap high quality blue chip equities and we think there is a bubble in blue chip bonds. In other words, investors are seemingly willing to accept any yield no matter how low on safe bonds, Treasuries for example, and yet they have no interest in the safest blue chip companies with the strongest balance sheets and the companies are doing quite well, so thats where we are steering our portfolio.
- Liesman – Give us an idea of the relative valuation of the bond of a company vs the stock?
- Tilson – Sure. Take Johnson & Johnson, fabulous company, encountering some short term issues now. They just set an all time record in corporate America issuing debt 10-year and 30-year debt at 2.95% on the 10-year, just a few basis points over the comparable Treasuries. Yet, the stock is available at 12 times earnings and is paying 3.7% dividend. So its almost certain that over the next 10 years, that stock purchased and held for the next 10 years will massively outperform the debt….(But) If you cannot withstand any loss of principal even mark-to-market for any short period of time, it makes sense to buy Treasuries.
This, in a nutshell is the huge question before hundreds of thousands of individual investors, especially baby boomers. They have been told this for the past ten years and they have found it to be wrong. Why go that far? At the beginning of this year, CNBC experts were full of such advice with stocks like Microsoft, a stock Mr. Tilson likes very much. It is a company with a much stronger balance sheet than JNJ. Yet, MSFT has fallen from about $31 to about $24, while the 10-Year Treasury has enjoyed a terrific rally.
Mr. Tilson could be very correct in his diagnosis and he may not be. History tells us that stock markets make major secular bottoms at single-digit PEs and not when slow growers like JNJ are valued at 12 PE. So who knows whether the August 31 low will prove to be a cyclical low or a secular low. Mr. Tilson does not venture an answer. Then, you have predictors with good track records like Charles Nenner who say there is a good chance Dow can fall to 5,000. Why should baby boomers, who have already seen their portfolios lose 30%-50% of their principal, experiment with equities?
This to us brings up the most important question we would ask and which NO CNBC Anchor ever asks “Mr. Tilson, how is your own personal portfolio invested?” If Mr.Tilson really believes what he says, he should NOT own any bonds at all in his personal portfolio and he should be almost 100% invested in high quality companies like JNJ & MSFT. He is probably an extremely wealthy man and he should be able to make the probabilistic 5-year, 10-year, 20-year bet he suggests CNBC viewers should make.
Is that the case? We would like to know. But we would never know because CNBC will never ask this question. This is the main reason CNBC always ends up damaging its individual investor viewers. They never make their expert guests disclose how the guests invest their own personal money.
What about CNBC anchor Trish Regan? Trish usually sings the bullish tune on CNBC but how is her family’s portfolio invested? Is it all in equity mutual funds or, like Mark Haines, is Trish Regan invested in CDs, Bank savings and Muni Bonds? Because we do not know the answers, we sometimes think of CNBC Anchors as peddling snake oil (to use a Jon Stewart term). Our dream is that one day FCC & SEC will make it mandatory for all financial TV guests and anchors to disclose their personal portfolio allocations (in % terms) on TV and on their websites.
Listen to us, Bloomberg TV & Fox Business. You make your anchors & guests disclose their portfolios and advertise that as evidence of your fairness to individual investors. We guarantee you will see an immediate jump in your ratings. CNBC will never be able to recover from being the last network to provide such disclosure to individual investors.
Having said all this, this clip by Whitney Tilson is good. The best part of this clip is the discussion between Whitney Tilson and Gary Kaminsky of CNBC. Gary Kaminsky takes the other side and argues as have that people who accepted this argument and held dividend paying stocks like AT&T for 10 years, did not do well. Whitney Tilson replied with the traditional argument about driving while looking back through the wind shield. This discussion begins at minute 03:03 of this clip.
This is a good clip but not one that deserves the pole position. But then this is a holiday week and there is a paucity of insightful clips.
Finally, Gary Kaminsky intrigues us. When he is a guest on another show, like in this clip, he is feisty, combative and debates other guests in a determined fashion. But, on his own Strategy Session show, Gary lays down and allows his guests, especially the retail broker kind, to utter platitudes and use his show as their personal advertising. Why is that so, Mr. Kaminsky?
2. Take Your Position – David Rosenberg on CNBC Fast Money (05:07 minute clip) – Thursday, September 2
We are fans of David Rosenberg and in this clip, we admire the question Tim Seymour asked of Mr. Rosenberg.
- Seymour (minute 02:54) – Where are you allocating Capital at this point?
- Rosenberg – I think that right now, technically, the S&P trades up to 1100, but I still have my primary theme – to have a core weighting in precious metals, to be in hedge funds that really hedge and be net short the market, take out the volatility, my primary theme is disinflation morphing into deflation, with T-Bills at zero, that does not mean cash is king, it means that Income is King. So whether you can get income from oil & gas royalties, out of bonds, out of dividends, thats where I would like to have our clients oriented.
This is how it is done, Gary Kaminsky. Just ask your retail broker friends this basic question – how have they allocated their and their clients’ capital?
3. The Gloom & Doom Report – Jim Kiekka with CNBC’s Sue Herera (04:46 minute clip) – Friday, September 3
Jim Kiekka of Sudbury Bull & Bear Report, is the creator of the Hindenburg Omen, we are told. This is the Omen that was sighted a number of times in August 2010 and was expected to signal a 20% drop in the stock market. That was also what Sue Herera of CNBC expected to hear from Mr. Kiekka.
That’s why you do a live interview, to clumsily paraphrase the ESPN Swami.
- Kiekka – Good to be here. As a matter of fact, I am going to modify my position somewhat based on the last several days of action.
- Herera – What are you going to modify? What is your new prediction?
- Kiekka – Well, as I said, I still think there is a possibility that we could have a substantial decline..but that substantial decline would occur if the McClellan Oscillator goes negative..So at this time, the McClellan Oscillator has risen substantially above the zero line, I am pretty sure we are +100…. If I were in the market, which I am not, I would stay in the market as long as the Oscillator is positive..because we are not going to have a substantial breakdown unless and until the McClellan Oscillator goes negative. in combination with the Hindenburg..
- Herera – ….You got out of your positions in anticipation that we would have a downturn, would you get back in to stocks given what you have just laid out or are you not confident that the time frame is long enough?
- Kiekka – Since I am currently out, I am going to stay out..We have seasonal weakness and we still have the Hindenburg out there. We have had multiple signals. Hindenburg is like a funnel cloud, it doesn’t mean you are going to get a tornado, but it certainly means it is strong possibility. And I have looked back at the Presidential cycles and a lot of times, we have a low in the fall of the year in which we are in now…However if we go back to 1998, we had a low on August 31, and I suppose, as long as the Oscillator stays positive, I have to consider the possibility that the low might already be in…..
Mr. Kiekka goes on to explain that when the Hindenburg has resulted in a decline, the McClellan Oscillator has gone down below zero and stayed down below zero for a substantial period of time.
We remember 1998 rather well and it was news to us that August 31, 1998 was the low. Even if that is true, we would not wish the state of being overweight stocks into October-early November 1998 on anyone.
We must commend Sue Herera for an excellent interview. She is a veteran anchor and it showed. Thank you, Ms. Herera.
4. Indian Outsourcing Tax – Azim Premji with CNBC’s Erin Burnett – Friday, September 3
Azim Premji is the Chairman of Wipro, one of India’s large technology consulting firms. Recently, the US Senate passed a bill that levies a large fee on companies that bring in people to work in the USA on specialist visas. Erin Burnett discussed this topic with Azim Premji.
This is a good discussion and we urge readers to view the clip. Mr. Premji makes the case that at most 2,000-3,000 jobs would be created by this bill but the message it would send is ominous. He also said that this bill, if passed, could damage the visit of President Obama in November. The Indian press is upset with this bill and has urged the Indian Government to take this case to WTO and to slap retaliatory measures against American business.
But the key comments for us came at minute 02:43 of this clip.
- Premji – ….talent is simply not available in the United States. There is a huge scarcity of technical engineering talent in the United States because you know what the Universities are not graduating enough..So I think the root cause of the problem is tackle that problem, so that it cheaper for us in terms of availability of people to hire people in the United States. We are very clear, we would like to employ more than 50% of our people who working in the United States as Americans and we are rapidly moving towards that..We have already done that in most parts of the world.
- Burnett – What are the degrees you are talking about?
- Premji – Its a degree in Engineering, its a degree in Science, Its a degree in Math, Its a degree in Physics…drawing quality talent into those degrees and not the leftovers into those degrees. It seems to be a very low preference job for many college graduates to go higher studies in engineering and science.
This conversation is important but sort of deceptive. Not in a pejorative sense but in a missing the forest for the trees kind of way. Allow us to elaborate. We know a few recent American graduates with degrees in Engineering, Mathematics, Physics and Science. They found jobs in Investment Banks and Hedge Funds. This is generally true of most bright engineering and science grads. They are hired by Financial Firms, Silicon Valley firms and Management Consulting companies. These jobs pay far larger compensation and offer a better career than a company like Wipro, Infosys or Tata Consultancy Services.
The reality is that basic science and technology jobs, apart from the careers describe above, simply do not pay enough. That is why science degrees are low preference jobs for talented Americans. This is exactly what David Roberts of Carlisle Companies told Erin Burnett on August 23, 2010. Mr. Roberts has number of jobs for engineering graduates that pay about $50, 000 a year. But he cannot find people to fill them. Look at Erin Burnett herself. Would she have accepted a basic science job when she graduated? Had she done so, wouldn’t she be making a fraction of what she makes today?
What we have in America is a mismatch between the size of the industry and the size of the graduating pool. American industry is vast but America has a relatively small population. In every population, a relatively modest percentage is bright enough to get degrees in Engineering, Science and Mathematics. Naturally, America has developed a shortage of graduates with such degrees.
India has seen the same trend during the past 30 years. In the early 1980’s, the best talent from Indian Universities would be hired by technology firms like TCS, Infosys, Wipro. Then in the 1990’s, American Investment Banks came in to recruit. These firms paid the same salary to a student from Indian Institute of Management that they paid to an MBA from Harvard & Wharton. Within no time, the best Indian talent moved to get MBAs rather than Masters in Sciences. Then came Management Consulting companies and Multinationals. Today, it is a lower level of talent that joins Infosys, Wipro and TCS, the talent that cannot find a job in Goldman. Merrill, McKinsey etc.
But India has a large educational sector and a relatively smaller industry base. So India still can deliver a large enough student body for hire by Infosys, TCS & Wipro. America cannot and that’s not a bad thing. It means America is much richer and much more industrially advanced than India.
There is another angle too. Many American colleges, like Williams College for example (Ms. Burnett’s alma mater), do not offer engineering programs but every college offers liberal arts programs. In stark contrast, all Indian colleges focus on engineering programs but few care about liberal arts programs. This exacerbates the problem Premji was talking about.
This is not a small issue. We are willing to bet that in about 5 years, the lack of talented labor will become a major problem for America. That would force most large American companies to move more offices and functions overseas.
What is the solution? We refer readers to the last section of our article A GMization of America – A Trite but Real Description of America’s Structural Problem & Solution .
5. Most Important Spot on Earth – Robert Kaplan on Fareed Zakaria GPS – Monday, August 30
First, we must congratulate CNBC on the ease with which we can find videoclips on cnbc.com. Try doing that on any other network/show and you will see what we mean. We tried hard to find the videoclip of this segment on cnn.com. No luck. It is a shame because the maps are so key to this topic.
Many analysts have discussed the USA-China rivalry as a risk to global trade and investing. Robert Kaplan has made a study of Naval Strategy of these two countries. On February 28, 2009 we discussed his views on the emerging China-India rivalry in the Indian Ocean in our own (strangely titled) article.
Last Sunday, Robert Kaplan was a guest on Fareed Zakaria’s show on CNN to discuss his new article, The geography of Chinese Power in Foreign Affairs. We think this article is a must read for any long term investor in China or Emerging Markets. We include below a few excerpts from the transcript of the CNN interview:
- ...if China got its act together, China is in a position to dominate Eurasia to the degree that no other Eurasian power is. The fact that China now is at the apex of its reach on land gives it unprecedented opportunity to reach beyond in this age of globalization…
- If China dominates East Asia, the marginal seas like the South China Sea and the East Sea, that makes it a great regional power. But once China has a presence in the Indian Ocean, it becomes a great power. And China is busy building ports in Chittagong, in Bangladesh, in Hambantota and Sri Lanka and Pakistan, in Kayukpu, in Kyaukpyu, in Burma here.
- Burma, Myanmar, on the map, is sort of the pre-World War I Belgium, because it’s where India and Chinese influence terrifically overlap. Just north of where China is building a port, in Situai (ph), 50 miles north, the Indians are building a deepwater port. What’s here?
- Natural gas. They both want natural gas. China wants to build roads and pipelines across Burma into western and central China so they can avoid the bottleneck of Malacca Strait here. So, to take oil and natural gas from the Middle East, all the way to get more natural gas from Burma, and then ship it over land.
- The Chinese look at the South China Sea the way we looked at the Caribbean in the 19th and early 20th century. What makes America a great power ultimately? It’s our domination of the Western Hemisphere, which means our domination of the Caribbean. There was a time in our history when the Caribbean was contested by many European powers, and the U.S. policy was it’s technically an international waterway, but, in fact, we will dominate it. And that’s how the Chinese see the South China Sea. In fact, Chinese officials have told me that. They made the comparison with the Caribbean, not me.
- Actually, I see a great opportunity for the United States if we play this smart. We are entering a militarily naval-wise, multi-polar world in the decades to come. We are not going to have the dominance that we did. Maintaining our bases because of public opinion in Japan is getting harder. One of the only reasons our relations with South Korea are so good is because we have reduced their land presence from about 37,000 troops to 25,000 troops there.
- So what’s going to happen is that if the U.S. plays it smart, it will put more emphasis on the islands of Oceania outside here, Guam, the Northern Marianas, Palau, et cetera, which are U.S. holdings where we can build up bases, be less provocative towards China, and where we can be, you know, to borrow Madeleine Albright’s phrase, the indispensable power. In other words, because we will be the balancing power that has no territorial ambitions in Asia so that all these countries here will need us.
- It’s going to be balance of power flanked with three-dimensional chess essentially. And this brings us back to the great 19th century and even ancient strategists
This is a really a topic for a week-long series on CNBC with a close look at all littoral states of the Indian Ocean and how they play in the global trade & global commodities game. The question is will CNBC have the vision to do such a series? If they do, which show would be chosen to carry the series?
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