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.
Bernanke Awakens Animal Spirits
Chairman Bernanke lived up to his “helicopter” nickname in his statement on Tuesday. Yes, we know it is the statement of the FOMC. But, this Fed is ruled by Bernanke. He stated without any equivocation that the Fed will begin Quantitative Easing II if the economy requires it. Frankly, the “if” in the statement is just for effect. His message is clear. Either the economy shows signs of recovery or the Fed will launch QE II.
The timing is also impeccable. This is the time for performance managers to gun the risk markets to deliver a reasonable return for 2010 to their investors. Since the next Fed meeting is in November, managers have 6-7 weeks to chase the meltup.
We get derided at times because we prefer simple views. Apparently David Tepper, one of the most successful hedge fund managers, agrees. Just listen to his interview on CNBC on Friday morning (see clip 1 below).
We attribute a substantial part of Friday’s huge rally to Mr. Tepper’s comments. His long term performance is just superb. He has been mainly a bond guy. But on Friday morning, Tepper announced that his animal spirit has awakened. In his view, stocks will perform well whether the economy grows or not. He also said that the risk is low because of the Bernanke put.
We do believe that these comments took away the fear of downside from many investors and the result was the broad 200 point rally.
Technicians and Nay-Sayers
This week showed the perilous nature of technical & indicator based investing. Usually, markets do tend to follow technical patterns. But technical patterns fail during a meltup, especially a meltup stocked by the unlimited power of the Fed to print money. The run in September seems like a vertical liftoff from a major bottom. If true, it could carry for awhile, perhaps until the Fed makes noises of taking away some of the promised stimulant.
This is what we saw in September-October 2007. Bernanke signalled easy money in the September 2007 Fed meeting. The next few weeks saw tremendous rallies in Commodity stocks, EM equity markets and Gold. Then Bernanke threatened to withdraw stimulus at the Oct 31, 2007 Fed meeting. November 2007 was bad and the downturn began.
Frankly, we do not see Bernanke taking away his QE pledge in the November 2010 Fed meeting. Unless the U.S. Dollar gets trashed and the Republicans turn on the heat on the Fed. After all, the Fed has always been a political animal and the Bernanke Fed is probably more political than its predecessors.
For conspiracy theorists, we offer a thought. Is it possible that this week’s “QE II for sure” statement is a verbal sop to Democrats which can be taken away in November if Republicans take control of the Congress? Is the Fed that political? We don’t know and we hope not. But as we said, this is a thought for the conspiracy theorists.
This Friday’s rally confounded many experts, including the man with the biggest CNBC megaphone. We mean Jim Cramer, of course. On Tuesday, after the Fed meeting, Cramer was extremely bullish on his Stop Trading segment with Erin Burnett. Then on Thursday evening , on his own show, Cramer told viewers that he did not like the market action and asked his viewers to sell all the “3” rated stocks in their portfolio. But on Friday’s Stop Trading segment with Erin Burnett, Cramer called the market action terrific and demanded credit for being bullish.
Jim Cramer does deserve credit for this week’s Chart Work series on his Mad Money show. He invited a technician to discuss charts on each day this week. Kudos to Jim Cramer for this series.
Gold, Currencies & Treasuries
The rally in Gold has been spectacular. But then, September has been a great month for risk assets for many years running. September 2008, the month of Lehman Bankruptcy, was the exception. The Dollar got hit very hard this week as it usually does when risk assets rally. How can the Dollar stay resilient when the Fed is actively pushing it down? Last year, the Dollar kept going down until November. But last year, the Euro seemed desirable. That is hardly so today. Is that why Gold is rallying against every major currency?
You would expect Treasuries to fall hard. But they don’t. Despite the QE II pledge by the Fed on Tuesday, long maturity Treasuries rallied hard on Wednesday & Thursday. Despite the decline on Friday, Treasuries remain above their prices just before the Fed meeting. Even the newly awakened David Tepper does not see the 10-year yield rising beyond 3%.
The CFTC figures show that virtually all asset classes are in an overbought state, Stocks, Commodities & Treasuries, all except U.S. Dollar cash.
The Tail is getting Fatter
The tail to us is the possibility of a geo-Political accident, a rapid escalation of a simple dispute into a shooting solution. This week we saw how easy it is to get one. The long standing dispute between China & Japan burst into open with a rapid diplomatic escalation when Japan imprisoned a Chinese boat captain.
How severe was this incident? On Thursday, September 23 at 14:27, US Defense Secretary Robert Gates said “US will fulfill Alliance Responsibilities to Japan”. These are extremely expensive words. Gates essentially announced that if the crisis escalated into a shooting situation, the US will come to the support of Japan.
Our main worry is that the Chinese Military is flexing its muscles within the Chinese leadership. Our opinion is that China’s military leaders are vain, too sure of themselves and ignorant of how the rest of the world thinks. This is how the Japanese Military thought in the 1930s and they eventually ended up dominating Japan’s leadership. We know how that story ended.
Investors who worry about this tail risk should read this Friday’s Washington Post article titled Dispute with Japan highlights China’s foreign-policy struggle .
This is classic tail risk. Probably nothing will happen for a long time, if ever. Even if a dispute props up, it will be handled swiftly and peacefully. In the meantime, worrying about this possibility would mean giving up current high returns in the EM space. But the fact is that this tail is getting fatter.
- David Tepper on CNBC Squawk Box on Friday, September 24
- Bill Gross & Ken Volpert on CNBC StreetSigns on Tuesday, September 21
- Bob Doll & Ken Heebner on CNBC StreetSigns on Tuesday, September 21
- John Roque on CNBC Mad Money on Wednesday, September 22
- Walter Zimmermann on CNBC Closing Bell on Thursday, September 23
1. David Tepper on CNBC Squawk Box – Friday, September 24
David Tepper is the President & Founder of Appaloosa Capital Management. He has been one of the most successful hedge fund managers with great long term performance.
We were impressed with the simple thinking of Mr.Tepper. He and his fund are renowned for coming up with a simple viewpoint that becomes a successful investment and leaves others wondering why they did not see it. Isn’t there a proverb that says simple thinking yields the most profound thoughts or something like that? If there is such a proverb, Mr. Tepper seems to be a personification of it.
His comments are in two clips:
CNBC provides a complete transcript of the Tepper comments on CNBC.com. We include a few excerpts below:
- SOMETIMES IT’S JUST THAT EASY
- EITHER THE ECONOMY IS GOING TO GET BETTER BY ITSELF IN THE NEXT THREE MONTHS AND WHAT ASSETS ARE GOING TO DO WELL? YOU CAN GUESS THE ASSETS. STOCKS ARE GOING TO DO WELL. BONDS WON’T DO SO WELL. GOLD WON’T DO AS WELL. OR THE ECONOMY IS THE NOT GOING TO PICK UP IN THE NEXT THREE MONTHS AND THE FED IS GOING TO COME IN WITH QE. THEN WHAT’S GOING TO DO WELL? EVERYTHING. IN THE NEAR TERM. EVERYTHING.
- THE MARKET CAN GO DOWN A LITTLE BIT. WHAT DOES THAT MEAN? GO DOWN TO 1,100? SURE IT CAN. CAN IT GO DOWN TO 1,000? NO. I DON’T BELIEVE THAT. IT CAN, I TELL YOU WHAT WE’LL BE 100% EQUITIES.
- I’M THE ANIMAL AT THE HEAD OF THE PACK. OKAY? I GENERALLY AM. LIKE I SAID, I EITHER GET EATEN OR GET THE GOOD GRASS. MY ANIMAL SPIRIT YOU GUYS TALK ABOUT IS AWAKENED. IF HISTORICALLY I CAN LOOK BEHIND ME AND SEE, THERE’S OTHER ANIMALS FOLLOWING ME, THEY’RE NOT NECESSARILY FOLLOW ME THAT FAST. SOMETIMES THERE ARE NO OTHER ANIMALS AROUND WHEN WE DO THINGS.
- WHAT YOU NEED IS YOU NEED THE ECONOMY TO START GETTING GOING AGAIN. OKAY? SO I DON’T KNOW, YOU KNOW, THE LONG TERM — IF THE FED DOES QUANTITATIVE EASING THE NEXT FIVE YEARS THAT’S NOT GOOD. IF IT DOESN’T GET BETTER ON ITS OWN, WE’RE TALKING ABOUT THAT SCENARIO. IF IT DOESN’T GET BETTER ON ITS OWN, THE FED HAS TO DO QE FOR A BIT OF TIME, NO BIG DEAL. IF IT WAS A CONTINUOUS THING, IT WOULDN’T BE GOOD.
Our friendly CNBC anchors went in to a frenzy with Mr. Tepper’s remarks and the rally the comments created. They dutifully trotted out their perma-bull experts to get investors to put money into mutual funds. Did they read what Mr. Tepper really said? He said clearly that “in the near term everything” will do well with QE. He is talking about a trade. He makes it clear that if the QE lasts for a bit of time, then it is no big deal. But if it becomes a habit and the economy requires it again and again, then it would not be good.
Mr. Tepper like most superb investors is talking about his investment horizon and his possible exit reasons. Unfortunately, CNBC Anchors went on an evangelical pursuit trying to persuade individual investors into buying for almost ever. This is what happens when CNBC Anchors do not put their own money in what they preach to others.
2. Fed Leaves Key rate Unchanged – Bill Gross & Ken Volpert with CNBC’s Erin Burnett & Steve Liesman – Tuesday, September 21
It is always helpful to hear the views of Bill Gross & Ken Volpert when the Fed statement is released. This clip is no exception. The best idea of Bill Gross is GMAC, Ally Bank and AIG, all Government owned or controlled. Mr. Volpert’s best idea is the intermediate sector of the corporate bond market.
The most interesting comments of this clip came from Mr. Gross. He said that the Fed will launch QE when they downgrade their GDP forecast from 3% to 2% in November. He declared himself against extending the tax cuts for the wealthy because he thinks the fiscal deficit is a big problem for America. But he thinks USA can afford a $2 trillion QE and adds that it would come at the expense of the U.S. Dollar.
3. Reaction to the Fed Decision – Bob Doll & Ken Heebner with CNBC’s Erin Burnett – Tuesday, September 21
This is the equity counterpart to the fixed income discussion between Gross & Volpert above. Mr. Heebner and Mr. Doll are two smart investors. They had essentially the same reaction to the Fed statement, it is bullish for stocks. Mr. Heebner reiterated Ford as his best idea and Mr. Doll mentioned tech stocks like Intel.
Erin Burnett is at her best in these Fed day segments and these segments offer investment value. So we wonder why CNBC does not provide transcripts or summaries of these segments on CNBC.com.
4. Chart Week – John Roque with Jim Cramer (minute 06:40 clip ) – Wednesday, September 22
Jim Cramer has been bullish on Gold. He told his viewers in late August to buy Gold because Gold runs in September. Kudos to Jim. This week, he invited a number of technicians to explain their views on his show. Jim Cramer does a very good job in explaining technical analysis and chart work to his viewers. This Chart Week segments have been an excellent series and we thank Jim Cramer for it.
We elect to feature the Wednesday segment with John Roque on Gold for obvious reasons. Until Friday’s stock rally, Gold was the topic of the week. Jim Cramer called Mr. Roque as one of the smartest people around. Cramer added that Roque uses long term trends to buttress his arguments.
In this clip, John Roque focused on the ratio of Gold to the S&P 500. He took the chart back 80 years from 1928 to the present. He said there are 3 prior advances. In the early 1930s-1940s, Gold got to roughly 4-4.5 times the price of the S&P. In the second run, Gold went to roughly 3 times the price of the S&P, actually 2.7 times. He added that “if the S&P stays at 1000, the long term average is 1.5 times, but we have to go above the long term average to create the long term average (?) say to 3. So if the S&P is at 1000, Gold gets to $3,000. That’s the way this ratio works“.
- Cramer – So $2,000 is not a bubble according to this?
- Roque – No it’s not. As a matter of fact, 1.5 times is the long term average. People think we are in a reversion to the mean business. Not reversion to the mean business. Reversion beyond the mean business. So I think you have to get above this long term average of 1.5. At this point, (Roque points to the chart), Gold was actually 6 times the S&P 500.
Roque then explained this one of the highs was in the deflationary period of the 1930s when S&P collapsed and Gold kept its value. He added “People think this can’t happen now because rates are so low now. But in 1945, the 10-Year Treasury yield was 1.67%. So it can happen again. Then you had a period here when it was fraught with inflation, higher oil prices, not so different from now when we have high commodity prices….Then here (6 times S&P 500), you had the Iran-Iraq war, and the peak was roughly around the time of the Soviet Invasion of Afghanistan….also in the 1980s, the S&P was selling at a single digit multiple which we don’t have yet.”
- Roque – Gold will get to the next peak when there is the next crisis; may be it is a dollar crisis, we are not there yet. The trend says you should be sticking to Gold here and have it as a part of your portfolio.
- Cramer – People might think they missed it and they might also think it might take years to get there. Give me some time frames and tell me if I buy Gold tomorrow, how do you think I would do?
- Roque – You are gonna do fine. Consider Newmont Mining, it is just breaking out right now. Gold stocks have not really participated to a great degree.
- Cramer – lets just sum it up, no bubble, has been more expensive at other times, lots of room to go up, theoretically could even go up $3,000 and not be over valued vs what it has done before
- Roque – Jim, numbers to the upside can be ridiculous I don’t want to get into them now. Lets just say $3,000 is not a crazy number…I have heard talk that Gold is in a bubble. Bubbles are born out of greed and not fear. This is fear.
This is a good clip and we do not disagree with the basic message that Gold can keep its value both in deflation and in inflation.
The only caveat is we recall John Roque asking Erin Burnett in Summer 2007 when discussing a chart of the 10-year Treasury yield “if this yield were a stock, would you not buy it based on this chart?”. That was when the 10-year yield was at 5.50%. That was one of the worst calls ever by a technician on CNBC. Since then, we tend to be cautious when John Roque asks us to buy a chart like that of Gold today.
5. Bond Bubble Trouble? – Walter Zimmermann with CNBC’s Maria Bartiromo – Thursday, September 23
We have featured clips of Walter Zimmermann a few times in these articles. Some of his predictions are:
- Dollar will mount a substantial rally from a head & shoulders bottom to parity with the Euro (see clip 6 of our August 22 – August 28 Videoclips article).
- Stock market will begin falling in late October or so in a move parallel to the 1930 decline and go down to 6800 or so (see clip 2 of our September 4 – September 10 Videoclips article) .
These are clearly out of consensus calls or tail risks. Mr. Zimmermann’s style seems to be a mix of technical, sentiment and fundamental. In this clip, Mr. Zimmermann does not discuss any technicals but focuses on the heavy issuance of refinancing of debt that will come between 2012-2014.
- Zimmermann – …there is a tsunami of debt refinancing coming due in to the market starting in 2012, unprecedented amount of debt across all sectors, sovereign debt, high yield, investment grade, all coming due in one big chunk. There is an old proverb – great events cast their shadows before them, and we expect that all that crowding of the debt markets runs the risk of driving interest rates higher…. I think there are a couple of levels of risk. One is, call it a maturity wall, spark a rise in interest rates, just out of a competition for a limited amount of lenders. The second risk here is the ability of these lenders to repay these loans. Just because they are getting money cheaply, doesn’t mean there is no risk of lending to these people.
- Bartiromo – ….$700 billion of junk bonds would need refinancing; adding to that $1.2 trillion of investment grade debt, even $6 trillion of Government debt. and some notable investors are sounding the alarm
- Zimmermann – today’s events with Blockbuster I think highlights the risk. here you have a bunch of investors happily getting 11.75% yield, now suddenly a billion of debt has become 100 million in equity in a failed company..thats the risk here besides interest rates going higher..is the risk that a crowded debt market in an economy that is still deleveraging, that’s a terrible environment to try and manage a high debt load.
- Bartiromo – clearly rates are at a low in the current environment
- Zimmermann – yes,
- Bartiromo – how does this add risk to the refinancing front?
- Zimmermann – well, right now, these companies are able to refinance because there is more demand for their debt than supply……
- Bartiromo – What’s the bottom line? Want to get out of bonds?
- Zimmermann – The bottom line .. I think, investors have to revalue the risk of holding this high-yield debt and get out of some of the higher risky debt, as I said, the Blockbuster incident today highlights the risk ahead, Investors have to trim their high risk bonds in favor of a safer store of wealth…(emphasis ours)
- Bartiromo – Great to have you on the program.
As we heard the program and as we write this note, it seems clear to us that Zimmermann is focusing on credit risk and the need to get out of the higher risk portion of investor’s debt portfolios. But CNBC headline writers did not get this distinction. The biggest risk CNBC sees is a rise in interest rates. To our knowledge, neither Maria nor any of her co-anchors have ever discussed the credit risk problem or the problem in which corporate bonds take a big hit because of the problems of the underlying companies.
How could they? When all their regular perma-bull guests keep telling them to invest in high yield bonds as the only alternative to stocks.
We must give a shout out to Maria Bartiromo. She was at the Clinton Global Initiative and seemed completely unprepared for this interview. In fact, you could see her read her notes as she was talking to Mr. Zimmermann. But she managed to keep her composure as she was winging it. Nicely done.
Another view of interest rates, probably before the 2012-2014 tsunami debt refinancing, is from Dr. Gary Shilling on CNBC Fast Money. His outlook is for very slow growth at best. Dr. Shilling confirms his target of 3% for the yield on the 30-year Treasury Bond and 2% on the 10-Year Treasury. The funny part in the clip is the incredulous look on Joe Terranova’s face after Gary Shilling stated his yield targets.
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