Interesting Videoclips of the Week (December 18 – December 23)

• Whitney – ….If you really do the work, you can see how simple the Math works out which is States clearly have been funding the municipal governments for now up to 40% of their total expenditures, as the States become more compromised from the fiscal standpoint, that funding is gonna end, particularly as the Stimulus runs out in June, that funding ends. So the Federal Government supplies about 32% of the States funding which flows to about 40% of the municipal’s funding, if States get compromised they cut off that funding. And how it works is, you will so many states, so many states are in reorg anyway, you will see indiscriminate selling and prices for all municipals rise (she probably means yield rise & prices fall). But the reality is that you have municipals that can’t pay their debts, I am not the first person to say this and I certainly won’t be the last person to say this, I appreciate the reaction is so violent but I didn’t put this debt on the states, we are looking at the numbers; this is how it plays out. You have overlevered consumers that pay the consequences, now you have overlevered states, municipalities that will pay the consequences and there is so much at stake for Wall Street…I think a large portion of individual investors, a trillion dollars out of the 2.8 trillion dollar market, have been kept in the dark and pacified by saying nothing is going to happen, there hasn’t been a default in 30 years, you better hope there hasn’t been a default in last 30 years, it has been one of the biggest bull markets for the country that we have seen in generations.
  
• Whitney – (in response to a question about comparison to Europe)…Yes, we have a Federal Government that can bail out but the idea is the Federal Government then is comprised of a lot of constituents from a lot of different states and who in Nebraska is gonna want to bail out someone in Florida? So you are going to have so many issues, the severity is not the issue, it is the frequency, you have so many different municipalities; when I say default, I also mean technical definition of default, their debt is going to get reorganized, that’s still a default for the bondholder, you are going to have special contract defaults, you are going to have so many different issues of laying off employees, this is going to be such a wider spread issue. Its going to look like Europe, when programs are cut, you are going to see a lot of social unrest with those programs being cut., unemployment, job cuts from the state & local governments that employ over 19 million people, social unrest to that point. Obviously the most important thing for the markets, but the most important thing for the economy, what happens with the given states that will underperform so much because of the fiscal gap..(emphasis ours) 
  
• Bartiromo – So how do you come up with the figures of 50-100 defaults and you said 100 hundred billion dollars in losses? They were saying yesterday that we have seen about 64 defaults in the last 30 years. You are saying of course we are not going to see defaults in the last 30 years because we have been in a bull market for the country…
  
• Whitney – We saw thousands of defaults during the Great Depression and you could argue that states were in better shape during the Great Depression than they are now. It was a matter of speech, I said 50-100 or more right? We already know obvious municipalities that are compromised, but imagine the area. The Municipal Debt market doubled since 2000 and so you had massive issuance in the Municipal Debt market that compares only with in fact greater than the almost doubling of debt at the consumer level, at the mortgage level. So the idea that is not all of this debt was triple rated, not all of this debt has the revenues to support it, we are not talking about GO, the State issued Debt, we are talking about the more local municipal debt..the revenues will not support the debt payments, I mean, (Meredith stutters)
  
• Bartiromo – Do you assume the Federal Government will not lend money to for example, Illinois, as needed as a bridge?…Assuming that it gets repaid, gets repaid sooner than say AIG would repay them?
  
• Whitney – I think the problem comes when you have California which is the first to really beg for support, the BAB program could arguably be a reaction to that..then you have Illinois, then you have Georgia, then you have problems in Florida..its just..the numbers line up, it becomes such an issue of how many states are going to be inline and how big does this bailout have to be? If the Federal Government decides, OK we need to do another formal bailout, thats another trillion dollar number in terms of a bailout, I don’t know thats politically viable in this new Congress.
  
• Bartiromo – Is this priced into the market? You have got, certainly equities rallying, real strong performance at year-end here..we saw an upset in the Muni bond market..but as far as real implications of this prediction, services being cut, jobs being cut,  100 hundred billion in losses..is that factored into the market or do you think we see a market reaction if in fact this materializes…
  
• Whitney – There is no way that this is priced into the markets because just imagine how this pans out from a sequencing basis…States as I said employ, States & local governments are the largest employer in the United States, we estimate they are going to cut between 1 & 2 million employees over the next 18 months..so that keeps (un?)employment at very high levels, so if large corporates come back and hire they are working off a very strong head wind of state & local government hiring (firing?), so you have a persistently high near 10% unemployment rate; GDP cannot add up to +2% on the basis of the fact that you imagine that the states that are the coastal states, CA, FL, IL (coastal state?), states that are so depressed from weakened housing prices, AZ, NV to a smaller extent, that they are going to underperform the stronger parts of this economy..so the coastal states represent about 22% of GDP, the states that are doing so well, this center region, the agricultural rich region, they are only 7-8% of total GDP and the Government stimulus programs are running off in this June; I don’t know how you get the numbers to work to get excited about stronger than already factored in GDP..
  
• Bartiromo – From an actionable investments standpoint, obviously your clients are looking at making money from this situation, whatever that may be…Gary Kaminsky today said that Muni Bond Market presents a fantastic buying opportunity..You would be on the other side of that trade?
  
• Whitney – I am on the other side of that trade, today; I think what will happen is when you start to see the first several major defaults in this area, you have had stealth defaults, everyone knows about Vallejo, everyone knows about Harrisburg, you start to see more material defaults, you start to see indiscriminate selling; if you do your research now and figure out who is protected where, which revenues are safe where, there will be great buying opportunities, but its way too soon because look the fact that people are surprised by this, and more importantly the fact that people won’t talk about this because there is so much at stake..the fact that there is so much complacency out there..tells you that the news isn’t out yet. When the news is out, and only when the news is out will there be a buying opportunity.
  
• Bartiromo – What about buying in terms of equities? You have been bearish on the financial sector, obviously thats going to be a sector that is going to get impacted when we see defaults from some major cities.. last 12 months, a number of financials have actually outperformed the broader market..are you still bearish on financials?
  
• Whitney – …certainly the big banks have not outperformed..but think about why? Their business was coastal oriented, right? So 23% of the mortgage market is in California, another 7% of the mortgage market is in Florida, that’s where they did all their business..So the financials that are outperforming are the regionals, probably based on the fact that there is some hope and prayer that there will be consolidation. There are so many great opportunities in the equity market to play but you want to play where there is growth, the ag-rich section of the country is what I would call the BRIC of the US, ..
  
• Bartiromo – because we are seeing real demand
  
• Whitney – massive demand for agriculture, massive demand for transportation which transport the agriculture, the services that support that, the financial services that support that…that region is booming….That region of the US is going to massively outperform, the problem with the US is that that region is too small to matter. For example, a perfect reflection of this is in 2008 the top 15 states comprised 70% of the GDP, by 2009 that figure dropped already to 68%, thats a huge move. Whats that telling you is the smaller states are really powering the growth and the larger states are going to be underperforming. So an investment thesis that plays on all of this is, it doesn’t have to be financially related at all, you can play so many themes, thats how you will make money. But if you are gonna be dependant on what was in the economy, you are going to underperform..
  
• Bartiromo – If we were to see these kinds of defaults, I would suspect the equity market goes down. Do you want to be selling the equity market at year-end or buying into this rally that we have been seeing?
  
• Whitney – I don’t think the equity market is all created equal, there are parts of the equity market that do well and there are parts of the equity market that do not do well. I don’t think financials, the large cap financials stand a chance to do well because their loan books are still shrinking, from a capital markets standpoint so may of the large banks are so US-focused. The US debt market is shrinking and the European Debt market is shrinking and so if you have great emerging markets exposure you can grow but sadly a lot of US financials are US-centric.

• whether Ms. Whitney owns any Municipal Bonds in her personal portfolio? Frankly, this would have the most relevant question for us. If Ms. Whitney does not own any Munis, that would tell us far more than her long interview. On the other hand, if Ms. Whitney owns State GOs and is comfortable owning them, that would also tell us far more than this interview did;
  
• whether Ms. Whitney owns Treasuries?
  
• whether Ms. Whitney owns commodities, emerging market stocks or agricultural stocks?

• The hundreds of billions of dollars is really the issue,….I can’t say nothing’s impossible, but the reality is you need major urban areas to collapse in the next twelve months for this to be true.
  
• Interestingly, over the summer the volatility was related to credit. The volatility of the last six weeks is really related to Build America Bonds, heavy supply, mutual funds outflow,
  
• When you have the unrated sector, which is things like nursing homes and housing projects and speculative development, you are going to see an increasing default rate, and you have
  
• Also, comparing sovereign debt to muni debt, Greece is 130 percent of GDP in debt, going to 150 percent. Even the U.S. government is over 50 percent, – When you look at the states as a percentage of growth, state products, they’re basically 7 percent,….Illinois is fully loaded obligations, debt and pensions, 16 percent of the growth state product.

• 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…

• “To be clear, I’m not saying the muni market today offers the same opportunity as it did in 2008,…. But it now presents a fantastic opportunity for those looking to generate tax-free income, and here’s why.”

• “Moreover, state and local issuers can do something corporations can’t: raise your taxes and cut your services, something that is happening right now across the country.”

• “This idea that the debt must be repaid is fallacious“,
  
• “Phil Bredesen, governor of the state of Tennessee, told CNBC that the first quarter will be the hardest time for states”

• “Jim O’Neill of Goldman Sachs is calling 2011 the Year of the USA. He says things are going to getting back to normal and that means you could see stock market increases of up to 20%; US Bond Yields will rise further and he thinks that the Dollar could rally quite a bit as well.”

Through out this clip, when David Rosenberg answered or tried to make a point, either Becky Quick or Andrew Ross Sorkin, a guest host from the New York Times, jumped on Mr. Rosenberg. Mr. Sorkin’s questions were direct to the point of being sort of hostile. This was unusual because Mr. Sorkin is polite to most other guests. May be because the other guests are bullish. This treatment of Mr. Rosenberg really suggests that the bullish forecasts are so deeply engrained in the psychology of CNBC Anchors and NYT Journalists. Will this prove to be a signal?

Of course this hostile questioning was nothing compared to the angry, derogatory tone used by Joe Kernen in the earlier segment titled Testing the Bull’s Endurance . This segment featured Jason Trennert of Strategas Research Partners and David Rosenberg. If you have the patience to watch this 15:39 minute clip, you will see the substantial difference in how these 3 anchors treat the bullish Jason Trennert and the usually un-rosy David Rosenberg.

Now fast forward to minute 15:01 and hear Joe Kernen say

• “why is the only thing I can hear with a Canadian accent is “hose” (our phonetic attempt to show Mr. Kernen’s pronunciation) and all you talk about is “hose”, “housing, housing, housing”

Look at Mr. Kernen’s face and see the anger, the derision as he deliberately overdoes the Canadian accent and look at Mr. Rosenberg’s face to see the derision hit home. Mr. Rosenberg replied:

• “I am from Toronto, not Labrador, OK?”

to which Mr. Kernen responded with sarcastic laughter. Then Mr. Kernen again ridiculed David Rosenberg about how housing is the only word Rosenberg uses. Finally Mr. Kernen asked (at minute 15:31)

• “You know it is so cold and dreary up there? Is that why you are always so cold and dreary? Does it have anything to do with being from there?”

• Rising exports and falling unemployment will drive US growth in 2011 and allow the country to avoid comparisons to Japan’s lost decade, Goldman Sachs Asset Management economist Jim O’Neill told CNBC.
  
• Too many investors are still stuck in a crisis mindset and need to see the “big picture” that shows the US is poised for strong growth ahead, O’Neill said,
  
• With exports driving higher and weekly jobless claims edging lower toward 400,000, that could provide the catalyst for sustained growth, he suggested.
  
• O’Neill said that would most readily show up in consumer cyclical stocks as well as strong multinational companies. He is projecting GDP that could eclipse 4 percent and stock market gains of 20 percent for the year ahead.
  
• A modest recovery of the dollar on the back of rising real yields and circumstances of a stronger US economy almost definitely will lead to some breaking down of those correlations,” he said. “We’ll get back in some ways to a normal that we knew of yesteryear.”

1. There’s Never Just 1 Cockroach: …….When a problem occurs, it’s generally followed by another. Debt concerns in Greece, for example, were followed by similar problems in Spain, Portugal, Italy and so on. Gartman’s trade – Short the Euro against any other currency, against the Aussie & Canadian Dollars in his case.
   
2. Buy High and Sell Higher: “The one thing you learn in this business is things go higher than we ever anticipate and things fall lower than we ever anticipate,” Our comment – This does not mean Buy High and forget about it. It means when you buy high, you are buying a winning stock, a stock the market likes. But this also imposes a responsibility to watch whether the stock keeps making new highs or begins to falter. If the latter, get out.
   
3. Never Add to a Losing Trade: This is the most important rule of all, Gartman said.”What ever you do, never average down into a long position and never, ever, ever, ever average up into a short position,” he said. “Averaging down is the suicide move in the business of trading and investing.”  Our comment – This is a variation of our Blessed Are the Meek… adaptation. Hedge Funds have gone out of business because they thought they knew better than the markets; they kept adding to loosing positions until their capital ran out. This is also the reason many traders ended up destroying their firms by betting against the market, i.e., on losing trades. The statistical name for this game is Gambler’s Ruin and it guarantees bankruptcy unless the player’s capital is limitless. This is only plausible if the trader is Ben Bernanke. Look at the history of global macro hedge funds that went out of business. A common trade for these funds – Shorting long maturity Treasuries. These funds thought the market just didn’t understand that inflation was inevitable. This is also the game CNBC Anchors play with their viewers. Of course, they only bet their verbal capital which appears to be limitless.

Besides this nugget, Dennis Gartman did Trade School  on Wednesday, December 22 (at minute 14:15) about Contango & Backwardation:

• “When you see a market going to Contango, in the Futures market when the Spot price is below the next Future, the next Future is higher than that…that is a commodity that is bidding for storage, usually a commodity that is abundant, demand is low and the commodity has to go into storage. Backwardation is the opposite of that. When the spot rate is above the nearest future, the next future is lower…the market is saying to that commodity, come out of storage, we need you, demand is high and watch how markets move from wide contango to narrower contango to backwardation, it often tells you where the next great move is going to come from. For example, last year you had the front month to the second month futures contract in WTI Crude at almost a $4 contango, that was an enormous supply of crude in the world, crude was in a bear market, and contango began to narrow, the crude prices began to strengthen. Now you are starting to see the market go to a backwardation which tells you that market still wants to go higher and you are probably only getting started in a bull market.”

What Mr. Gartman says has been evident in the climb of Oil to above $90.       

• All three previous markets peaked on 3rd January 1910, 3rd January 1940 & 3rd January 1977. So, they expect the current stock rally to peak on 3rd January 2011.
  
• The last three chart patterns delivered on average a 5% down January and so the CitiFX folks expect a 5% down January 2011.
  
• Finally, the market fell by an average of 16% in the past three chart patterns. So CitiFX expects a down double digit 2011 for the stock market.

This might sound whimsical to many, but CitiFX is a well followed group. Erin Burnett asked both Peter Eliades and Dave Rovelli for their reactions to the above CitiFX forecast. They both thought that the stock market is likely to correct in the January-February period and then rally to a mid-year high. Mr. Eliades was the more bullish of the two. He thinks there is a chance that the stock market will test the 2007 highs by mid-year. That makes him among the most bullish on the street.  


6. K-Call for the Next Decade – CNBC’s Gary Kaminsky – Thursday, December 23

This is an unusual call. Rather than issuing a call for 2011, Gary Kaminsky, CNBC Anchor and ex-money manager, issued a 10-year call. His 3 main points are:

1. Organic Growth ALWAYS Wins Over Volatility.
   
2. U.S. Equity Market Will Appreciate 6-7% Annually – 2/3rds of that will come from dividends and distributions.
   
3. The Secular Shift To Fixed Income Remains Intact – Gary dismisses the notion of a “bond bubble”. He believes that as a result of the last 10 years, so many people are in Bonds because they believe for their own asset allocation, that’s where they want to stay.They are not interested in the risk reward of the other asset classes.