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.
What a Present to All of Us?
We are almost giddy about the Tax-Deal that was announced this week. We are partisan about the success of the American Economy and of America. This bill is what we needed. We thank President Obama and the Republican Leadership for negotiating it.
We are delighted to see the majority of the American people support this bill. Say what you will about Democracies. The people always know what is good for them and a democracy that genuinely allows its citizens to express their opinions & act on them is and remains a winner.
We are no Edward Yardeni (see clip E4 below) but we do wonder whether 2011 will be like 1995. We realize there are so many obstacles ahead and that this will be a slow recovery at best. But what happened this week is a major step forward.
Go back and look at investment patterns. The stock market does better when the President does better.
Giddy Strategists and A Giddy Stock market?
Nearly every strategist we heard on TV was maximum bullish. Why shouldn’t they be? What’s not to like? Pimco and many others raised their GDP forecasts by 1% to about 3-3.5% for 2011. The tax-deal puts much needed income into the pockets of American Families starved for income. Americans will spend when they feel good. Who knows, even corporations might begin spending at home?
We like being giddy. It is a good feeling. But is a giddy stock market good for investing? There is no question the stock market is giddy. The ISEE Call-Put ratio for All Equities closed on Friday at 343% after having touched the unheard 421% number at 2:30 pm. The Arms Index is screamingly overbought. The scary performance of Chinese IPOs this week could be a huge tell.
These are good indicators and they almost always work, except at major inflection points like say, March 2009 or July-August 2003. And that reminds us of Bernanke Indicator. Recall that Bernanke panicked and talked about throwing money from helicopters in 2003 just as the Bush tax cuts were passed and the economy was beginning to improve. There is no question that Ben Bernanke panicked this fall when he launched his crazy buying of short maturity Treasuries at their peak levels (when 5-year Treasury yielded 1.05%). Let’s see what he tells us this Tuesday.
We have no idea what will happen to the stock market in the next couple of months. We may be ready to bury the Prechter forecast of doom and that in itself might be a bearish signal. But we are ready to embrace his call for a Strong U.S. Dollar and ready to accept the outperformance of US market if that happens.
A Gift for Those who like to Spend?
It may be hard to remember now but the stock market had some anxious moments this week. Treasuries started getting crushed on Tuesday, especially after a bad 3-year auction. This caused a major reversal in risk assets, especially in Gold, Silver and commodity stocks like Freeport. By Wednesday noon, there was panic in the Treasury markets before the 10-year Auction.
We have always believed that panics in the Treasury market should be bought, at least for a trade. That worked on Wednesday. CNBC’s Erin Burnett noticed that risk assets fell as Treasuries panicked and after a rally in Treasuries following the successful 10-year auction, Dollar gave up its gains and commodities bounced.
Ms. Burnett was right. In our view, the greatest danger to risk assets and stocks in general is a sell off in long maturity Treasuries. Remember that the 1995 stock rally was supported by an even greater rally in long Treasuries.
So we look at views of smart people like Jeff Kronthal (of Merrill Lynch fame) who are bullish on 30-Year Treasuries (see clip B1 below). Those who concur and who like to spend received a gift of a Treasury sale this week. We hope they did spend.
Talking of a gift sale, this week proved what we have tried to explain to our CNBC Anchor friends. A Treasury auction is like a large secondary stock offering. The success of your buy depends on the discount you get in the offering which can also act to clear the overhang. Witness the strong after-market performance of the Citi overnight secondary this week. They priced it at a discount and gave out decent allocations. The stock closed up almost 10% from the offering.
Last month, Rick Santelli of CNBC graded the November 30-Year Treasury auction as “D-” . What a fire sale that turned out to be. The Treasury Zero-coupon ETF rallied from about $80.25 just after the failed auction to $89 in the next 7-8 trading days.
This Friday, the 30-year Treasury auction was graded as “A+” by Rick Santelli. Presumably, the sell-off this week made investors bullish or persuaded some of the shorts to cover. In any case, this auction closed in the red by Friday’s close. This is why we prefer to buy an ugly auction, but that could simply be a function of our self-perception.
We hope experts like Jeff Kronthal and David Rosenberg are correct and the sell-off of the past few weeks proves to be a buying opportunity for long maturity Treasuries. Mr. Tom Tucci of RBC seems to agree.
Finally, we wish CNBC anchors stop babbling about the steepening yield curve. It is actually flattening inexorably. The 30-10 yrs yield spread has dropped to 111 basis points from its giddy levels of 158 basis points on November 5 and our favorite 30-5 yrs yield spread has dropped to 246 basis points from 304 basis points on November 5. These must have been beautiful trades for those who put them on.
If there is a guru who can keep us on the straight and narrow, a man who regularly and presciently delivers the antidote to giddiness, it is David Rosenberg of Gluskin Sheff. We strongly recommend reading his “scattered thoughts” for 2011 on page 2 of his Lunch with Dave missive on Friday, December 10. We also recommend a serious reading of the book “the Age of Deleveraging” by A. Gary Shilling, a man who invariable makes his listeners money. We hope to review this book soon.
China – Inflation & Rates
Bloomberg reports that China’s Inflation topped 5% in November, an acceleration to the fastest pace in 28 months. The Bloomberg article also discusses the possibility of an interest rate increase this weekend. Two experts, David Riedel and Dennis Gartman gave their own views
on Friday. Read the summary of their views at Is China About to Slaughter This Bull? on CNBC.com.
Can any discussion about China be complete without Jim Chanos? Listen to his appearance on CNBC or read the summary of his views at China Overbuilding to Hit a Wall on CNBC.com.
Amerigable Or Westernized?
During her series on Iran this week (watch the Kish Island clip) , Erin Burnett of CNBC interviewed an American Investor in Iran who used the term “westernized” to describe someone in Iran. This is a common phrase for Americans, especially American TV people. Apart from being rude or culturally egotistic, we think it is a mistaken concept.
It is our belief and experience that very few smart people in other countries become “westernized”. What they become is knowledgable about America and the West. They learn a great deal about how Americans think. This translate into a significant advantage for them. This is why we have begun using the term “Amerigable” to describe the sort of person Erin Burnett and her guest discussed. The term is a play on being “knowledgable about America”.
You see this in almost every non-European country. Smart people from these countries know far more about America than smart Americans know about that country. By this we don’t mean the average American. We mean Americans who come into contact and transact with their counterparts in other countries. In almost all such contacts or transactions, you will find that Americans learn far less about how their counterparts think than the counterparts learn about how Americans think.
This lack of knowledge is becoming a very serious deficit in America. May be this is why American foreign policy tends to fail in non-European theaters. Smart American analysts have begun discussing this in their policy monographs. Witness what Robert Kaplan wrote in his August 2010 monograph:
- “…even as the Indian political class understands at a very intimate level America’s own historical and geographical situation, the American political class has no understanding of India’s. Yet if Americans do not come to grasp with India’s age-old highly unstable geopolitics,…., they will badly mishandle the relationship. Indeed, America has come to grief in the past by not understanding local histories.”
Featured Videoclips
This week, we separate the clips into 3 sections given the number of clips. We have tried to include as many clips or articles as we could with predictions for 2011.
Pole Position for the Week:
- President Bill Clinton on the Tax Deal
- Jeff Kronthal with CNBC’s David Faber on Friday, November 10
- Tom Tucci of RBC with CNBC’s Maria Bartiromo on Thursday, November 9
- John Miller of Nuveen & Mike Tuff of Russell with Maria Bartiromo on Wednesday, November 8
- Laszlo Biryini’s Top 5 Stocks on CNBC’s The Call on Wednesday, November 8
- Byron Wien’s Radical Asset Allocation with Maria Bartiromo on Thursday, November 9
- Thomas Lee of JPMorgan on CNBC Squawk on the Street on Friday, November 10
- Edward Yardeni on CNBC Closing Bell on Friday, November 10
Pole Position for the Week
Bill Clinton Talks Tax Deal (07:01 Minute clip) – Friday, December 10
We have been fortunate to meet and speak with as well as learn from a couple of people who will go down in history as among the most intelligent men of the 20th century. No exaggeration here, a mere statement of fact. So we generally don’t rave about intelligence of public figures or CEOs.
We also distinguish between different kinds of intelligence. We recall that in 1992 it was fashionable to speak of the intelligence of Hillary Clinton. Mrs. Clinton to us, especially then, represented Analytical Intelligence , the type of intelligence recognized by media. Sorry, Mrs. Clinton, you got to step aside.
In our opinion, Bill Clinton is one of the rare personalities who combines the best of Instinctive Intelligence and Analytical Intelligence . We also think the economic success of the Clinton Administration was due to Mr. Clinton’s intellectual curiosity, his intelligence and his deep passion to win. Mr. Clinton said on Friday that he spends an hour each day thinking about the US Economy. That is today, a decade after he left the White House.
We believe the Democratic Party never understood Bill Clinton. This is why they never embraced Mr. Clinton the way they embraced Candidate Obama.
We are almost giddy that President Obama worked with Republicans to get this Tax-deal done and that he embraced the Clinton smarts & flexibility. We concur with President Clinton in his comment that “there is never a perfect bipartisan bill in the eyes of a partisan”.
Watch this clip and see a master put on a performance. Unlike some of his public “masterpieces” of “creative” expression, this clip is for the good of the American Economy and of America.
Bond Market Clips
B1. Ticking Time Bomb – Jeff Kronthal with CNBC’s David Faber – Friday, December 10
Jeff Kronthal is the Co-Founder and Chief Investment Officer of KLS Diversifies, a fixed-income hedge Fund. He is of course much better known as one of the men who could saved Merrill Lynch had the CEO listened to them.
We featured comments by Jeff Kronthal in Clip 1 of our October 30 – November 5 Videoclips article. At that time, Mr. Kronthal described the 30-year Treasury Bond as an “orphan” and predicted that 30-year Treasury Strips would outperform the rest of the fixed income market. A week after that clip, EDV, the 30-Year Treasury zero coupon strip ETF, rallied from about $80.25 just after the ugly 30-year Treasury Bond Auction to about $89 in about 7-8 trading days as the yield dropped to about 4.08%. So we listen to Mr. Kronthal when he speaks about Treasuries.
David Faber introduced the subject in a decidedly non-CNBC manner by saying “The story again is not in the stock market. It is in the much bigger, much more important, at least we think so here at Strategy Session, bond market. The yield on the 10-year continues to creep higher; it started the week under 3%, you see where it is now, well over 3.2%.” Be careful, David. You could disenfranchised for such seditious talk.
Then he asked Mr. Kronthal “what about the future?”
- Kronthal – Certainly, we have seen a stronger economy for the last couple of months….. and certainly what you have seen occur in the last month is a huge move in what we would call the belly of the yield curve; 5-year Treasuries are up over 80 basis points, 10-years are around 70 basis points; what’s interesting actually is the long bond traded off only around 30 bps. Implied in that I think is that a couple of changes to the thought process … we do think that it has probably a little room to go higher in yield but we are pretty bullish again right now (on the 30-year).
- Faber – Why?
- Kronthal – well, we think there is a lot of slack in the economy and that despite the strength in the economy the things that the Fed focuses o , unemployment and inflation really are going to lag in here. The Federal Reserve Board of San Francisco just came out with a report that 1/6th of what affects core PCE (personal consumption and expenditure) is in a disinflationary move right now; 3/4 is actually slowing down, we don’t see inflation picking up dramatically any time soon and the unemployment rate we just think will take a long time to deal with..
B2. Finding Value in Bonds – Tom Tucci with CNBC’s Maria Bartiromo – Thursday, December 9
Tom Tucci is a Managing Director at RBC according to Maria Bartiromo. His comments are both interesting and helpful:
- Tucci – There has been a massive liquidation in the marketplace. It started about a month ago when we realized that we weren’t rolling over into a second recession. People’s growth estimates were closer to 2-2.5%…but the big game changer this week was what came out of the administration, the payroll tax cut is really gonna add growth significantly into 2011….it is going to put $110 billion dollars back into the economy; it will come right off of people’s payroll checks and that is enough for another boost of 1% to the GDP (slide shows GDP growth expectation of 3-3.5% ith inflation around 1%).
- Bartiromo – What went on in the Muni bond market a couple of weeks ago? We saw that big decline in prices…
- Tucci – Seasonally December is not a very good month for that market because there is a lot of supply then..with a lot of year-end window dressing..but it also has to do with the Build America Bonds program. A lot of people had expected an extension of that program..and that so far is off the table..So it was a glut of supply coming back into the marketplace.
- Bartiromo – Where do you see the best opportunities in Govt. Bonds right now?
- Tucci – I think it will be in the long end of the market. What’s happening is the market is repricing that stronger growth story…the bond market is trading in two markets right now, the long end of the market is relatively stable at these yield levels as evidenced by the bond auction today..but the front end of the yield curve is in some difficulties because that is where the bulk of the long positions are and that’s where the liquidation has been coming in..
- Bartiromo – Let’s talk more about the bond auction today. What kind of sentiment did you see?
- Tucci – You got a taste of it yesterday; it had to do with the fact that the yield curve was flattening, which means that the long end of the market started to outperform yesterday and that continued into today..So what I am seeing is real money accounts that we have been seeing selling the market, reposition themselves in the longer end to pick up that incremental yield, the 2-year is yielding 60bps, not that big of an allure, picking up bonds between 4.40 & 4.50 seems to be a reasonable opportunity.
B3. Top Bond Plays for 2011 – John Miller of Nuveen Asset Management & Mike Ruff of Russell Investments with CNBC’s Maria Bartiromo (04:25 minute clip) – Wednesday, December 8
- Bartiromo – What’s behind the sharp sell off in Muni Bonds? … Do you think this continues into 2011?
- Miller – No, I actually expect a significant snap back in Muni Bonds in 2011. Because a lot of the sell off that has occurred, especially over the last month, month & half, on the Muni side has been related to technical factors and related things going on in Washington DC which should get resolved by the end of the year.
- Bartiromo – I see. Mike, do you agree with that? There is a lot of talk about a bond bubble, do you see it that way? (Come on Maria, stop babbling about bond bubbles – just because you proudly told us that you spoke to Chuck Schwab, you don’t have to marry his views about Bonds. Also what’s this name dropping – Don’t you confidence in your own thinking? )
- Ruff – No, we don’t really see it as a bond bubble. Talking about Munis, I have to agree with his thoughts in the Muni market. But in the Bond space, we still see very good fundamentals, if you think about going on in the last couple of years plus, there has been a lot of deleveraging; if you are Bond investor, you are loaning money, they are deleveraging, that’s good for us. So fundamentals are good, valuations are reasonable, we have seen some Treasury sell off in the last few weeks, but the reality is the valuations are still fairly reasonable……and the technicals are frankly very good….
- Bartiromo – Do you think if money moves into equities, it comes out of Bonds?
- Ruff – That’s a great question. We are getting quite a bit of push back from our clients but ….. the money is stickier than it used to be.
- Bartiromo – So, you are not selling bonds then?
- Ruff – No, what I will say is …do we expect to see the 15%-20% return you have seen in the bond market going forward in 2011, certainly not. We don’t think that’s reasonable.
- Bartiromo – So John, you are not selling Bonds either then?
- Miller – No, we are not.
Then in response to Maria’s question, John Miller discussed three separate Muni bonds, Univ. of S. California. Ford Motor and Yankee Stadium. Kudos to Maria for focusing on the Muni Bond Sell off. It is very rare for a CNBC Anchor to do so. Thank you Maria Bartiromo.
Equity Market Clips
A decent summary of bullish equity predictions for 2011 can be found at Wall Street Strategists making More Bullish Calls for 2011 by Patti Domm, CNBC Executive Director. This article also contains a link to Boldest Predictions by CNBC Anchors & Reporters.
- Ms. Domm, how about a slideshow highlighting personal asset allocation of CNBC Anchors & Reporters. We have always wondered how your Anchors invest their own money. After all, they have access to the most renowned investment minds and all the resources of your First in Business, Worldwide network. Shouldn’t we know how they invest?
You are not going to answer, are you?
E1. Top 5 Bull Market Picks for 2011 – Laszlo Biryini on CNBC’s The Call – Wednesday, December 8
Laszlo Biryini is always a must listen and this is a colorful clip. You can also read the summary in Laszlo Biryini’s Top 5 Bull Market Picks of 2011 on CNBC.com. His top five stock picks are:
- Hermes International (HESAY)
- PriceLine.com (PCLN)
- Polo Ralph Lauren (RL)
- BP Prudhoe Bay (BPT)
- Cummins (CMI)
E2. Wien Goes Radical on Allocation – Byron Wien with CNBC’s Maria Bartiromo – Thursday, December 9
Byron Wien, a Vice Chairman at the Blackstone group and an ex-strategist from Morgan Stanley, recommends a more “radical” allocation than found at many institutions. Read a summary of his allocation at Investors Need to Be in Emerging Markets on CNBC.com. A couple of excerpts below:
- 20 percent each in emerging-markets equities, hedge funds and high-yield fixed income
- 10 percent each in large-cap multinational growth equities, private equity and real estate
- 5 percent each in gold and commodities.
And what did Maria Bartiromo say? Nothing. Mr. Wien made no mention of Municipal Bonds either.
Come on Maria, you need to be more vocal in questioning your guests. Institutions and Pension Funds don’t need you to be on their side. Individual Investors do. We made you what you are today and you ignore us so!
By the way Maria, how have you allocated your own money for 2011? You are not going to answer, are you?
E3. JP Morgan’s 2011 Bullish Call – Thomas Lee on CNBC Squawk on the Street – Friday, December 10
Thomas Lee of JP Morgan has distinguished himself this year by his predictions and analysis. He is bullish for 2011 but recommends tactical sector rotation during next year. Read the summary of his comments at S&P to Rise 15% in 2011 on CNBC.com. A couple of excerpts below:
- We found that in the third year of a bull market, section rotation is the greatest,
- So we think 2011 is going to be broken up into thirds, wherein the first third of the year, you want to own credit-sensitives, like the insurance companies, asset managers and the consumer cyclicals
- By summer, Lee recommended a shift into industrial cyclicals,” such as energy and airlines.
- He said to wrap up the last third “heavily focused on defensives.”
Lee expects US GDP growth to “accelerate to 3.5 percent in the last quarters of 2011, from 2.6 percent in 2010”.
E4. Econ Boom in 2011 – Edward Yardeni with CNBC Closing Bell – Friday, December 10
When most strategists are bullish, how bullish would Edward Yardeni be? Very bullish indeed. He is calling for a global boom in 2011. Listen to his views in this clip.
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