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.
Tepid Tepper, Terrific Trichet
Rarely have seen such anticipation of a guest interview on CNBC. The reappearance of David Tepper, Macro Viewpoints Most Useful Financial Guest of 2010 , was trumpeted by CNBC for two days. With such a hoopla, you knew the actual event would disappoint. And it did. Apparently, Mr. Tepper came to create awareness of his favorite charity, the New Jersey Food Bank. The cause is real and kudos to him for his support of such an important cause.
David Tepper did offer some thoughts about various asset classes, thanks to the persistent and, for once, polite questioning by CNBC’s Joe Kernen. David Tepper seemed more interested in talking about the Food Bank, about Pittsburgh Steelers and the game on Sunday. Kudos to Joe Kernen for keeping him on track.
Essentially Mr. Tepper is tepid about the stock market at this stage but a determined buyer at much lower levels. He thinks the stock market will go higher to a PE of 14-15 on $100 in projected earnings for 2012. One of his favorite sectors is Semiconductors, especially Micron and he likes Dean Foods.
He is positive about America and he thinks the newly re-transformed Obama will win in 2012. He hopes the ECB will be successful like the Fed was. If he could convince himself that Europe will do the right thing, then he would be a buyer of Spanish Cajas. In the meantime, he is happy to own Banco Santander.
He thinks China is too hard to analyze for his Firm and he thinks Gold is struggling. He thinks Treasuries will go to 4%. He thinks QE2 was a clear success and thinks the Fed will not engage in QE3 (see clip 1 below for his detailed comments).
Unlike David Tepper, Marvin Schwartz of Neuberger Berman was not tepid. He was a roaring bull thinks that the stock market is “significantly underpriced” and that the S&P is going to new highs. And unlike Mr. Tepper, Mr. Schwartz believes in being fully invested at all times. Mr. Schwartz is convinced that Europe will come out well.
But of course, “Terrific Trichet” is the prevailing consensus in the markets. Just look at the performance of European Stock markets. They act as if they are the new emerging markets. The Spanish market is up 10% this month while the Greek market is up 8%. The Euro is in the midst of a real rally. Strange that when ECB pours in money, the Euro rallies but when the Fed pours in money, the US Dollar falls. Kudos to Monsieur Trichet.
How confident are the markets about Europe? Look at the inverted chart of the German Bund. And if the Bund is falling, the Treasuries have to fall.
Rotation, Rotation, Rotation?
It looks like every over-owned trade was unwound this week. High flying tech stocks like Apple, Google kept being sold after delivering terrific earnings. High flying commodity stocks like Freeport fell and fell hard. Financials like Goldman and Citi fell after their earnings.
But the stock indices, especially the S&P 500 did not. When will traders learn that hedging long stocks with S&P 500 is a loser’s game? The action this week mirrors the reaction of the 2010 stock market to terrific earnings in January 2010. The charts of the 2010 & 2011 S&P 500 can be virtually overlayed on top of each other as CNBC’s Gary Kaminsky pointed out on Tuesday (see chart at minute 03:00 of the clip).
A Different point of View
Enough people have written about equity sentiment indicators reaching 2007 levels. Remember 2007 was not just a stock market story. It was more of a credit markets party. So we paid attention when Jeff Gundlach described the valuation of junk bonds as richest in history, even richer than they were in 2007 based on his total return metric (see clip 2 below). If the stock market is up 92% since the March 2009 lows, then the High yield market is up 84%. So these two markets have shared the cockpit of the rally. So, if the High Yield market is so overvalued, what does that say about the stock market?
But of course, in our neo-Gallo perspective, nothing matters to the stock market before its time. If you are not considered about timing, you may want to read what David Rosenberg wrote on Friday:
- I am convinced that we will, before long, be replaying something along the lines of the reversal of the tech mania,which were equally unsustainable. Those fully invested in the stock market today thinking that have it all figured out are going to be faced with a deep quandary and are putting their clients at huge risk.
If They Go Up on Bad News…..
A proven, old adage is that securities that go up on bad news should be bought. Look what we read on Friday morning in the New York Times :
- Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
How would MUB, the Muni Bond ETF, open at 9:30 am, we wondered? We were not the only ones. CNBC’s Rick Santelli said all his colleagues at the CME were going to watch that open.
Guess, a watched pot never boils. The MUB traded up all day on Friday and closed up nearly 1%. Various Muni Closed-End Funds also closed up from about 0.5% to 1.5% on the day. What does this say? That Munis have found a short term bottom?
Even if they have, is that just the pause before the next drop? That seems to be the opinion of Jeff Gundlach of Doubleline whose watchword for Munis is Dry Powder (see clip2 below). Those who watched Apple, Google, Freeport & Goldman go down this week may want to heed Gundlach’s warning. He says the “technical setup for Munis is bad” because the billionaires are “all-in” in Munis. In other words, the wealthiest investors do not have any dry powder to buy Munis when panic hits. The corollary is that when panic hits, these large portfolios might be sold. As we all know, panic selling is what creates a bottom.
This seems similar to what Meredith Whitney said on CNBC, that you will see indiscriminate selling when serious defaults hit.
Gold, U.S. Dollar & Treasuries
Gold seems to be coming unglued. At least that is sort of the claim of Doug Kass, one of CNBC’s most favored guests. In his update on Friday , he said that Gold will fall to $1,050 and end the year about $150 lower than Friday’s close.
David Tepper said the US is doing great. Jim O’Neill, the man who coined “BRIC”, said last month that 2011 was the Year of the U.S.. But, the U.S. Dollar cannot sustain a rally, even a minor one like what we had during the past couple of weeks. Apparently, the most favored currency is the Euro.
If the U.S. Dollar cannot sustain a rally, if the US stock is to be the best market in 2011, why on earth would anyone want to buy or own U.S. Treasuries? The 30-Year Bond does act bad. If the yield on German Bunds keep rising, then can the 30-Year Treasury yield fall?
Michael Hartnett of BAC-Merrill Lynch offers another explanation. He wrote on Friday morning:
- Driven by the sell-off in fixed income markets, fund flows indicate investors are preparing for higher rates: witness the surge of money into funds that invest in floating rate debt.
- Floating Rate debt saw its biggest inflow ($947mm) on record, while Municipals recorded massive outflows of $3.6 billion this week, the biggest weekly redemption ever (since 1992).
- His chart showed that Floating rate debt inflows went up 21.5% when measured as “16-week flows as a % of AUM”.
David Tepper & James Rickards – QE2 & China – Policies for Stocks & Policies for People
Everyone knows David Tepper. In full disclosure, we did not know of James Rickards until we heard him on Squawk Box on Friday, November 19 .
David Tepper says QE2 was a success from a purely domestic US point of view. James Rickards says (see clip 3 below) that “QE2 was really about getting the Chinese to revalue their currency” and that “we won the round one in this currency war.”
David Tepper says:
- Corporations have gotten themselves incredibly efficient. So profit margins are higher across the companies…I’ve never seen anything like it…..But don’t forget margins and profits do not necessarily mean employment when you have worldwide companies….
- Employment is …..not going to get where it was……never going to happen…never is a long time….you’re not talking about next couple of years, you’re are talking next ten, 15, 20 years.
- You look at Apple’s margins on the iPhone, 65%. We ought to take 10 or 15 points of margin away from Apple and force them to put more in the US and create jobs. You take 20-30-50 thousand assembly jobs even high paying jobs – reduce Apple’s margins and create jobs here. It is bad for the stock market , good for the people.
But they agree on one deep, sad problem:
- Rickards – We have got 40 million people on food stamps,
- Tepper – You have to feed people. You have to have kids with food in their stomach to learn….But that’s why you talk about stuff with the food bank.
Google – Management Changes
Google announced their first management change since the IPO. Founder Larry Page became the new CEO and Eric Schmidt moved to become the Executive Chairman. Then on Friday, news hit the tape about a large sell of Google stock by Eric Schmidt. Google stock fell from its after-hours price of $655 to close below $612 on Friday.
We heard CNBC guests complain about this transition with really demeaning comments about the “need for adult supervision”. Others spoke of the need to have a business man lead a huge company like Google at this stage of its development.
We have two words for them – Apple & Dell. Remember the Apple board deposed Steve Jobs because of they thought Apple needed proven executive talent to take it to the next stage. So they hired John Sculley from Pepsi. We all know what happened to Apple under Sculley and until Steve Jobs was rehired as CEO. Dell hired a Bain consultant to replace Michael Dell as CEO. We all know what happened to Dell.
We don’t know whether Mr. Page will be a great CEO. But we do think that it is better for Google to choose its founder as CEO, a founder-inventor who built the Google culture rather than an executive at this stage.
President Hu’s Visit, the US Media Focus on the Chinese PLA
Before President Hu’s visit, the American media was full of comments and questions about how loyal or subservient the Chinese PLA (People’s Liberation Army) was to President Hu and the Chinese Civilian Leadership.
We have wondered about the struggle between the PLA & Chinese Leadership for many months. For example, we wrote in our Videoclips Article of May 29 – June 5, 2010:
- But what if these civilian leaders are NOT the real power in China? In our opinion, the civilian leadership in China governs at the sufferance of the PLA or China’s People’s Liberation Army. There is absolutely no doubt in our mind that the PLA retains at least a veto power on all major foreign policy decisions and no civilian regime can survive in power if they challenge the PLA on issues that the PLA considers paramount.
- The PLA is far more insular and cares much more about China’s Power Projection than the Civilian Government. The PLA does not understand America or other countries the way the Civilian leaders do.…But when these trends reverse and when the PLA feels it needs to exercise its muscle, we think it will and there is nothing China’s civilian leaders can do to prevent it.
So we wonder whether President Hu create doubts about his own power vs. the PLA to lessen the pressure on him from the Obama Administration?
We don’t know but we would not be surprised. In any case, it may not matter. The Hu visit did nothing to change the Simmering Strategic Clash of U.S.-China Relations, the title of an insightful Stratfor article. According to Stratfor, the Chinese need to push out from its narrow, geographical confines and the America’s strategic need for command of the seas and global reach creates an unresolvable strategic clash. Fortunately for the markets, unresolvable does not mean immediate.
Unfortunately, this rise of the PLA and the unresolvability of strategic imperatives invites a chilling parallel to the rise of Japan in the 1930s. Remember as the Japanese economy got stronger, the Japanese Imperial Army became more and more powerful. Eventually, the Japanese military ended up dominating the government and exercising power. It is at that time the economic conflict with the U.S. and Japan’s need for natural resources created conditions for the then inevitable military conflict between Japan & the U.S.
This is why we look at the rise of the PLA with grave concern.
- David Tepper on CNBC Squawk Box on Friday, January 21
- Jeff Gundlach on CNBC Strategy Session on Wednesday, January 19
- Douglas Holtz-Eakin and James Rickards on CNBC Squawk Box on Wednesday, January 19
1. David Tepper with CNBC’s Joseph Kernen – Friday, January 21
How big was the hoopla surrounding Mr. Tepper’s visit to CNBC? We think it was even bigger than that for President Hu’s visit to Washington DC. Joe Kernen spoke with David Tepper for almost the entire 8am-9am hour with limited commercial interruptions. After the visit, CNBC.com wrote five different articles, one transcript with excerpts, two summaries and two briefs. Every other CNBC show featured clips of Mr. Tepper’s comments on Friday.
We have never seen anything like this before on CNBC. This unprecedented coverage forces us to give the Tepper clip our pole position for the week. The interview itself is in four clips:
- Tepper: No More “Free Ride” But Markets Still Look Good
- Tepper: It’s No Longer “An Everything Will Go Up” Market
- CNBC Excerpts
- BRIEF – Appaloosa’s Tepper says Dean Foods looks cheap-CNBC
- BRIEF – Appaloosa’s Tepper says China tightening would be a risk- CNBC
We do recommend reading the CNBC Excerpts article. Below we include comments not discussed above:
- WE HAVE BEEN INVESTING IN THE SEMICONDUCTORS ACROSS THE BOARD. EQUIPMENT COMPANIES AND STOCKS LIKE MICRON.
- THERE IS UNCERTAINTY OUT THERE. EUROPE STILL HAS TO BE FIGURED OUT. AND THERE’S CERTAIN THINGS THAT WE’RE LOOKING FOR FROM EUROPE. CHINA IS HARD TO ANALYZE. WE CAN ANALYZE IN EUROPE AND WE CAN KNOW THE STEPS THAT THEY SHOULD BE TAKING. CHINA IS HARD. HARD TO ANALYZE…..AND IF THAT PLACE REALLY OVERHEATED, AND REALLY HAD TO TIGHTEN, IT WOULD BE A RISK RIGHT NOW
- MAYBE IF ECONOMY GETS BETTER, WE’RE UP TO 4% ON TREASURIES. WE MAY BE HEADED THERE. IF YOURE AT 4% ON TREASURIES YOU’RE NOT GOING TO SIT AT 11.8. YOU’RE NOT GOING TO SIT AT 12, 13,….BUT TO GET TO 14-15. THAT’S NOT AN – THAT’S NOT A FAR STRETCH.
- IT MAY BE THAT FULL EMPLOYMENT IS 7% OR 6.5% NOW.
2. Bond, Bubbles & The Buck – Jeff Gundlach on CNBC Strategy Session (09:01 minute clip) – Wednesday, January 19
The “best bond manager of the decade” is what CNBC’s David Faber called Jeff Gundlach. Fighting words, David. At least that is what your colleague Erin Burnett would say. Her two Bond Kings are Bill Gross, her favorite guest and Ken Volpert of Vanguard. But we leave this battle to David & Erin.
We like listening to Mr. Gundlach because his comments help us. We featured his telephone interview with Bloomberg last week . Ordinarily we would not repeat a guest interview within a week of the first feature.
But in this interview, Mr. Gundlach covers High Yield Bonds & Muni Bonds, areas he did not cover in his Bloomberg interview. Watch this clip or read the summary of his comments at Muni Bond Yields Higher Than Junk on CNBC.com. A few excerpts of his comments are below:
- I think the investment grade category of corporate bonds is OK. I think the below investment grade category or junk bonds is pretty overvalued. There are 3 ways of looking at it. The most common way is people look at yields, look at the yield spread vs. Treasurys and some people say it looks kind of cheap, because high-yield to no losses (on principal) yield 7 percent, while Treasuries yield 2%, so there’s about a 5% spread—that’s about historically average
- But that’s a failed analysis because high-yield bonds have a lot more volatility then a Treasury bond index. You really need to compare high-yield bonds to long-term Treasurys, and since the yield curve in Treasurys is so steep—long treasurys yield about 4%, so 7% to no losses from high-yield bonds is only a 3 point spread and that’s kind of similar to what you had in 2007 at the top of the previous cycle in junk bonds. So the spread isn’t really all that great when you volatility adjust it.
- Also Doubline (Gundlach’s firm) uses a metric where we compare a total return based valuation and using that metric vs. Treasurys, actually high-yield bonds are at their richest level in history.(emphasis ours)
- Faber – I am surprised to hear that. I would immediately think in 2005-2006, that had to be a higher level than now.
- Gundlach – It’s just about the same as was in 2006-2007 but actually thanks to the rally that happened while Treasury Bonds sold off in December & November (2010), junk bonds are now at the highest valuation on a total return metric in history. Specifically, they are up 84%, believe it or not, since the low in March of 09, junk bonds are. So it has been a great ride.
- But there is another category that people need to think about when they think about junk bonds. They need to compare Municipal Bonds. There’s a tax benefit in municipal bonds. When you take that into account on a tax-adjusted basis, long-term munis yield 8.25%—they actually yield about a percent and a quarter more than a basket of junk bonds and one can say there are problems in municipal bonds, in terms of fiscal situations at the state level. But either those problems are going to blow up or they’re not, if the problems don’t blow up, you’re obviously going to have better results in munis and, if they do blow up, junk bonds are going to blow up too. So it’s kind of three strikes and you’re out when your looking at junk bonds,
- Kelly – Jeff, which one is it going to be on the Municipal Bonds side. There has been quite a bit of tempest with Meredith Whitney’s dire predictions of $100 billion in municipal defaults ….How much would the default rate rise and how much of a danger is it to investors?
- Gundlach – Rather than try to pinpoint estimates…., the way to successfully invest is to understand problem lies ahead, whether it is a moderate problem or a larger than moderate problem, really doesn’t matter. Municipal bond market is going to have investors scared to even a greater degree than they are now and so the watch word is dry powder for the municipal bond market. You know….people buy Munis really for only one reason, the tax benefit. And most people who do that are kinda all in…I met with quite of few billionaires actually in the last year since I founded DoubleLine and a great many of them, all they want to talk about is Munis, because they have all of their fixed-income money in munis. Now all is a lot.
- Kelly – So, you think that is putting all their eggs in one basket.
- Gundlach – yeah, right. They don’t have the wherewithal to buy on weakness unless they leverage which is highly unlikely. So the set up technically in Munis is kind of bad. So I think we are going to look at fear and the time to buy Munis is kinda when your hand is quivering because usually that is the time that is most profitable.
Remember what Mr. Gundlach told Bloomberg last week (see clip 4 of our Videoclips article of January 8 – January 14) ,
- If we break to lower yields thanks to weak economic data, then we should see a pretty good rally in the 10-year,” Gundlach said in a telephone interview yesterday. “As this correction to the downside is unfolding in the weeks ahead, Treasuries will be the best performer.
Then Mr. Gundlach discussed the three factors inhibiting economic growth:
- it is clear that the flare-up in Europe is going to repeat itself time and time again until some kind of solution of austerity and restructuring is finally agreed upon and as those fears come to the forefront, you are going to be seeing weakness in the Euro and problems overall in risk assets.
- we already touched on the Municipal problem
- last week, we saw finally we have this commodity price boom with gasoline prices creating demand pulling inflation while wages are stagnant when we look at California, wages being cut is the center piece of Jerry Brown’s plan for cutting 12.5 billion dollars out of the budget
3. Rolling Out the Red Carpet – James Rickards and Douglas Holtz-Eakin on CNBC Squawk Box (10:42 minutes clip) – Wednesday, January 19
This is a real conversation rather than a single interview. The conversation has some gems or at least what we consider as gems. That is why we include this clip.
Douglas Holtz-Eakin of the American Action Forum was the advisor to Candidate John McCain during the 2008 Presidential Race. James Rickards of Tangent Capital has been featured in this article for his insightful views on Bernanke & China (see clip 1 of our Videoclips article of November 13 – November 19, 2010 ).
- Holtz-Eakin – QE1 was classic lender-of-last-report by a central bank in a crisis. QE2 is monetary policy that is just inappropriate. It takes an option off the table that they should held onto in case something bad happens. They don’t get anything for it, except 40 basis points on long rates as they estimate and they pick fights with our international partners, higher inflation. If you do a cost-benefit analysis, you shouldn’t do it.
- Rickards – QE2 was really about getting the Chinese to revalue their currency. When you print money in the U.S. where does it go? Well, most of it is going to China. China has to print local currency to absorb the dollar inflow so that creates inflation in China. So its just a different form of revaluation. So the Chinese are saying we can revalue which is controlled or we can have inflation which is uncontrolled. The Chinese are sort of control freaks. So they would prefer the revaluation. That is exactly what the United States wanted. We are getting it. But we are getting it by forcing them to print money. We think of this as a boxing match-you’re scoring on points; both boxers are still standing – we just won round one in the currency wars.
- Holtz-Eakin – The biggest problem is what it says about our monetary authorities. 1) Are they a serial bubble blower? They are creating a commodity bubble now? That hurts the reputation. 2) That is activism for the sake of activism.
- Kernen – Whether we should just assume that China passes us? When are they going to pass us? 2020?
- Rickards – I am not sure they ever will.….That is the consensus, the projection that they will pass us. John Harwood reported that the White House is not hoping for a major announcement, they are playing the long game. The problem is China invented the long game. They have been playing the long game for 5,000 years. We need something like a two-minute drill. We have got 40 million people on food stamps, we have got 25-26 million people who are unemployed, under-employed or marginally attached to the work force. That’s the real problem. The currency is a side show……Chuck Schumer is really the stalking horse for the real agenda. The real agenda is getting better treatment for US companies in China….. It reminds me of President McKinley from 1899 saying ‘open up your market let us in.’ This has been in American policy for 110 years,
- Kernen – you saw there is this GE deal for avionics yesterday…..aren’t they in a position where we are going to get the short end of the stick
- Rickards – You could double the value of the Chinese yuan and it wouldn’t create one job in the United States,..Chinese workers make 10 percent of what U.S. workers make. If you double the yuan and all of a sudden they make 20 percent, no one’s going to move jobs to the United States…….our jobs come through innovation
- Kernen – if we share our intellectual property with China, are we still going to be ahead?
- Rickards – It is a question of what we are sharing….actually we are working with a German company…they said we send China our second best stuff and we keep our best stuff for the US…but we have to be extremely careful…it is extremely dangerous..
- Kernen – Is there any way there is a Japanese element to this…? No one talks about Japan now. is there any way this neo-mercantilism comes back to roost and they have allocated assets improperly ..
- Rickards – It will fail. It will fail eventually.
- Sorkin – It will fail after we fail or before we fail?
- Rickards – It will fail before. China is putting all this money into Green energy.It is not economic. It is never been economic anywhere in the world. So let them spend their money and waste it…..
- Liesman – What is the interest of the people in the room with Hu Jin Tao? Is it a US economic interest or a corporate interest? And is that the same?
- Rickards – Of course not…..It means more economic benefit for the corporation. One of the things you have to do. You look at Apple’s margins on the iPhone, 65%. We ought to take 10 or 15 points of margin away from Apple and force them to put more (jobs?) in the US and create jobs. You take 20-3-50 thousand assembly jobs even high paying jobs – reduce Apple’s margins and create jobs here. It is bad for the stock market , good for the people.(emphasis ours)
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