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.
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.
The Earthquake in Japan
A devastating tragedy. Mother Nature at her most terrifying. The sight of the mighty Tsunami sweeping cars, boats, houses, even burning houses makes adjectives like irresistible force seem so puny. It reminded us of Hurricane Katrina.
The markets probably made the same comparison. At least so it seemed from their reaction. The concept of rebuilding took center stage and Freeport McMoran jumped 3.5%. Stocks moved up all day and of course jumped vertically in the last hour. But it was not a Michael Jordan vertical, just a Woody Harrelson vertical. The Treasury yield curve steepened with the long end losing some ground while the short end remained unchanged.
Yen predictably rallied. We say predictably because Carl Quintannia of CNBC asked a guest “so you buy the Yen and short the Nikkei right?” Dennis Gartman was publicly short the Yen until Friday morning and he told viewers of CNBC’s Money in Motion that he covered his shorts in the wee hours of Friday morning. Rebecca Patterson of JP Morgan went against the prevailing wisdom (an oxymoron?) and recommended shorting the Yen against the Dollar come Monday (see clip 1 below).
Europe
The markets believe Monsieur Trichet or at least his hawkish talk about hiking rates as early as April. Rebecca Patterson said on Friday that this rate hike is completely priced in. She also stated that as of Friday’s CFTC data, just about everyone in the world is short the Dollar (we paraphrase of course – see clip 1 below for her comments).
We have been on a roadshow tour in Europe all last week, covering 5 cities in 5 days. The prevailing opinion from the people we met was that the Trichet tough talk was mainly political. We cannot but make the comparison to the summer of 2008 when Trichet raised rates just before the global economy went into a skid. Within a week of Trichet’s tough talk, rating agencies downgraded Spain and Greece. The Greek two-year note yield reached high teens on Friday but no one cared. The Euro still rallied against the Dollar.
How weak is the Dollar? The best way to feel the pain is to go to Geneva. This is one of our favorite cities and we have always enjoyed visiting Geneva. Until this week, that is. At least Geneva robbed us up front. We got taken in Milan. One of our colleagues spotted a nice looking restaurant near the Galleria in Milan. The menu posted outside was expensive but reasonably so. The three of us went in. They took us for the Tourist mugs that we were. They brought us menus on Apple iPads with lovely pictures of the courses. The iPad menu was beautifully done but the prices were very different from the ones in the paper menu posted outside. Give us Italian food in New York any day.
Spain was the most reasonable. But we couldn’t help wondering whether Spain would benefit from a peso rather than suffer under a strong Euro.
Libya & the Middle East – Is it over?
It seems that Colonel Qaddafi is on his way to winning in Libya. Seasoned mercenaries and well-equipped soldiers against amateur young men & boys, aircraft and tanks against rifles. Not a fair fight. The picture below says it all.
(Ali Abdul Karim, who claims to be 14, in Ras Lanuf, Libya – Source NYT)
Frankly, this was over when President Obama refused to intervene in Libya, either with a no-fly zone or by delivering weapons to the people in revolt. The turning point was the ambush a week or so ago when a tribe friendly to Qaddafi lured the rebels into their area by promising to join the revolt and then opened fire on the rebels as they entered the trap. Western Libya now seems under firm control of Qaddafi’s forces.
We have been fans of Defense Secretary Gates. His was the sensible,balanced voice among the cries for US enforced no fly zone in Libya. The reasons for not getting militarily involved in Libya are ex
plained well in the Wall Street Journal article U.S. Wary of Libya Role .
plained well in the Wall Street Journal article U.S. Wary of Libya Role .
But we wonder whether the shadow of Saudi Arabia was an even more important factor. When signs emerged of protests in Saudi Arabia, it was game over for the revolt in Libya or so we think. No one can stand the prospect of contagion spreading to Saudi Arabia.
So was a determination made to end this progression of protests in Libya? Will a decisive defeat of the rebels in Libya send a strong signal to protestors everywhere that the regimes are fed up and will do whatever it takes to end these protests.
Look at Saudi Arabia They circled the wagons, got the religious leaders to declare any demonstrations against the regime as un-Islamic, then banned protests and finally fired on the protesters on Thursday. The force prevailed. The promised day of rage on Friday fizzled and the markets heaved a sigh of relief.
Then Secretary Gates arrived in Bahrain and signaled U.S. support for the Bahraini regime. The Obama Administration understands that the rights of the 70% strong Shia community in Bahrain must be respected. But they also understand as we argued that Bahrain is really a battleground between Iran and Saudi Arabia. And no one, except perhaps Hugo Chavez, wants Iran to get the upper hand in this battle.
So we wonder whether the success of Qaddafi might actually signal the end of the protests in the Middle East in the short term.
Growth Trajectory & Treasuries
Another battle, perhaps more vociferous, was waged in the US last week, the battle of Bond Titans. It pitched the reigning monarch Bill Gross against a younger challenger Jeff Gundlach. Bill Gross has dumped all his holdings of US Government Debt from his Total Return Fund and increased his cash holdings to about 22% of the Fund. A massive bet. It seems he is supported at least verbally by other well known bond managers like Dan Fuss and Margaret Patel.
Mr. Gross is afraid of a sell off in Treasuries when the QE program ends in June. He thinks that US Treasuries, at least at the long end, should trade 150 basis points higher in yield. Both Fuss and Patel think there is a sea change coming in Bonds.
This is the consensus viewpoint at least as we found in Europe. Therefore the attraction of Emerging Markets remains strong and best places in fixed income are deemed to be EM Bonds and US High Yield Debt.
Bill Gross agrees with the first call and has invested in EM Debt and in Spanish bonds. He believes that inflation Jeff Gundlach takes a strong stand against the latter and has called the valuation of High Yield Debt as the highest in history.
Gundlach also likes long maturity Treasuries here and expects the 10-year yield to fall to 3.25%. His argument is that Treasuries are above all a play on US growth and he thinks the US Economy is slowing down. Michael Hartnett, the EM guru at BAC-Merrill wonders whether Q1 will prove to be a peak in economic growth. JP Morgan cut its growth forecast for the US Economy on Friday. On the other hand, Bill Gross believes in higher nominal growth.
We confess to be sympathetic to the Gundlach view. We are also aware of the danger of betting against the King. Will the Fed signal its opinion next week?
Featured Videoclips
- Rebecca Patterson & Andrew Busch on CNBC Money in Motion on Friday, March 11
- Bill Gross & Tom Lee on CNBC Street Signs on Thursday, March 10
- Jeffrey Gundlach on CN
BC Strategy Session on Wednesday March 9 - Alwaleed Bin Talal al Saud on CNBC Closing Bell Friday March 11
1. Money Match Up – Inaugural Episode of the new CNBC Show – Friday, March 11
To make it simple. We like this new show. It focuses on the currency market, the largest in the world. It follows the Fast Money format by letting the traders speak much more than the anchor. The anchor’s seems to be to ensure the pace of the show is fast, the opinions are succinct, the recommendations are actionable. This inaugural show met all the objectives.
Friday saw a breakout by the Yen against all currencies mainly due to the belief that monies would be repatriated to Japan to pay for the insurance claims. The two traders Rebecca Patterson of JP Morgan and Andrew Busch of BMO Capital both agreed that a stronger Yen is very negative for Japan. Busch said there is not much they could do while Patterson said that the Bank of Japan will try. She pointed out that the BoJ meets on Monday and they will try to draw a line in the sand. She said “they can’t do anything with rates, they are already at 0%, they can’t do much with fiscal, they have been downgraded at least twice this year”. At this point, Busch agreed and said they got to intervene in the currency markets. It was anchor Melissa Lee who pointed out that after the disaster in Kobe, the Yen actually appreciated 20% in the next few months.
At this point, the show brought on Dennis Gartman who, in his own inimitable style, explained how he closed his short yen trade in the middle of the night. Listen to him rather than read us.
Rebecca Patterson then recommended a trade – if the Dollar-Yen falls to 81, she would initiate a long Dollar – Short Yen trade with a stop at 78 and a target of 88. Technical analyst Todd Gordon was summoned to opine on the trade. He agreed with the trade but would rather enter it when the stops at 80 have been cleared out. He thinks the market is going to put Prime Minister Kan of Japan to the test just like it tested the Swiss National Bank last year.
The trade recommended by Andrew Bush is to short the Euro at 1.3945 with a stop at 1.4040 and a target of 1.34. Rebecca Patterson concurred and said that if the Fed gives even a hint next week of ending QE early, the Dollar will get a lift.
As we said, we like this show. Hopefully, they will recall the lessons of Fast Money and get a pool of FX traders to minimize monotony and boredom from familiarity.
2. Gross & Lee, Bonds & Stocks – Bill Gross and Tom Lee with CNBC’s Erin Burnett – Thursday, March 10
This is a focused clip with clear predictions and statements. First Tom Lee of JP Morgan points out that 30 days of high oil prices cuts S&P earnings by 20 basis points. So the duration of the oil price move is important. Mr. Lee thinks this is not the start of a correction in stocks but predicts a correction in April.
Then Rick Santelli praised the 30-year auction as the best since August 2000. That set the stage for Bill Gross to explain why he has sold all of his Treasuries (except Bills & Repos). He said it was simply a case of Treasuries being expensive due to QE buying by the Fed. His basic question is that once the trillion dollar buyer stops buying, who steps up to buy? Mr. Gross also believes that Treasury yields should be about 150 basis points higher. This is why Mr. Gross has been buying Emerging market debt and some Spanish debt. As he said with a chuckle, Spain has a better balance sheet than the USA. The result he explains the Total Return Fund is yielding 5% whereas the yield of the treasury curve is 2%.
3. Jeffrey Gundlach on CNBC Strategy Session – Wednesday, March 9
This interview is in 3 clips. The first clip High Yield Cracks? focuses on the High Yield Bond market. Mr. Gundlach explains that the high yield market is priced for the current 1% default rate compared to the double digit default rate we saw 2 years ago. Then he reiterated the point he made on January 19, 2011 that high yield bonds should be valued against the 20-year Treasury because of the high volatility of high yield bonds. Further he explains the average default rate is 4% for high yield bonds and when that is factored in, the effective yield of high yield bonds gets close to that of the 30-year Treasury bond. This is why Mr. Gundlach calls the high yield market a priced-to-perfection market. This is why he says you won’t outperform Treasuries in High yield. A totally different view from that of Mr. Gross, of course.
The post-TV interview clip is the most counter-consensus. Look at the title Deflation Will Be Back. In this clip, Mr. Gundlach explains that the US is a debt-clogged economy, credit card debt and public debts have been rung up and so deflation is always around the corner. He says that it will be back when you have wage cuts at the municipal level, when you have the consumer economy softening because necessity prices are going up and the economy underperforms the expectations people have right now. When the economic growth gets soft in a debt-clogged economy the deflation thing gets going again. Then he says “Europe is amazingly out of the investor psyche right now”. Mr. Gundlach points to Emerging Market Equities which he says are topped out in a very convincing way. All of this points to a softer economy to him. Then Mr. Gundlach makes the prediction that state and local governments are going to have to cut one million jobs. When asked, Mr. Gundlach said the Fed will at least take a pause after QE2 before attempting any further QE. He described the debt burden as the elephant in the kitchen because you can get around it, a multi-year deleveraging effort. And in this environment, when you get softer economic data, you get bursts of deflation.
When asked what should an investor do, Mr. Gundlach said “it is time to ring the register in risk assets”. His multi asset fund is in 30% cash and then he uttered the heresy “I think in the short term, meaning from now until labor day, we are going to make the most money in long term government bond”‘. This is the final and most definitive statement of the clip.
The 3rd clip titled State of Denial: Munis features his negative views on Municipal Bonds. Read a summary of his well publicized views at Muni Bonds Will Fall At Least 15-20% on CNBC.com. The definitive statement of the summary is:
- You got a history of low defaults [within the muni market] which is comforting. But that kind of sounds like what subprime sounded like back in 2006. You had a AAA market that had never traded below par, the fundamentals were getting worse and it was owned for a technical reason.
This is why Mr. Gundlach believes that the municipal bond market will go down by at least 15-20% in the long term.
4. Saudi Prince One on One – Alwaleed Bin Talal al Saud with CNBC’s Maria Bartiromo – Friday, March 11
Alwaleed bin Talal (son of Talal) al Saud (of the family Saud) is no stranger to investors and CNBC viewers. He is the investor who put a substantial amount of capital into Citi when it traded around $8 in 1990. He has remained an investor in Citi since then.
It is appropriate for Ms. Bartiromo to use his formal Saudi title and to call him Your Highness. We suffer from no such organizational requirements. We have a disdain for any title or position that is attained by heredity alone. Such systems are a blot on humanity besides being totally anti-American, at least for those who believe in the self evident truth that All Men (& Women) Are Created Equal.
For those who believe in the Bill of Rights, the British “Royal” family concept is also a violation of basic human rights. In fact, we think it is the most perfect implementation of the Portuguese term “Caste’.
But all that aside, we chose this clip because it is the single worst interview we have seen in 2011. We awarded Maria Bartiromo our Most Useful Financial Anchor award for the past two years. So it is our duty to criticize her when she falls short.
Ms. Bartiromo, this year, has reverted to her pre-2008 behavior. In those days, her “interviews” simply provided a forum for infomercials by her guests without any fear of contradiction or interrogation. In this clip, she invites a member of the ruling Al Saud family, the nephew of King Abdullah, to opine on the protests in Saudi Arabia. Contrast her questioning in this interview with the questioning of the Qaddafi children by CNN and NBC reporters. Watch the clip and judge for yourself.
- Bartiromo – Prince Alwaleed, could you tell us what happened on the streets of Saudi Arabia today? Gi
ve us a first hand look of what went on on this so-called day of Rage - Alwaleed – Ok, let me give you an exact first hand report of what happened today, exactly. Today, after the Friday prayers, when the so-called demonstrations were supposed to happen, I prayed with the King personally. …Then I went to the two locations where the so-called demonstrations were supposed to take place. In one location, I saw 3 police cars and I didn’t find a single human being there after the prayers. In a nut shell, this whole thing was a tempest in a tea cup……
- Bartirmo – Prince Alwaleed, what do you hear from the people? Do you worry that the protests may spread even as the Govt has said the demonstrations will go untolerated.
- Alwaleed – Let me tell you. This so-called Day of Rage should be called something else, like day of allegiance ….today if you were on the streets, people had the flags up; they were just embracing themselves and saying they will not tolerate any demonstrations here, we are happy with our King, we love our King and we will not accept any outside interference at all. Really, the day of rage should be changed to day of allegiance to the King
- Bartiromo – That’s a great way to put it.(really Maria?)….What type of reform is necessary in your view? For example, do you think women should have the right to drive in Saudi Arabia, Prince Alwaleed?
- Alwaleed – Having said all that and the fact that we have the allegiance of our people, King Abdullah is a reformer since he became King almost 5 years ago and it is an ongoing process, each country has to advance and move at its own speed…..remember we are the center of Islam, 2000-3000 million Muslims pray to us every year, so our constituency goes well beyond our borders…so King Abdullah has to balance all these things together…Sure enough he is a reformer ands sure enough we would like to make many changes..
This was the toughest question of the entire interview and there was no follow-up. Is the ability to drive the most important right that Saudi Arabian women need? Ms. Bartiromo’s colleague Erin Burnett does not think so. Watch her interview titled The Pulse of Saudi that aired a couple of hours before Ms. Bartiromo’s interview. Perhaps, Erin & Maria should have interviewed Mr. Alwaleed together.
We are believers in Saudi stability, at least for the economic good of the world. But that is a pragmatic position, not a moral position. There were many questions Ms. Bartiromo could have asked to at least maintain a semblance of Journalism. But she didn’t even bother. She intended this interview to be a propaganda platform for Mr. Alwaleed. We think she and CNBC should be ashamed of themselves.
Perhaps Mr. Alwaleed should also be careful. In his words, Saudi Arabia claims the allegiance of Sunni Muslims all over the world. So why can’t Iran claim allegiance of Shia Muslims in Saudi Arabia?
But having said the above, we would rather choose the existence of the Saudi regime to the existence of the Iranian regime.
Finally, Ms. Burnett was bested by Husein Haqqani, Pakistan’s Ambassador to the USA. Mr. Haqqani is an accomplished speaker and debater in the tradition of Pakistani Diplomats. His predecessor Maleeha Lodi was simply amazing. Mr. Haqqani might not be Ms. Lodhi but he was good enough for Ms. Burnett. Watch the clip Pakistan: Could Unrest Spread There?
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