Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. 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.
That’s Why They Call it the Bull
It now seems that the Bull has been pawing the ground with his feet for the past three weeks, getting ready to charge in rage. This week, he did and it was a classic western stampede. The shorts standing in the way were gored and then trampled. Kudos to Carter Worth of Oppenheimer who said that the market has been stabilizing for the past three weeks (see clip 2 of our last week’s article).
Everything that could go right for the stock market did. First Greece went off the radar screen. Then the Japanese Industrial Production data came in stronger than expected. This was the trigger for commodities to rally hard on expectations of Japanese rebuilding. Then the Chicago PMI surprised on the upside carrying the rally for the 4th day. Finally on Friday, the ISM number came in much stronger than expected. So the market went vertical on that number. It was a celebration of the return of Global Growth.
And how? The Dow was up 5% for the week. the S&P up 6% and the NDX up 6%. The Aussie Dollar and the Euro rallied big. Credit rallied big. Risk was on again. Naive souls might have expected the US $ to rally after the release of the stronger ISM number. But they just don’t get Risk, do they? When growth is back, Risk gets turned on and that means the primary carry currency of the World, the US$, gets sold.
If this week is not a great 4th of July present, then what is? So enjoy it by watching the bulls stampede a defensive line the old fashioned way (minute 2:28 of the clip below).
(No Law west of Dodge & No God west of the Pecos – they used to say)
Gentlemen Prefer Bonds
Thus spake Kudlow in his chat with Gary Shilling. Not this week, Larry!
The Treasury market was routed this week. Last week, the 2-Year yield dropped to 33 bps, a low not seen since the Eisenhower Administration. This week, this yield jumped by 50% to 49 bps. The yields on the 5-Year and the 7-Year rose by over 40 basis points. The 10-year yield closed up 34 basis points to 3.21% from 2.87%. Rarely do we see three awful auctions in a week. But then this week was special.
Larry Kudlow talked Stocks, Currencies and Treasuries with his old friend Gary Shilling, an old Bull on Treasuries. Dr. Shilling has a great track record and he has the conviction to take losses for several months. We don’t have that fortitude. We are simple folk. We don’t like to see profits turn into losses.
So we prefer to convey the sage dictum of Coach Chuck Daly – If a play works, keep calling that play until they figure out how to stop it. And the play that works in US Treasuries is that when they rally steeply from April to June, Sell’em in June.
For those who did not listen to the Daly dictum, we offer the comfort of Jeff Gundlach’s reassurance “short-term yield rise is just about over” (see clip 1 below).
We hope he is right. We do think the 30-Year Treasury Bond has value. But standing behind a Semi when it is backing up is for more daring souls.
Currencies
Next week, the RBA & the ECB meet. Monsieur Trichet is expected to raise interest rates to comfort German fears about inflation. How does it help Greece and other PIGS? By sending more money their way of course!
QE2 Ending & Geithner Leaving?
Allow us to simply quote the comment from Patty Edwards of CNBC Fast Money who tweeted thus on Thursday “Let’s name Bernanke Treasury Secretary and end the whole charade. He can float the economy by buying Treasuries from himself.”
An Economic Indicator?
A couple of weeks ago, we saw a segment on CNBC about the Annual Undie Awards. We had never heard of this award. We were informed that this year’s winner was comfy “Granny Panties“. The last time (& the only other time) we had heard this phrase was on a re-run of The 70’s Show. In that episode, the young woman who was discovered wearing Granny panties was mortified.
(The 70’s Show Episode)
We get the “mortified” bit. But if we say this aloud, then Jane Wells of CNBC would undoubtedly chide us. Because she informed us on CNBC PowerLunch that this was an indicator of the current lackluster economy. As we seem to recall, Ms. Wells closed her segment with the prediction that something much more glamorous would have won the Undie Award had the economy been robust.
As usual Jane Wells is correct. Because our rigorous research reveals the 2007 Undie Winner – Barely There Flirtatious Bikini panties. For minds that wish to inquire, the website writes “Sorry, this item has just sold out.”
The Rise of Risque
Upon reflection, we should not have been surprised by the existence of this indicator. Because the level of risque has been a historical indicator of the Indian economy.
When India has been poor and without self-confidence, the dress of Indian women has been full and extremely modest. But during periods of prosperity and global success, the dress patterns and customs of Indian women were more bold & daring. For example, when India was the richest nation in the world (until about 750 CE), The Kaam-Sutra was written and exquisitely erotic sculptures like Khajuraho were carved.
The incomes in India have been in a great bull market this decade. This has shown up in Bollywood films and especially in “Item Songs”. Sixty years ago, Indian women were unwilling to work in films. So Bollywood imported women from overseas to play the more daring roles. The roles of virtuous Indian or “Hindu” women were played solely by Muslim women. As incomes grew, “Hindu” women began starring in films. But the “heroines” would never star in “item songs” or songs with a less than virtuous message
But for the past 4-5 years, starring in an “Item Song” has been a must for the leading ladies of Bollywood and the roles have become more daring. To make our point, we include below a riposte of Rihana’s What’s My Name music video by Katrina Kaif, who made it big with an innocent girl next door image.
Reportedly Katrina had to learn belly dancing for a couple of months to prepare for her What’s My Name item. It shows. This is a semi-English song and its message, though petulantly prudish, should be clear. The visually attractive video belies the message or so we feel.
(What’s My Name? Or The Youth of Sheela)
In case you didn’t know, “Sheel” is Virtue and “Sheela” means a Virtuous woman. Watch the clip. And if you are interested, have a friend translate the two lines from 00:36 to 00:47 just before the question “What’s My Name?”. It suggests a unique and rather indelicate style of “virtue”.
By the way, these Item Songs are enormously important to the business success of Bollywood films. The film’s songs are released weeks or months before the release of the film. The success of the songs has a major influence on the financial success of the film. The item song above made its film a business success even though it bombed at the box office.
The “Aam-Sutra” – Et Tu Pepsi!
Getting back to the linkage of risque to income levels, consider the name of Pepsi’s new Mango (called Aam in Hindi) Slice – The Aam-Sutra. The message of one of the TV ads – Take it Slowly, the More Desire builds, the Sweeter the Union, union of course being a drop of Slice gently falling on Katrina’s open lips. Other TV ads suggest sweet union starring Katrina Kaif and a man. Watch the Aam Sutra Ads on You Tube to see the consistent message from good old Pepsico. Oh, Indraa Nooyi, the staid, professional Indraa on TV! You offer heaven while selling a drink. Just like your ancient namesake.
So is the rise of risque in India and the award to Granny Panties in America, an indicator of bubbling income levels in India (& EM in general) and of a slow economy in the US? If not, just consider the above clip as a fun introduction to Bollywood Item Songs.
Featured Videoclips
- Jeffrey Gundlach on CNBC Strategy Session on Thursday, June 30
- Bob Doll & Peter Fisher on CNBC Squawk Box on Thursday, June 30
1. Jeffrey Gundlach on CNBC Strategy Session – Thursday, June 30
The clip begins with comments by Leon Cooperman, Chairman/CEO of Omega Advisors. Mr. Cooperman’s target for the S&P 500 is 1425 and he believes that this is a stock picker’s market. His views are sensibly put and worth listening to.
For more details about Mr. Cooperman’s thoughts and his stock picks (Apple, Citrix Systems, Discovery Communications, Teva, Ace, CVS, Pacific Booker Minerals, KKR Financial), read Top Portfolio Manager Gives Picks for a Shaky Economy on CNBC.com.
We focus today on the comments of Jeff Gundlach who has made a couple of accurate and money-making calls in his prior interviews on CNBC Strategy Session.
- Gundlach – The Treasury market certainly did rally in anticipation of QE-2 ending. But there are other things going on, too. We have this drum beat of disappointing economic news week after week after week and then we had the crescendo of fear a week ago with the Greek situation.
- Gundlach – I kind of think that the 10-Year Treasury can get down towards 3% on nervousness but to get it down below into the two handle where it was a few short days ago, you need fear. And it seems to me that the fear, certainly around the Greek situation, has passed it’s crescendo.
- Gundlach – So the next thing up in terms of things to look at for bonds is the economic consequences of the debt ceiling debate which is what investors are going to be focusing on for the next several weeks.
- Gundlach – Treasuries were up at 3.75%. they got down to 2.85%. Interestingly right now, at about 3.20%,… we got to 3.22% today. You’re getting close to the average yield of the year. The average ten-year yield is 3.30% and that’s where it started in 2011.
- Gundl
ach – My guess is that the Treasuries have sold off a lot with the Risk On trade with the Greece situation being short-term resolved. My guess is that the short-term yield rise is just about over and now we’re going to look into the barrel of this debt ceiling situation. - Cooperman – Jeff,…forget this year or next month or next week or tomorrow, look out two or three years. From my historical knowledge, the ten-year government bond is generally yield in line with nominal GDP, and if I’m looking at the world two, three years out that the real growth is something approaching 3%, which you kind of need to keep unemployment flat, and inflation is 2 to 3%, that would give you nominal GDP of 5 to 6%. Do you see, two, three years out, that the ten-year government yields 5-6%?
- Gundlach – I kind of think that what you won’t get is a ten-year yield of 5-6%. I think we’re going to be attacking the budget deficit, which means much slower growth and there’s all kinds of problems that go with that idea... If you think about really cutting the deficit significantly, I don’t think you’re going to get 3% real GDP growth while that’s happening. If that’s the case, if the deficit is attacked that way, then you’re going to have sustained low bond yields. That would make sense if they attack the deficit.
- Gundlach – I hate to be such an economist and say on the one hand or the other hand,… maybe when you start talking about attacking the deficit it becomes just too painful and that would lead to the potential of an inflationary policy and if that is the case, then the yield on the 10-Year would be higher than 5-6%. If they run an inflationary policy, if you look at the charts, which I do like to do long-term, the charts suggest 2008, if you’re going to be a chartist, you would probably be in the camp thinking bond yields are bottoming and heading to those higher numbers in the next three, four years.
- Faber – … is there anything that you’re looking at asset class that will or won’t have an impact, perhaps a change that you’re focused on in terms of your investment?
- Gundlach – well, I think what we’re looking at is a market that has been lousy across the board in the month of June. Bonds have lost money, credit has lost money, non-guaranteed mortgages have lost money, stocks have lost money, commodities have lost money and I think that’s just been a reversion trade. In my view, it’s fairly neutrally priced but I still look for further markdowns in credit and I still look for a lot of volatility which will have some downside as we work towards this debt ceiling problem. Right now we are holding cash in anticipation of cheaper prices in credit.
This was said on a day that featured a great rally in credit and stocks. We will wait to see whether Jeff Gundlach turns out to be correct in this call.
2. Bob Doll & Peter Fisher on CNBC Squawk Box – Thursday, June 30
According to CNBC Squawk Box, BlackRock released its 3rd Quarter Asset Allocation on Thursday, June 30. Bob Doll and Peter Fisher from BlackRock appeared on Squawk Box to discuss their recommended asset allocation. In a sense, Larry Fink, the CEO of BlackRock had given the secret away by stating on Wednesday that he would be 100% invested in Stocks if he could be.
- Doll – You may remember that 90 days ago, we turned a little more cautious on stocks in favor of bonds. We’re reversing that now and being more constructive on equities. We don’t sound like we’re jerking things back and forth every quarter but at a nuance level that’s the right thing to do…..We have a five point scale and we went from favoring equities to neutral 90 days ago. Now going back to favoring (Stocks)…
- Doll – well, stocks lagged, bonds did reasonably well. I think the concerns about the economy went from not too weak to gee I wonder if we’ll have a double dip. We think that’s overdoing it. You all talked about Greece. We’ve gotten a little more clarity there. The debt ceiling is still bothering Ma and Pa as they watch television. I think the real issue is the weakness in the economy we’re seeing, Temporary or is it more Structural? If it’s temporary and I would vote for that; Jobs, Japan, Weather, China, Oil, then equities will get a bid in our view because overall they are cheap and as you reported in an earlier story the strength of corporate balance sheets, the free cash flow in the income statement give them a lot of Sustainability.
- Doll – We have gone too far into the soft patch discussion. Feels a lot like last year. Recall July-August last year; it was hot and heavy and in 20/20 hindsight that was perfect time to add beta, cyclicality, risk to the portfolio. We think though we have not dipped as much in share prices as we did last summer, its a good time to be adding them.
- Fisher – We think High Yield will do better now. It sold off a lot with equities. Munis had bad first quarter. They had a pretty good second quarter. What we have seen the rates market really rallied a lot. Rates came down in the second quarter as Bob said. The economy was weak. The fear trade came on …a lot of people shorted the Rates market and got stopped out. That got us awfully low in the yield curve. We know that’s backing up here. I don’t think the economy will go on a tear… We got lower trend growth than we’re used to from the last two decades…we’ve seen the volatile down side now. Time to get slightly better news; not so much that the Fed will come and punch us in the nose. Chairman Bernanke has been pretty clear he doesn’t know what his next move is.… He thinks it is going to be tightening but he doesn’t know when and he’s been really clear about that.
- Fisher – ..monetary policy has its bigger impact by change not by level. So it was the announcement and doing of QE2 that makes a big change and over time that will wane but it is still a pretty powerful easing force. The Fed told us more or less that they thought by doing this they were effectively putting the overnight rate at minus 2% or 3%. Everybody thinks the yield curve is steep. Yeah it’s really steep if the overnight yield should be measured as minus –2.5%. That’s partly why the 2-Year note keeps coming down. It has a hard time backing up. The Fed is still really accommodative here. The Fed knows it will take a while if you think about it to get from minus 2.5% to 0%. You won’t go from minus 2.5% to plus 100 basis points in one go. That’s part of the transition.
- Fisher – That’s why the end of QE2 is the end of the easing process. The process of normalizing could take many months, could take many quarters.
- Fisher – notice think the market is right in the sense that it’s going to take them a while to get to zero% and plus 75 bps and plus 1%. They are going to have to tell us they are doing it. They have been pretty clear the portfolio will stay on auto pilot, that is re-investing the proceeds not let it shrink. That’s the first sign of tightening. That will be the first thing they tell us.
- Fisher – …that shrinkage has to go on for a while. They have gotten the banking system to a high level of excess reserves…that will take a while to wean the banking sector off of those.
- Doll – …back to Peter’s point. The structural head winds of deleveraging won’t go away…. the debt ceiling issue is a technical issue that we’ve made such a big deal about. the real issue is what will we do long term structurally. We have to get past it. Ma and Pa are watching television and don’t like the chaos they see in DC and that doesn’t help confidence. We have to get past that. I believe in the 11th, 12th, 13th hour, We will get it done.
- Fisher – If we get past that lack of confidence, they do something that really matters, cut a trillion or 2 trillion where will it come from? The first three years? the Back seven years? Where is it? The yield curve is gonna have to wait and see. that will really matter.
- Doll – On Financials we are still cautious. there are some signs we might get a trading rally but the long term revenue growth, the regulation issues, it’s still questionable. Health Care fav
orite defensive sector, Tech favorite cyclical sector.
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