Interesting Videoclips of the Week (February 20 – February 24, 2012)

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.

What’s Not To Like

S&P 500 closed this week at its highest level in nearly four years. Michigan consumer sentiment number came in at the highest level since a year ago. Apple, the symbol of consumer spending, closed at a new all time high. Europe seems quiet and a Fed President lauded the ECB for its good job. VIX, the Volatility Index, keeps trending lower. And interest rates stay low despite the ebullience. So may be all is indeed right with this world!

How can all asset classes rally at the same time? How often has that happened and how has it been resolved? David Darst of Morgan Stanley Smith Barney provided the answer on Friday afternoon:

• .. last
  60 months, that’s five years, there have been only 4 times when stocks,
  bonds, gold and oil have gone up in one month. January was one of
  those, that’s the 5th time. Every single time, that’s a medium term peak
  for stocks and they are down by double digits a few months later. \

This week, Adam Johnson of Bloomberg announced that Tom DeMark had gone to cash a couple of weeks ago. Strangely Mr. DeMark neither volunteered this information nor did he explain his reasons for such a major decision. He simply said he is looking for two more up closes and then a 5.56% decline in the S&P. He said this decline would be more rotational and the declines in sectors could be much larger than the decline in the S&P 500 (see clip 7 below).

Frankly, EM depends on China and as Michael Shaoul of Marketfield Asset Management told Bloomberg’s Betty Liu:

• “M1 in China collapsed in January, the local creation of liquidity is at its smallest rate since the data began in mid-1990s .”

1. Recession Call Stands – Lakshman Achuthan on CNBC Squawk Box on Friday, February 24
2. 3% GDP growth in 2012 & Rates to rise in 2013 – James Bullard on CNBC Squawk Box on Friday, February 24
3. Q1 2012 GDP at 1%, Serious Recession in Europe – David Rosenberg on Bloomberg’s Surveillance Midday on Friday, February 24
4. Saudi Arabia like India in 2003,2004 – John Burbank on Bloomberg’s InBusiness with Margaret Brennan on Friday, February 24
5. Don’t Buy Government Bonds – Leon Cooperman with Bloomberg’s Erik Schatzker on Wednesday, February 22
6. Baby Boomers & Ford Motor Company – Bill Gross on Bloomberg’s Street Smart on Thursday, February 24
7. Went to Cash a couple of weeks ago – Tom DeMark with Bloomberg’s Adam Johnson on Tuesday, February 21

Lakshman Achuthan of ECRI made the recession call in his appearance on CNBC Squawk Box on Friday, September 30, 2011:

• it’s a done deal. We are going into a recession. There is a contagion among those forward looking indicators that we only see at the onset of a business cycle recession… And it is a new recession.

The economic data looked pretty bad at that time and the call seemed logical. Then the data began improving. So Bloomberg’s Tom Keene questioned Lakshman Achuthan on Friday, December 8, 2011:

• Keene – You had a recession call. What happened?
• Achuthan – It is happening…… If there is no recession in Q4 or the first half of 2012, then we are wrong….The downturn we have now is very different than the downturn in 2010 which did not persist. This one is persisting……forward looking data has remained weak, it is getting weaker. It is not turning up…..

In contrast, the risk markets are sending very different signals. The global stock markets have rallied, commodities have rallied and optimism abounds. So what did Mr. Achuthan say to the anchors on CNBC Squawk Box on Friday?

• Achuthan – …Our call still stands. Since our recession call (September 2011), all of the definitive hard data that is used to officially date business cycle recessions, it has been getting worse not better despite what the consensus view of an improving economy has been. GDP growth, year over year peaks in Q3 of 2010 and falls down to 1.5% by Q2 of 2011 and has flat lined essentially since then, the last reading was 1.6. Similarly personal income growth — I’m talking big, aggregate numbers, has the same kind of pattern. Broad sales growth. the broadest measures of sales, same kind of pattern. Industrial production growth, year over year, as of January it is at a 22-month low.
• Achuthan – So you put all of this,…., you put it into a coincident index of the U.S. economy and if you look at the year over year growth
  of that index it’s now at a 21-month low – it is the definitive measure of economic growth. In English the growth has been slowing……you haven’t had a decline like that in the past 50 years without a recession following in short order, okay?
• Achuthan – I wish this wasn’t our forecast. we are the skunk of the garden party. it’s no fun…. but to the point of the Fed, – the world’s central banks, plural, are printing money like crazy. That does make you feel better but go to where that interacts with the economy. You look at the Velocity of Money – how often does money exchange — all that money that’s going in, they’re goosing the money supply, how often does it exchange in the economy? That’s a really important metric on the health of the economy. It has dropped to a record low in the United States. it’s near a record low in Europe. it’s even near a record low in China.  These are not symptoms of health. And when you have all that money out there, it’s got to do something. so it is goosing the markets.
• Quick (CNBC) – does the coincidence index …give an indication of what’s coming in terms of the jobs outlook? Have we seen the best number and is the jobs picture going to get worse from here?
• Achuthan – The index itself does not forecast forward. What we’ve seen there in that decline in the growth rate you haven’t seen in the past 50 years is not a recession in short order so that doesn’t bode well for jobs. Speaking to jobs, I admit, I am acknowledging they have improved through the latest readings. But jobs are basically a bit of a lagging indicator. They follow, they do not lead consumer spending growth.
• Quick – would your call be that jobs are going to get worse?
• Achuthan – yeah, and I’d say in the next few months I would expect them to start to flag because they follow, they lag at turning points where consumer spending growth has been going and we know that’s clearly been going down and if you delve into that, look at personal disposable income, you look at personal disposable income that has been negative now growth for five months. You’ve never had that, not even close.
• Achuthan – Now let’s switch to our leading indicators – stock market. is one of them – but the stock market, just like it has forecast nine out of the past five recessions, it has forecast nine out of the past five recoveries. It could be QE-related, too. First off on the leading indicators I look at them across the board – they are not negating our recession forecast, the full array.
• Achuthan – We’re printing a lot of money and given all that money I’m surprised the index hasn’t lifted more because the risk assets are being goosed and look back to early ’08. The recession begins in December of ’07 and what happens? You get a springtime rally – double digits in S&P. We’ve gone much further this time. We’ve printed more money. We were cutting interest rates a little bit and back there inside of a recession oil went to $147 because the economy wasn’t able to absorb all that liquidity.

Later on Friday, Mr. Achuthan appeared on Bloomberg’s Surveillance Midday and made similar comments.
 

2. 3% Growth in 2012 & Rates to rise in 2013 – James Bullard on CNBC Squawk Box – Friday, February 24

In his first clip, President Bullard scoffed at the forecast of Lakshman Achuthan (see clip 1 above):

• Kernen (CNBC) – Did you see the interview that we had with (Lakshman Achuthan)? Did you hear any of that? Have we overshot on our expectations for how solid th
  is recovery is and do you feel the coincident indicators are indicating that it’s much less vibrant than we think?
• Bullard – I thought he was like the weather today, a little bit gloomy. So, no, I think the economy’s looking brighter in 2012 here. I think we can get 3% growth. I think we can get unemployment down 7.8% by the end of the year.
• Kernen – what the heck was he talking about? what was he looking at?
• Bullard – He is looking at coincident indicators and they are great things to talk about and on the show. But I would say this, the indicators don’t know about things like European Sovereign Debt crisis and probabilities of meltdown in Europe falling. Those kinds of things aren’t factored in, so I think that that’s really what’s changed here early this year at the European situation has settled down some. It’s not — obviously it’s still a problem but it’s settled down some, and the ECB has done a good job of restoring calm.

We are confused. Don’t indicators reflect the impact of events like the European Sovereign debt crisis? And if economic indicators, as Mr. Bullard says, are merely great things to talk about on TV, then how does Mr. Bullard measure the health of the economy? Does he simply rationalize any indicator by applying any reasoning that seems convenient to him?

CNBC’s Steve Liesman then asked an important question, a tough question about the impact of Fed’s policies:

• Liesman – The Wall Street Journal has an editorial this morning basically saying that higher oil prices are in large part the result of Fed policy, and you can’t go out there and take responsibility for higher stock prices and not take responsibility for higher oil prices. Is it right?
• 
  Bullard – you know, I was on here last year when, you know, probably about this time when QE-2 was in full force, and I do think that some of it said true that commodity prices, and I think that’s a serious issue for the committee to consider exactly how that’s working. I think is a difficult thing to get our heads around. But I do think it’s an important consideration. I think it would be very worrisome that you have the situation in Iran being a wild card for global oil prices. You wouldn’t want to feed into that with new policy moves at the Fed.

Liesman asked a tough question and then allowed Mr. Bullard to evade it with a rambling response. Becky Quick asked a question about QE3:

• Quick – Is it possible for the Fed to be able to say that the situation – the economic situation – is improving and that’s good news, which means you may not see QE-3 if I’m interpreting that correctly? but it could be enough of a concern still that we would keep rates low through 2014 as we’ve indicated? is it possible to walk that fine line?
• Bullard – Monetary policy always walking a fine line, so, yes, I think that’s about right. and, you know, I wouldn’t take QE-3 off the table ever. I‘ve been one that says this is a potent weapon that we can use, but we should use it only if the economy deteriorates and especially if the inflation numbers come in below our inflation target and start to look — start to drift down into, you know, more disinflation or deflation, and so we’re not — we’re not in that circumstance right now. Headline inflation above target. Even core CPI is above target measured from a year ago.
  

We are underwhelmed by President Bullard and by the quality of his comments.  If you see the clip, you will notice an air of smugness (if there is such a word) about Mr. Bullard. We did not hear or see in President Bullard the intellect we see in Bill Gross, Jeff Gundlach, David Rosenberg or Lakshman Achuthan.

In the 3rd clip, Steve Liesman asked a direct question about interest rates and followed up:

• Liesman – When you forecast the Fed will first hike interest rates?
• Bullard – 2013.
• Liesman – So, you’re one of those people. So, how is it that there are so many people, you among them, I’m sure President Fisher was in there, we interviewed President Plosser, he’s in there, too, 6 of the 17 members say there will be a hike in 2013, but the statement says 2014, how does that square?
• Bullard – well, it’s up to the Chairman to form a consensus. I guess what I’m impressed about that date, you can think about the date and you can think about the uncertainty around that date and it’s pretty wide. It’s pretty wide, and the dispersion on the committee shows that, and it just shows you that different people can have different views of how the economy’s going to behave in the next several years. Very hard to forecast out to, you know, it’s hard to forecast out six months, you know, much less two years or three years. so, that’s where we are. and i do think the date’s adjustable if the economy changes.

Later on, the group discussed the possibility of a single mandate for the Fed and how that might impact decision making at the Fed.

We haven’t seen much of David Rosenberg on Financial TV in recent months. So we were eager to hear what he had to say about the ebullience in the risk markets. A summary of his comments are below:

• If gas prices go over $4 and stay there, the odds of a recession go up materially….
• I am thinking of Bob Farrell’s Rule 9 – “when all the expert forecasts agree, something else is going to happen“. That is exactly what happened last year when we had tremendous ebullience over the economic outlook, risk assets. It worked basically into April…last year was the story of investor anxiety and capital markets volatility. I am thinking, right now, very similarly, you have a very high level of bullishness, and I would say, a very high degree of investor complacency right now.
• Right now, the markets are breathing in the fumes of central bank liquidity…right now, you have positive seasonals, positive technicals..the fundamentals to me are questionable…human nature is that you take the most recent trend and extrapolate it into the future…this is the mistake a lot of economists, strategists make…the point I am stressing here in 2007, the stock ma
  rket peaked in October, the problems started pestering a year earlier…
• At Gluskin Sheff, we are not pushing people into Government Bonds, we are pushing them into corporate bonds….corporate bonds is a totally appropriate place to be in the Fixed Income markets…
• last year, the earnings held in but the multiple contracted…it is not going to be a story about multiple contraction anymore, it is going to be a story of earnings disappointments …
• (about Gas prices) – rule of thumb is that a rise of 1 penny in gas prices drains $1.5 billion from household cashflows..if we break over above $4, you are talking about another $50-$100 billion drainage from income…
• I think the first quarter is going to be close to 1% in annual rate...the consumer is sputtering  into the first quarter, Housing is 2.5% of GDP, , consumer is 70% of GDP…..
• You have three different shocks coming down the pike. We have not seen the full impact of the European recession. I think it is going to be a very serious recession in Europe. People are talking about Decoupling again, the US went into a recession in 08 and it took about a couple of quarters for Europe to feel it and the rest of the world. Everybody confused Decoupling with Lag.  We are going to have a Net Export shock in addition to the Oil shock..and how people respond to the end of the Bush tax cuts is going to be real important.

Veteran hedge fund manager John Burbank seems to concur with David Rosenberg in the next clip.

5. Don’t Buy US Government Bonds – Leon Cooperman with Bloomberg’s Erik Schatzker (03:07 minute clip) – Wednesday, February 22

• “I have great confidence the Fed is ultimately going to get their way. The Fed is trying to elevate asset prices, help consumption, help the economy and in two-three years time, we will be worrying about inflation and interest rates will be materially higher.”
• “An instrument that I have absolutely no interest in – the most widely traded instrument in the world – is US government bonds. I don’t think people understand how risky a US government bond is at 2% return.”
• “I understand the arguments of those that are liking it but a 2% government bond… if we’re  talking about marginal tax rates, all in state and local, federal 40%, you’re keeping 60% of your 2%, you are keeping 1.2% . The rate of inflation is somewhere in the range of 2-3% so your capital is being confiscated, it makes no sense.”
• “If you look at the history of the 10-year government bond – normally, and we’re not in normal times now, we’re in a world of financial repression because of weak economic conditions – in normal times, a 10-year US bond yields in line with nominal GDP – nominal GDP is the summation of inflation plus real growth.”
• “So if inflation is ranging 2-3%, let’s say and real growth is 2-3%,that would mean nominal GDP would be growing normally between 4-6%. So if I told you 10 year government bond was going to 4-5%, you wouldn’t think that was a bold or unusual forecast. Well, that is an enormous capital loss for the person that holds that 2% government bond.”
• “Amongst the panoply of financial assets, I think US government bonds are the least attractive and I think equities, and I’ve been premature in all honesty, the market didn’t do as well as I thought it would do last year, it’s slightly ahead of schedule this year- but when I look at the alternative of financial assets – Cash earns zero, and Bernanke has promised us it is going to be zero for a couple of years; you’ve got keep some of that for security and safety purposes; you have U.S. government bonds at 2% – 0 interest and I don’t own ONE In my portfolio.”
• “The third alternative is high yield, that’s had an enormous rally that’s down to a little over 7%; so selectively you could find individual issues that make sense, but collectively high yield has kind of got itself fully priced.”
• “Then you’re left with the S&P, which is 13 ½ earnings; yields a bit over 2%, 10% below the historical multiple at a time when interest rates are below historical and you can find lots of cheap stocks out there that will yield more than bonds today that are good companies that will grow over time.”
• “So I think by default stocks went out, and they are the best house in the financial asset neighborhood. Not to say we’re not without problems – Iran, the price of oil, the uncertainty over political outcome come November…”

• “I think gold will work, I think the S&P will work, they’ve already worked somewhat this year. The S&P is up somewhere around 8%.”
• “We find a lot of cheap stocks around, technology. I hate to buy things that are up a lot, so forgive me if I mention things that we own, but we own them and we would not own them if we didn’t like them.”
• “I would like to put new money to things that haven’t moved.  We like, in technology, Apple and Qualcomm.”

• “We think [Apple] is worth something north of $600.”
• “It’s funny, it was really like a mass hysteria. We put about a half of one percent  of our assets into RIMM late last year on a theory that they had a revenue base that was being mispriced by the market. Which was 20% of what we had in Apple, we’ve owned Apple now for a long time, and we continue to own a big position, so we had five times more Apple investment than RIMM.”
• “We kept on getting calls from the press about RIM. We sold RIM because we have a discipline of taking stop losses, still think it might be intriguing. They have 75 million subscribers, that are paying them on average almost five dollars a month for the email service. We’re out of it.
• “I wouldn’t say Apple is the leading candidate for new money, I wouldn’t put new money into Apple, but we’re riding the trend. And we think they have a unique position and a couple more years of very good runway ahead of them. “
• “Qualcomm has the dominant chip in smart phones.”
• “In the financial area, we own JPM, a little bit of Citicorp, Bank of America, and a very unique company called Altisource Portfolio Solutions which helps manage the foreclosure process for banks.”

On June 30, 2011 (clip 1) , Leon Cooperman appeared on CNBC Strategy Session with Jeffrey Gundlach. He was bullish on US stocks at that time as well and made the same case (as above) about liking stocks while shunning Treasuries. His target for S&P 500 was 1425. In that interview, Leon Cooperman faced Jeffrey Gundlach who argued that Treasuries were attra
ctive. The next 6 months conclusively proved that Gundlach was right and Cooperman was wrong.

Below Bill Gross makes the same point.

6. Baby Boomers & Ford Motor Company – Bill Gross on Bloomberg TV’s Street Smart (09:36 minute clip) – Thursday, February 23

So you would think Mr. Gross is shorting Treasuries or at least shunning them as Leon Cooperman advises. Instead, he keeps buying them. His explanation is of extreme importance to Individual Investors:

1. Comparing Treasury yields to corporate stock dividends spans a huge gap of risk – AAA for Treasuries and an implied BAA and lower for subordinated stocks as investment instruments.
2. Stocks can go down too just like bonds. We certainly saw that in 2008.
3. Demographically, boomers prefer certainty as opposed to speculative capital gains, so there’s an element to that.

Then Bill Gross points out the surprising announcement by Ford Motor Company (stunning in our opinion and characteristically ignored by both Bloomberg TV and CNBC):

• Why Ford is shifting billions of dollars a year from their equity portfolio into bonds? – They are doing that because of the certainty, locking in their liabilities relative to their assets. Even at a low 2-3% rate. Boomers, from the standpoint of individual investors, are the same way. They are beginning to get older and require more certainty.

For his views on mortgages and the Federal Reserve, read the excellent summary below from Bloomberg TV:

Gross on whether investors should be looking at mortgages:

• “Sure. An agency mortgage, even a non-agency mortgage, but let’s stick to agencies and Fannie and Freddie, they yield 1% to 1.5% to 2% more than those similar average life Treasuries. If you have an environment where interest rates will not change, and that is the key. Is Bernanke good to his promise? If they do not change, you would prefer to have a 1.5% higher yield, a 3% to 3.5% yield as opposed to a 2%. I think mortgages makes sense. The extension of risk adding to high-yield is another situation that is similar to the equity argument that I just made. Yes, you get a higher yield, but you are principle at risk. As you get older and more fixed- income oriented then perhaps you want to stick to something safer.”

On why PIMCO is announcing a new ETF next week that will mimic the Total Return Fund:

• “That is a complicated answer, but technically the fees are the expenses on an annual basis are less on the Total Return Fund that now exists versus the ETF. There will be a slight difference, but of course you don’t pay the all-in retail fees and you could make the argument that it’s a lot cheaper as an alternative.  The ETF is limited to the extent it can’t use futures and optional types of securities that have been successful with the Total Return Fund. Basically they will be the same. We are excited to provide the same types of returns for that ETF as we do for the Total Return Fund and allow individual investors to buy it on the New York Stock Exchange. We do not suggest they trade it, but we think they can buy it at 10:30 in the morning, as opposed to the market closing and have a great longer-term performance record.”

Gross on whether the economy and investing environment has improved:

• “I think they are. We should analyze why. I think that is always difficult, but I think in this case with central banks writing checks in the hundreds of billions, and yes we’re doing that with our Operation Twist, and the ECB is doing that with LTROs, and Japan has stepped it up, and China has been writing checks in terms of increasing their monetary base. There has been a huge flush of money into global markets and ultimately into global economies. You would expect that to happen. That does not mean that is the solution, or the forever solution, but certainly temporarily it has helped to support the economy, and therefore financial markets.”

On whether he’s changed his position in U.S. Treasuries:

• “I do not think so. It is important to recognize, as we a tried to recognize at PIMCO for the past several quarters and past several years, that there are negative repercussions to writing checks and printing money.  It is not just inflationary.  To the extent that zero-based money that we have here in the United States, that we’re seeing in the U.K. and close to that in euro land, it begins to reap some unexpected havoc in terms of the real economy as well. Financial institutions like banks and insurance companies start to close branch offices and lay off people simply because the cost of money does not support the prior economic activity that historically has been the example.”

On whether Bernanke’s promise to keep low interest rates through 2014 is distorting the bond market:

• “I think it does.  There is no doubt.  It’s something to be reckoned with.  You don’t want to fight the Fed, as they say.  To the extent that yes, they have conditionally promised to keep interest rates low, in Bernanke’s vernacular that basically means 25 basis points for the next three years or so, then that produces an artificially to interest rates. There is no doubt that real interest rates now certainly from the standpoint o
  f the policy rate and even from the standpoint of five-year tip, for instance, an inflation protected security at a -1.25% relative to historical parameters, that is 1-2%, maybe even 3% lower than they should be. Yes, Treasury yields are artificially suppressed.”

On whether he still wants to be in Treasuries:

• “You do from the standpoint of recognizing the Fed is good to its promise, and that is something to consider, but if Fed is good to the promise, then interest rates are not going anywhere for the next two-three years, and there is a 3% yield from a longer-term Treasury and 2% yield from intermediate-term Treasuries. Does that represent value? Not really. Certainly the saver and the investors being short-circuited, haircutted, based upon historical terms. If in fact the price of the securities cannot go down very much if the Fed holds to its promise, that is if it keeps interest rates low, then 2% is better than nothing.  Put it that way”

On Leon Cooperman telling Bloomberg TV yesterday that the return on bonds is not worth owning them:

• “I do not argue against that, and Mr. Cooperman has a decent argument. I just argued that in terms of confiscation of capital.  There are several reasons to be cautious, however. One, comparing Treasury yields to corporate stock dividends spans a huge gap of risk. AAA for Treasuries and an implied B AA and lower for subordinated stocks as an investment instruments. Secondly, stocks can go down, too, just like bonds. We certainly saw that in 2008.  Third, demographically, boomers prefer certainty as opposed to speculative capital gains, so there’s an element to that.”

On why Ford is shifting billions of dollars a year from their equity portfolio into bonds:

• “They’re doing that because of the certainty, locking in their liabilities relative to their assets. Even at a low, 2-3% rate.  Boomers, from the standpoint of individual investors, are the same way. They’re beginning to get older and require more certainty. Do they find appeal in a Johnson and Johnson at 3.5% dividend yield with growth potential? Sure they do, but they also believe they want that money back, and if there is a 2008-2009 scenario, perhaps they won’t.  So there are demographic tradeoffs here that have to be considered.” .

7. Went to cash a couple of weeks ago – Tom DeMark with Bloomberg TV’s Adam Johnson (02:49 minute clip) – Tuesday, February 21

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