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.
1. A Neo-Tepper Lemma?
In a week full of talking heads and wild speculation couched as analysis, the most important comment was a one liner on the wire at 3:05 pm on Thursday. It read:
- “Central Banks preparing for coordinated action to provide liquidity if needed after Greece election – G20 sources”.
The news is never as important as the market’s reaction to the news, so goes a marker adage. If this is true, then this ‘news’ was extraordinarily important. The Dow exploded vertically from being up 70-80 points to up 190 points in a couple of minutes. So did all other indices. Right away, the experts began discounting this news as an obvious rumor and opined how this action showed the emotional schizophrenia of the market. The Dow closed up 155 points on Thursday.
All day Friday we heard how the Greek election was too close to call. Yet, the market rallied with Dow closing up 115 points. The Dow closed above its 50-day moving average and the S&P 500 closed above 1340, a level many pandits & gurus view as critical.
We wonder whether this market action is another instance of the David Tepper logic of September 2010. At that time, Mr. Tepper said that the stock market would rally if the economy became stronger and the stock market would rally because Bernanke’s injection of liquidity if the economy got weaker. We borrow that logic and wonder whether the argument is valid for next week:
- If the good guys win in Greece, a near term disaster will have been averted and so stocks will rally globally.
- If the bad guys win and despair reigns, then the Central Banks will pour in liquidity and so stocks will rally globally.
Clearly, this logic is valid only for the short term, possibly only for next week and conceivably only for Monday. In contrast, the Tepper logic of 2010 was valid for the entire duration of Bernanke’s QE2. That is why this logic can only be called the Neo-Tepper Lemma* as opposed to the 2010 Tepper theorem or the Tepper corollary.
Is this why the stock market rallied so strongly on late Thursday and Friday? We shall find out next week.
By the way, if the Europeans are unable to react quickly to a market event, we have Chairman Bernanke waiting on speak on Wednesday. We know he can act fast and aggressively when he wants to.
* a Lemma is a preliminary result obtained before a Theorem can be established, a sort of stepping stone.
2. The U.S. Stock Market – Crossing a hurdle? Overbought?
Lawrence McMillan of Option Strategist wrote on Friday before the close:
- “In summary, several buy signals have been generated, but
confirmation is needed in the form of $SPX rising above 1340 and
$VIX falling below 21. If that confirmation takes place, a strong
bullish phase should ensue.”
The SPX did close above 1340 but VIX closed just above at 21.11. So is this like a semi-confirmation or an almost-confirmation?
Recall the earlier tweet from Bespoke (@bespokeinvest):
- June 1, 2012 – “There haven’t been this many 52-week lows on a single day for the S&P 500 since October.”
Those who took this as a buy signal (as October 2011 turned out to be) are very happy. But what about now? Bespoke tweeted this Friday after the close:
- “Number of 52-week highs in the S&P 500 was the highest since May 1st.”
- “DJIA closes above 50-DMA for the 1st time since May 3rd.”
- “Number of overbought S&P 500 stocks exceeds number of oversold S&P 500 stocks for the 1st time since May 3rd.”
Do these facts suggest we are at resistance and about to fall back or do they suggest an imminent crossing of resistance? Doug Kass, veteran investor, head of Seabreeze, and favorite CNBC guest, has no doubts. He tweeted on Friday:
- “We might be leaving the rip your face rally and entering the short squeeze of all time rally shortly…$SPY”
The stock market seems clearly overbought. But is it a “good overbought” condition or not? Fortunately for us, the answer came on Friday from the creator of the McClellan Oscillator:
- “The strong breadth numbers on the NYSE have produced a reading of +164.60 on June 15, 2012. That is above the +150 level that has been marking an overbought threshold in recent years, and thus it indicates an overbought condition. But at the same time, it also signals strong upward initiation for this new price uptrend. It does that because this overbought reading occurs within a complex structure above zero, which is a statement that the bulls are in charge.”
We remind readers that Mr. McClellan made his bold call of a powerful rally into the election last week on BTV (see clip 1 of Videoclips of June 4 – June 12, 2012).
For what it is worth, we do think that the pain trade is a continued rally. It would be fun though to get a selloff that shakes off the weak bulls and makes the bears complacent only to then reverse and go straight up. With Bernanke coming in to bat on Wednesday, any combination of rallies and selloffs could occur next week.
In contrast to the above, Abigail Doolittle (@abbyDoolittle) of Peaktheories sounded bearish in her tweet on Friday morning:
- “Gotta tell you $SPX 2-yr+ chart now looks like gruesomely bullish IHS at
best & that means a drop next week into July & then Fed in Q3/4”
What about the fundamentals-based viewpoint?
- Barry Knapp, the Barclays Strategist, who told BTV’s Street Smart that the S&P will fall to 1200 by August before a rally in the fall while Andy Busch of BMO told CNBC that the Greek election was an opportunity to go long risk.
- Savita Subramaniam, a strategist at BAC-Merrill Lynch, told CNBC’s Closing Bell that sentiment is more negative than it has been for the last 15 years and generally that is a better buy signal than a sell signal. Her 12-month target for the S&P 500 is 1,450. She warns that it could be a dangerous, choppy environment until then.
3. U.S. Treasuries
Despite the 1.5% rally in the Dow and the S&P, the entire Treasury curve rallied this week with TLT rising by 1%. This could be due to the continued weakness in the economic data or perhaps due to the expectation that Chairman Bernanke will hint about an extension of Operation Twist in the Fed statement on Wednesday. Look what Jan Hatzius, Chief economist at Goldman Sachs, said to CNBC Squawk on the Street on Wednesday, June 13:
- “I think if you take everything together there’s likely to be easing. I wouldn’t say that’s a 99% call. I’d say maybe 75%. maybe a bit more. The form of easing, I think, is complicated because there are a number of things on the table. balance sheet expansion and purchases of treasuries and mortgage lists is our call. It’s also possible that they basically decide to extend operation twist and then there are also various options in terms of the communication about future monetary policy moves which also could be an easing move.”
This week, a strong buy on the 10-Year Treasury note and the 30-Year Treasury Bond came from an unexpected source. Jim Rickards, the author of the best seller Currency Wars, was a guest on BTV with Deirdre Bolton. Near the end of his long interview, Mr. Rickards said (at minute 07:29):
- “actually one of the best trades right now is US Treasuries 10 yr notes
and 30 yr bonds, I know everybody — people say this is a bubble and
when rates go to 5% you are going to set slaughtered..that’s true but
10-year notes can go from 1.40% to 50bps before they go to 5%, and at
lower absolute levels the DV01 or, the kind of money you make on each
basis point drop in interest rates, increases exponentially….” - “We are Japan , 1.5-2% growth is the best case – worst case is
some kind of systemic collapse…”
4. The U.S. Economy
Almost every single piece of economic data released this week was disappointing. The Consumer sentiment was bad and the inflation data was almost deflationary. The
annualized growth rate of ECRI’s Weekly Leading Indicator fell to
-3.0%, its lowest since February from -2.2% a week earlier.
For a detailed discussion of the U.S. Economy, run don’t walk to the free Charts with Dave report of David Rosenberg dated June 15, 2012. We include a few excerpts below:
- For the first time on record, we have gone 11 quarters into a recovery but not managed once to post a GDP quarter of 4% at an annual rate or better….even the 1933-36 bounce was bigger than this.
- The headwinds are three-fold:
- First we are still in the throes of a consumer debt paydown cycle which is unprecedented and inherently deflationary.
- The second headwind is housing… it could take years before the excess inventory is sufficiently absorbed to therefore establish a floor under residential real estate prices.
- The third headwind relates to chronic unemployment and underemployment which has triggered never-before-seen wage disinflation, especially for an economy deemed to be out of a recession.
- The output gap is 5.4% right now – that is equivalent to the whole state of Florida sitting idle…
What about the world?
- …the median OECD country is carrying at all level of society (corporate, household and government) a total debt/GDP ratio of 450%.
- The total OECD government debt/GDP ratio has shot up more than 30 percentage points in the span of five years…to the point where debt/GDP ratios in aggregate exceed 100%. It is at 90% that …fraying-at-the-edges in terms of fiscal sustainability and impairment to private sector capital stock.
What comes next?
- The economic intelligentsia were telling us six months ago that Europe would manage to escape recession….Then we were told it would be “contained” to the periphery. Yet the mid-40s readings in the French & German PMIs in May strongly hint at economic contraction at the core of Europe now.
- The U.S. economy has nearly a 90% correlation with Europe and combined with the upcoming fiscal squeeze at the federal level, one can reasonably expect a “trade shock” to hit America’s GDP exports before long.
If you think a picture is worth a thousand words, then you should really look at this Charts with Dave report. No need to read his writing. Just look at the 52 charts. You will understand why he thinks the 30-Year Treasury yield could go lower.
5. China & Chinese GDP numbers
Jim Rickards, the author of Currency Wars, has just returned from China. We heard him make an interesting comment about China’s GDP numbers to BTV’s Deidre Bolton:
- “China can make their GDP whatever they want, not with consumption but
with investment, so I say they have too much capacity there is nothing
to stopping them from building more capacity and that counts as GDP even
if it doesn’t generate revenue in the long run, even if it is not
needed in the intermediate run ..”.
We have heard several TV guests say that they don’t believe China’s GDP numbers. This is one case when a guest explained how GDP can be “manufactured” simply by building capacity, malls, stadiums, apartments etc. In other words, the GDP numbers might be real but might tell the wrong story. This is so reminiscent of an address by the Global Crossing management in 2000 when they boasted about the massive capacity of fiber they were building. Their mantra was “build and they will come”. Is China any different? Mr. Rickards said:
- “you got to put the brakes on the infrastructure development right
now..and be serious about bringing the consumer online – problem is
there are vested interests..there corrupt officials, cronies what I call
financial warlords who don’t care about overcapacity,…” - “by the way a lot of that high end capital
is leaving the country…the rich people know the party is over…they
are milking the government, getting their money out…it is a very
pessimistic scenario…”
For a traditionally skeptical view of China’s GDP numbers, listen to Bert Dohmen’s interview with CNBC’s Gary Kaminsky. Mr. Dohmen is the publisher and editor of the Wellington Letter.
- “There will be a soft landing [in China], but it will be different. It will be quicksand and mud….The Chinese economy is probably now showing zero growth… China has had a huge bursting of the speculative real estate bubble, prices are down in major cities 40-50% of condominiums, they have 64 million apartments empty where they have never had the electric meter turned on..
For a detailed discussion, read Mr. Dohmen’s article on CNBC.com titled Dohmen: ‘Soft Landing’ in China? No Way!
For a traditional and heart-felt rebuttal of such negative views of China, read the views of Jim Rogers at Ignore Economic Data, Here’s What Matters About China: Jim Rogers on CNBC.com. His central message:
- “China is growing,…These are hard-working, energetic people who are on the rise again. Don’t get me wrong – there will be setbacks. Some China real estate may be heading for a hard landing – but other parts of the Chinese economy are going to boom…”
We know what is happening in Europe. We, frankly, don’t know what exactly is happening in China. And as they say, what we don’t know is what ends up killing us.
6. Myanmar’s Ethnic & Religious Conflict – A look into the future?
This week there was an outbreak of ethnic and religious violence in the Rakhine state of Myanmar. This was a sudden violent conflict between Rohingya Muslims, migrants from Bangladesh, and Burmese Buddhists. About 16 people were killed and over 600 houses (huts!) were burned.
First, the investment angle. The easiest way to understand this is to watch the Stratfor video below. It shows the importance of the Sitwe port and the gas field near it. The threat is that the Rohingya Muslims will try to sabotage and attack the pipelines and the port if things get worse.
Our greater worry is that EU and Human Rights activists will use this to make further demands on the Myanmar regime. Such stupid actions could sabotage the nascent efforts of the Myanmar regime to befriend the US & EU. The only beneficiary would be China which so far has been the only ally of Myanmar.
Myanmar and Bangladesh are vital to America’s strategy in Asia. Secretary Clinton is pushing to build a land road, a highway from India across Bangladesh to Myanmar and beyond to Thailand thus connecting the South East to India. This is intended to loosen China’s grip on the region. A conflict between Bangladesh and Myanmar would destroy this effort.
But our concerns are deeper and more long term. Bangladesh has been a basket case for decades with a large population. Over the past 3 decades, refugees from Bangladesh have migrated to Indian Bengal, to India’s remote states that border Myanmar and to Myanmar itself. The Bangladeshi migrants, almost all Muslim, have neither assimilated nor have been accepted by the locals. Bangladesh now refuses to take back these migrants.
The Buddhists, traditionally pacifist, are waking up in most parts of Asia. This is a volatile cocktail mix. A few months ago, Buddhists in Sri Lanka destroyed a mosque and now in Myanmar, Buddhists have taken revenge of Muslims Rohingyas because a young Buddhist girl was raped by young Muslims. In the past, Buddhists would stay passive, now they don’t.
There are centuries old memories of Muslim invasions and Muslim atrocities all over Asia. Muslim majority Indonesia and Malaysia suppress Buddhists as a matter of policy. Now Buddhists are waking up, fighting back and in some cases like Sri Lanka attacking first.
These issues were dormant when money was flowing in freely and Asia had a credit bubble. Now as conditions worsen and economic opportunities become scarce, the prospects of violence becomes real. The last decade featured a conflict between America and the Middle Eastern Muslims. This decade could well see a conflict between Muslims in Asia and other religions that were born in Asia. The violence of that conflict would be beyond comprehension.
And we haven’t even touched the subject of Pakistan-Afghanistan. So, the next time you hear an EM strategist wax eloquent about great demographics, remember that the Af-Pak area alone will have 300 million Muslims by 2020, mostly young, aggressive, poor and without any gainful employment or hopes of employment.
Featured Videoclips
This week, we could not find any videoclip that stood out to us. So we included key comments from several clips in our discussion above with links to the videoclips. Perhaps this was because no one had anything real to say except guess about what happens this weekend.
Send your feedback to [email protected] or @MacroViewpoints on Twitter..
