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. Prometheus – the firebringer?
Like Prometheus of the Greek legend, the 3 major central banks have committed to bring the fire of growth to our globe. China surprised the markets by announcing a large stimulus to build even more infrastructure. Draghi, to his credit, actually managed to beat expectations created by his own leak the day before. He sent markets soaring to their best day in the past couple of months. He achieved his own goal of rallying peripheral European debt. That’s brilliant as BMO’s Andy Busch pointed out on CNBC Money in Motion on Friday:
- “This is the cheapest intervention I have ever seen; it is great, it is extensive,… but let’s face it, Draghi hasn’t bought one bond but two-year notes just collapsed in Italy, in Spain…this is awesome for what they are doing…”
Why couldn’t Bernanke do that? Any way, he is next at bat and the market expects some sort of QE next week. The payroll numbers released on Friday and the downward revisions to July & June have made it a virtual certainty. So said Jon Hilsenrath on Friday:
- “I think he pulls the trigger next week. They have now signaled 3 times that something is coming. If they don’t launch a bond buying program next week, I think the whole world is going to be asking what’s going on?… A big new bond buying program.”
What sort of a program? The base case of Goldman’s Jan Hatzius is an open-ended asset purchase program of around $50 billion per month of:
- mostly mortgages, conceivably all mortgages, there are technical questions around whether Operation Twist is continued or replaced by balance sheet financed Treasury purchases. My guess is that is going to be continued, but that is an open question.
So now we have a globally concerted open-ended unlimited effort to bring the fire of growth to mother earth. Will these modern Prometheus succeed? And when they do, what price will they or all of us mortals pay for their ego?
2. “Death of the Bundesbank” & the “Virtuous Circle”
Draghi’s goals might be more modest. He simply wants to keep the short rates in peripheral debt low and scare away the shorts. To achieve that and to keep the Germans somewhat content, Draghi has embraced previously unacceptable concepts like parity for the ECB with private creditors, conditionality etc. But what he embraces today, he can jettison tomorrow. Remember he doesn’t have a buy a single bond until a country seeks a bailout. All he needs is a positive ruling from the German courts next week.
We really don’t want to discuss whether his plan will ever work or whether the Germans, who are calling it the Death of the Bundesbank” (see clip 4 below), will really go along when it is time for a bailout. Why? Because we have seen this before. The markets will roll along in complacency until one day they decide to focus on the it.
Draghi has to be a diplomat and a politician in addition to being a central banker. So he doesn’t scare us that much. Bernanke does because there is no one to reign him in, because he has been given a carte blanche by the Administration to do whatever he wants to do. Above all, he scares us because we are afraid that he has become a believer himself. Read what CNBC’s Steve Liesman said about the Fed, meaning Bernanke:
- they believe if they were to help drive interest rates even lower, bring up the stock prices even higher…what they are looking for is this thing they keep referring to me which is the virtuous circle, they want jobs, demand, investment and then they want jobs. They feel like they need to get to a point on policy that could ignite that virtuous circle that has eluding them so far.
Steve Liesman added:
- there are those out there who think what the Fed is doing is preventing that virtuous circle from taking place. The center of the Fed as far as I know rejects that notion right now.
This suggests that Bernanke has become a zealot and his core followers, Yellen, Dudley, have embraced his zeal. The rest feel what Jim Bianco articulated on Friday on the Santelli Exchange – It’s structural, not cyclical (see clip 4 below).
3. Risk Assets Take Off
The markets are even more ardent believers, especially now that China has joined Bernanke & Draghi. CLF was up 14% on Friday alone and FCX was up almost 9%. Gold, Silver, Oil all took flight and the US Dollar fell. The big reversal was in the 30-Year Treasury which closed down on the day after an explosive move up just after the release of the payroll number at 8:30 am.
This reminds us of the August-October 2007 period. A risk-on rally began on August 17, 2007 when Bernanke cut the discount rate by 50bps. This rally caught a second wind with a negative payroll number on September 7, 2007. It went vertical on September 18, 2007 when Bernanke cut rates more aggressively than what the bulls were hoping for.
So we would not be surprised to see Bernanke announce the “mother” of all QEs next week. Such aggression has been his hallmark. Clearly, he sees what many of us do, a simultaneous slowdown in Europe, China and now America. Deflation is often the result of a global economic slowdown. And Bernanke has sworn to fight deflation.
What we also know is that all of Bernanke’s horses and men could not prevent what happened from November 1, 2007 onwards and we don’t think what he does now will prevent a slowdown in the next few months. After four years of ‘recovery’, it just might be time for a breather.
4. U.S. Stock Market
We have heard of triple tops but never of quadruple tops. The market seems to agree because the S&P broke out above its four year high of 1419 on Thursday. Doug Kass, who had called the triple top and this year’s high on August 14, 2012, reappeared on CNBC Fast Money to reaffirm his net short stance.
Mark Newton of Grey Wolf Execution made a terrific call on Oil in his CNBC appearance on Friday, June 22, 2012. He remains short-term bullish as he told CNBC’s Bill Griffeth on Thursday:
- “…today the market is moving up on an expansion of volume and breadth. If you look at the market trend over the past few months, we have had a slow gradual uptrend since last year – this small trend has broken to the upside and above this consolidation as well to new highs not only in the S&P but the Dow and the Nasdaq. And so, short-term it’s a good development. I expect th
e market to move higher in the next few weeks, 3-5% higher. My target is 1440-1465. There are a couple negatives to mention in the longer term, and the whole move this year has not been confirmed by momentum, you still have the Dow Jones transportation index and the Russell 2000 have have not confirmed this move to new highs. That is a more of an intermediate term concern.”.
Lawrence McMillan of Option Strategist remains bullish and expects the SPX to certainly reach 1440-1450. His outlook remains bullish as long as SPX remains above the support area of 1395-1400.
Ralph Acampora, the veteran technician, is not only bullish but he is very bullish not just for a couple of months but for a couple of years (see clip 3 below). On the other hand, Leon Cooperman, the man with the hot hand in 2012, feels the market has just about reached a “zone of fair valuation” (see clip 1 below).
Featured Videoclips:
- Leon Cooperman on CNBC Fast Money 1/2 Time on Thursday, September 6
- Bill Gross on BTV Lunch Money on Wednesday, September 5
- Ralph Acampora on CNBC Closing Bell on Tuesday, September 4
1. Market in Zone of Fair Valuation – Leon Cooperman on CNBC Fast Money 1/2-time – Thursday, September 6
Leon Cooperman is the founder of Omega Advisors and a relative rarity in the crowded hedge fund world, a man who has been successful over more than two decades. This year, his fund is up 22% year-to-date.
- I say at the current level 1,430 on the S&P, the market is in the zone of fair valuation and I would not be banging the table at this level…you have got a lot of issues.. we are looking at 12 month forward earnings of $108 so the market is 13.2-13.3 times earnings and when you consider the fact that the 3rd quarter will be the first down year/year earnings quarter since June 2009, when you recognize the huge tax uncertainty that businesses are facing going to 2013, the fiscal cliff issues, I think the market is in the zone of fair valuation.
- Based on our earnings estimates, Apple is about 13 times – less that 13 times next year’s earnings, yielding a little under 2%, we think it grows 15% percent over the next few years…So it is growing substantially more than the market, selling at a discount to the market multiple. It is may be 2-3% of our portfolio at the present time.
- I know where I don’t want to be. I think the bubble that exists today is in U.S. Government bond yields and I will give you a comparison. In 2000 Cisco was 100 times earnings, didn’t pay a dividend, no yield, and 10-year U.S. government bonds were 6.5%. Today taking consensus estimates, Cisco is ten times next year’s earning, yielding 3% which is twice the 1.5% yield in U.S. government bonds, so a very pessimistic price structure built into many equities and the bond yield is just in my opinion being subsidized by the government. So I want to be out of U.S. Government bonds. I think they’re a mispriced asset class. I am not short them because I recognize the financial repression policies being followed by the Fed.
2. Buy Gold, TIPS, Real Assets – Bill Gross on BTV Lunch Money – Wednesday, September 5
Bill Gross was the man who told us (via FinTV of course) that there is a Bernanke put & a Draghi put under the stock market. Was he so ever right! He appeared on BTV to discuss his investment article The Lending Lindy and his tweet after the leak of the Draghi plan:
- Gross: Draghi appears willing to write 2-3 year “checks” to peripherals. Very reflationary. Buy Gold, TIPS, real assets.
He earned the title we have given him – the fastest tweet-gun in bondland. Not only is he fast, he is accurate too. His tweet immediately moved the stock market to the upside.
Below is a detailed summary, courtesy of Bloomberg TV PR, of what he said to BTV’s Adam Johnson, Stephanie Ruhle and Alix Steel.
Gross On whether investors should be putting any money into funds at all or whether they should go for the lowest price option and buy the S&P:
- “Certainly, from the bond standpoint, let’s be clear in terms my cult of equity—it is really a diminished or dying cult of both bonds and stocks from the standpoint of a belief that they can return 10% types of returns to pay their bills, to pay for education, to pay for retirement. Those days are over if only evidenced by the bond market in the U.S. only yields 1.75%. How can you produce a 10% type of return historically that we have seen for the past 20 years to 30 years at 1.75% yields? It really cannot be done. Similarly, if equities are related to bonds and attached or conjoined at the hip in mathematical terms, then you would expect equities as well to produce less than 10% returns going forward. So pension funds and individuals and investors that expect 10% consistent returns to pay those bills will be disappointed. When we expect 2% to 3% return from bonds and 4% to 5% from stocks, if younger investors want to invest in stocks with that 4% to 5% expectation, then we suggest they do it.”
On what PIMCO is buying now:
- “With reflation as the odds on probability, it is clear that the world is in a deflationary, reflationary type of mode and does not know which way to go. If central banks are successful in terms of reflating, if Bernanke is successful in terms of a new QE, then an investor should be focused on reflationary assets, such as commodities and gold to the extent that they reflect future inflation. On the bond side that would be inflation protected securities such as tips or even floating rate securities that don’t have a fixed coupon and stocks as well. Stocks that in some cases can keep up with inflation and are not buffered by a head wind in terms of those higher inflationary rates which in historical terms, has occurred. But stocks are not a bet either. It’s just that all of them, as a category, cannot produce the returns that investors have grown used to.”
On whether the U.S. is falling back into a recession:
“I don’t think so. I think Bernanke has been successful up until this point. 2% is the number plus or minus in terms of real growth and it appears we are right about that level now. We do have some dramatic fiscal cliffs and some dramatic changes perhaps in terms of fiscal attitudes going forward and fiscal budgets and so those in combination with the weakened effects of monetary expansion in the U.S., with the weakened effect of QE1, QE2, Twist and now QE3, it will be difficult to stimulate the real economy in the U.S. At a faster rate than 2% and perhaps even less if we have that fiscal cliff in December or January of 2013.”
On the ECB’s bond-buying proposal:
- “The market awaits a 24-hour from now announcement in terms of what it might be and even then, conditioned upon some rulings from the constitutional court in Germany on the 12th. In any case, it appears, based upon unofficial leaks, that the program will be limited to one- to-three-year bonds. This pertains to the reflationary aspect that I tweeted—ultimately it will lead to an expansion of the ECB’s balance sheet. Currently, it is at $4 trillion. We don’t know how much it will expand, but nonetheless, a $4 trillion balance sheet that several years ago was $2 trillion or less is doubling in terms of the central bank’s monetary base. We are about to see an expansion of ultimate hundreds of billions of dollars by the ECB which come at some point, has the potential for inflationary aspects.”
On how gold helps investors protect their wealth in times of inflation:
- “Gold cannot be reproduced. It can be taken out of the ground at an increasing rate, but there is a limited amount of gold. There has been an unlimited amount of paper money over the past 20 years to 30 years. Now in this period of central bank expansion, whether it is QE1 or QE2 or the LTROs with the ECB or this potential new program which might be announced tomorrow, then central banks are at their leisure in terms of basically printing money. Gold is a fixed commodity. It has a considerable store of value that paper money has not. It is certainly dependent upon the price and it is hard to know if current levels for gold are the appropriate price. But when a central bank starts writing checks and printing money in the trillions of dollars, it is best to have something that is tangible and cannot be reproduced, such as gold.”
On whether the gold trade is too crowded:
- “I don’t think so. Central banks got out of the gold trade a few years ago. Just recently, they are coming back into that market. Central banks have trillions of dollars of reserves. We’re talking about China. We’re talking about Brazil. We’re talking about Mexico, countries that have earned a surplus of reserves and they have choices in terms of how to invest them. Would they want to invest them in a 1.55% 10-year treasury or in something that is more tangible that they cannot be fooled with in terms of the marketplace? And so central banks are coming back into the market. You see some diminished demand from countries such as India, which is suffering in terms of its economic growth. So there is a yin and a yang there. But I think for the most part it is not a crowded trade yet even though the price has accelerated in recent quarters and recent years.”
On his gold price target for medium-term:
- “I am not a gold bug. I am just suggesting that gold is a real asset and will be advantaged if the Federal Reserve or the ECB central banks start to write checks in the trillions. So what my objective is, I am not sure. I just think it will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3% to 4% over the next 5 to 10 years.”
On whether he has a different game plan for an Obama victory vs. a Romney victory:
- “I don’t think so yet. We are talking about that in the investment community in terms of how to how to play this. Obviously the polls are 50/50 so it is hard to make a bet one way or the other. I think coming out of both Republican and Democratic parties, in terms of the ultimate outcome, will be some type of tax reform that levels the playing field and perhaps promotes some productivity going forward. The important point in January or February of 2012 will be how both of these parties come together to address the deficit. If it stays at 8% to 9% going forward, that leads to Fed QEs and Fed purchases and ultimately higher reflation going forward. We will be watching carefully the aftermath of the elections and how these parties come together in terms of fiscal policy going forward. It will be critical.”
3. I am not bullish, I am very bullish – Ralph Acampora on CNBC Closing Bell – Tuesday, September 4
Ralph Acampora is a veteran technician. He is also an interesting speaker. This clip is no exception.
- Maria, I am not bullish. I‘m very bullish. And I’m very bullish for that reason that the sentiment is so very negative and here we have so many large cap blue chip stocks, many in the Dow who are close to if not at all-time new highs and the psychology is just wreaking with fear. I think this is a case study for students in the future, mass psychology. Do the opposite of the herd. I love that. I’m not bullish. I‘m very bullish.
- …everything that we are hearing on TV or in the media we’re reading, has already been discounted. I don’t want to hear any more about China. I don’t want to hear any more about Draghi. They are going to make it work. And the market is saying that.
- Maria, when I say I’m bullish, I‘m not talking in the context of a couple of months. I‘m talking a couple of years. If we were to have a 5%, 8%, 10% correction, that’s meaningless. I think that’s a buying opportunity. I think the head fake is that September, October is not going to be as bad as everybody is portending. I am saying we’re going to get through that. We’ll, of course, stabilize and consolidate like we did today. But there was no major damage done.
So as far as I’m concerned, the summer rally is alive and well
4. It’s Structural, Not Cyclical – Jim Bianco on the Santelli Exchange – Friday, September 7
James Bianco is the president of Bianco Research and an astute observer of markets. Here he speaks with CNBC’s Rick Santelli. Rick Santelli opens the exchange by pointing out that what is happening in employment is a long term trend. Jim Bianco agreed and continued:
- Bianco – …if you look at the payroll numbers, we need to create about 175,000 a month to cover population and immigration in the United States. What was the last year we did that – 2006. That spans two administrations, Republican and Democrat. We’re going on almost year seven now and we’re not catching up with population and immigration. So this is a much bigger issue. In other words, it’s a structural issue with the economy. But Bernanke insists that it’s a cyclical issue and he insists that QE can solve the unemployment problem although we’re going nowhere for six years now.
- Santelli – you’re preaching to the choir. I think it was around April of ’09 when I started talking, at least it was my opinion, that we’re giving the wrong medicine. Cyclical issues are much easier to heal, normal recessions, there is an ebb and flow. When you have a structural problem and it’s like using drano when your pipe is broken, correct?
- Bianco – That is correct. It is a structural issue. That means the way to create a job has changed. Just making money cheap is not going to work. That worked from 1982 to 2007 but in this post crisis period we’re seeing that it’s not working and as a matter of fact, if you look at this year, 2012, we’ve created 139,000 jobs on average, that’s lower than 2011 and about the same as 2010. We are not even getting any more momentum in job growth. We’re still hovering under that 175,000 number that we need and we can’t seem to move forward. It’s structural.
- Santelli – I agree with you. In terms of post-Draghi, I am getting so many e-mails from our great fans and sources out there and there are a lot of Germans that seem to be very unhappy with the recent trends. You want to weigh in on that?
- Bianco – Yeah, the Germans are not happy at all. The Germans made a deal with the public, you don’t take an increase in wages or raise, you work very hard and you will have a job and our economy will be okay. They did that. Their economy is doing okay. Now the rest of Europe that’s been spending money, working 35 hours a week and retires in their 50s, they are saying we are broke and want German money. The Germans are not happy about that at all and they are calling the Draghi statement yesterday, the Death of the Bundesbank. The final word on Europe has not been written because there is a lot of dissension about what they are planning on doing.
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