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. Belief in QE4ever & Its Wealth Effect
This is the central issue for investors. When Bernanke announced QE4ever on September 14, markets went euphoric. But it lasted just that afternoon. Since then, markets have trended down and the downtrend accelerated this week. This new and improved QE was specifically structured to remove the flaws of previous QEs, the main flaw being markets fell when the stimulus ran out. The new QE3 was announced as a QE that would never end, a QE which can be increased in magnitude and scope as desired.
So why has it failed so far? The key to an answer was provided by David Rosenberg (see clip 1 below). The 2009 and 2010 QEs were launched while the global economic trajectory was trending up. That’s why those QEs raised the angle of the trajectory, raised commodity prices and created inflation in the strongest growth areas in the world.
But QE4ever has been launched in desperation, launched to reverse the declining trajectory of the world economy. That is very hard to do. The other problem with QE4ever, as Jim Bianco explains (in clip 1 below), is that the “Fed is all in” with QE4ever and “and if they cannot help push markets higher then I think they are done “.
Bernanke’s desired wealth-effect was also scoffed at by both David Rosenberg and Jim Bianco in clip 1 below. “Rosie” Rosenberg pointed out that the average US household is still down in net worth by 10% or $60,000 and added “no one spends reduction“. Jim Bianco was a little more elaborative in a recent conference presentation:
- “Two conditions must be met for a wealth effect to ensue. Net Worth must reach a new high and it must be perceived to be permanent. This is why housing produced such a powerful wealth effect before 2006. Home prices always went up and their gains were perceived to be permanent. Currently we have a retracement of losses and a widespread distrust of financial markets. These conditions will not produce any wealth effect and we believe they have not.”
The problem is reduced income in addition to loss of net worth. As BTV’s Tom Keene quoted from a Gary Shilling note:
- Real median household income in 2011 was down 9% from its 1999 peak and 8% since the Great Recession started in 2007 as income polarization persists.
A society with a declining income trajectory, a 10% reduction in net worth and facing a declining world economy – the only QE that is likely to work is handing out pure cash to all. But wait a minute, India tried that for the last 3 years under its viceroy Sonia and today their currency is down 15% and the economy is slowing badly any way.
Frankly, risk markets have been programmed to look forward to more juice in the near future. Does the Great Bernack have any juice left to satisfy the yearning markets? We will find out on October 24?
2. The US Stock Market
The last two weeks have seen rotational action between US stocks and Treasuries. Last week stocks rallied to end the week overbought and Treasuries fell to end the week oversold. The week before was just the opposite.
The rotation continued this week with stocks falling and Treasuries rallying. The Dow and S&P fell by 2% and TLT rose by 2%. The action in the stock market seemed worse than the indices showed. This action bothered Lawrence McMillan of Option Strategist who wrote on Friday:
- We have been bullish continuously since early June. But recent events and indicator changes have put this short-term forecast into jeopardy….both the standard and the weighted equity-only put-call ratios are on sell signals now…Market breadth has gotten quite negative as well. After registering a strong overbought condition back on September 14th (right after the Fed’s latest announcement), breadth began to deteriorate and hasn’t stopped yet.
His message:
- An $SPX close below 1420, coupled with a $VIX close above 17, would clearly break the market’s uptrend and would dictate a more cautious outlook. If that happens, aggressive traders could buy SPY puts for an outright speculation.
Tom McClellan presciently called for a powerful rally in stocks on June 4, 2012 on BTV. He said then that the top of this rally would be just after the Presidential election in November. That is drawing near and Mr. McClellan looked into the future on Friday. We urge readers to to read his article 40-year Cycle in DJIA. The article lays out the reasoning that leads to his conclusions. We include couple of excerpts below;
- This week’s chart…compares the performance of the DJIA with dividends reinvested (total return) for two different periods, with the 1942 and 1982 bottoms aligned.
- The total return for the DJIA from the 1942 bottom to 1972 matches the total return from the 1982 bottom to present. The nominal returns were different, meaning that if you just took the raw index values you would get a different result. But when we factor in dividends, the total returns have been almost identical.
- Coming up, the earlier plot shows that the big decline of 1973-74 is the next item on the agenda.
- So we may not see a dip in 2013-14 that is as severe as the one 40 years before, if we do not have similar exacerbating factors. But this portion of the 40-year cycle schedule does suggest that it will be a less-than-bullish period.
Given Mr. McClellan’s track record this year, his words merit serious consideration.
3. U.S. Treasuries
Despite the predictions of a massive selloff from bond kings, long duration Treasuries rallied this week with the 30-year yield down 11bps on the week to 2.85% and the 10-year yield down to 1.66%. TLT, the Treasury ETF, rallied by 2%. It closed the week just above its 50-day moving average.
The best fundamental case for Treasuries was made by a point in David Rosenberg’s report on Friday:
- Global Deflation – The OECD countries show an “output gap” of 2.7% of GDP which is a wider deflationary gap today than was the case in the Great 2008 Recession year or the depths of the global recession of the early 1990s too.
Any one who followed the tweet of technician Helene Meisler (of RealMoney) on Wednesday afternoon made money:
- is that a h/s bottom I see in $TLT
Ms. Meisler attached a chart to her tweet. We show an updated version of her Wednesday chart below:
Rick Santelli interrupted a buy-stocks fest on CNBC Closing Bell on Wednesday afternoon to shout “Buy the 30-Year“. He proved to be absolutely correct. He again surprised his Closing Bell anchors with his comments after Friday’s close:
- I think we are going to look at interest rates working their way back down. You know, the big bet many people think you are going to see 2.25% – 2.35% in the long bond. As a matter of fact, David Rosenberg thinks you are going to see 2%.
So far, the David Rosenberg & Gary Shilling team is handily beating the bond kings team of Bill Gross and Jeff Gundlach.
Featured Videoclips:
- James Bianco & David Rosenberg on BTV Surveillance on Wednesday, October 10
- Marc Faber on CNBC Fast Money on Tuesday, October 9
- Rick Bensignor on BTV Taking Stock on Wednesday October 10
1. Wealth Effect & Net Worth – Jim Bianco & David Rosenberg on BTV Surveillance – Wednesday, October 10
David Rosenberg and James Bianco were together with BTV’s Tom Keene and Scarlett Fu this week. While their viewpoints are well known, they added some important nuances and evidence in this clip.
- Keene – new frugality?
- Rosenberg – ongoing in the consumer sector. even with the wealth effect that has taken place, the US household sector is, after 5 years, still in the hole to the tune of $60,000 per household. The average household is still down in terms of net worth by 10% that has an ongoing impact on spending behavior, it is ultimately deflationary….that’s one of the reasons why the consumer is so slow to come back this cycle..It is not just about employment, it is about the realization that the lost net worth is not coming back that significantly..
- Keene – Jim Bianco, Rosie talks about new frugality…look at median income of the nation… can a central bank staunch that? can a central bank make that better?
- Bianco – I don’t think they can, I think they are gonna try and they are probably wind up failing on it ..the reason is they are betting on a wealth effect..they are betting that QE3 is going to help push equity prices and risk markets higher, that will make people feel wealthy and that’s going to make them spend..as David pointed out, people don’t view it as wealth until they make a new high in their net-worth…as long as they are in the hole as David said for $60,000 that’s just lost reduction … no one spends lost reduction…there really won’t be much of wealth effect..
- Keene – what’s yr GDP estimate Q4 and next year?
- Rosenberg – the run rate on real GDP this quarter is between 1-1.5%…there is no acceleration next year, all the risks are to the down side… so I would say roughly flat next year…
- Keene – six moths ago, it was 2-2.5% and all the optimists have had to pull down where David Rosenberg is right now…
- Fu – it hasn’t done much for commodity prices and gold? what does that tell you Jim about the central bank’s limitations?
- Bianco – if the central banks’ new QE are not going to push the markets higher, then we are done with central bank intervention. I think that QE3 with 40 billion a month, they are all in and if they cannot help push markets higher then I think they are done and that’s the big concern right now.
- Rosenberg – what makes this post QE3+ situation different than all the other post-QEs is that estimates for global growth are going down, not up. and that makes a very big difference. this makes the debate about a Chinese hard landing – soft landing… we can talk about the Fed all we want but the key principal driver of commodity prices is China.. and what has really changed here is the downgrade that we are seeing in Chinese growth prospects….to me that’s more important than what the Fed does as far as commodity prices are concerned..
- Fu – do you see the central bank of China acting any time soon?
- Rosenberg – I would say they are waiting for the new regime to come in .. commodity prices haven’t gone to new highs, but they have remained elevated..
- Keene – Gold in Swiss franks is a Dennis Gartman chart… record highs
- Bianco – it tells you that there is loss of confidence in the world,,,when gold is going up in currencies, especially in European currencies..there is a worry that there are more problems in Europe that they haven’t that they haven’t turned the corner..Laggard might talk about the ESM as Europe’s IMF but the gold market is telling us that they are not so sure that Europe’s IMF is going to be the panacea for its problems..
- Keene – then why is the equity market up?
- Rosenberg – actually, since the FOMC meeting on September 14, the S&P is down 1.5%…this is the first time we have gone a month on these Fed excursions and the market isn’t screaming higher…..the only sectors that are in the green are health care, staples and utilities, the stuff you want to own on the precipice of an economic downturn..
- Bianco – but we had a tremendous run up in the months leading up to the announcement..this is probably the most telegraphed of all the Fed moves…so there might be a little bit of sell the news right now…and I suspect the market will probably grind marginally higher based on Ben
- Keene – David, part-time workers, is this going to be a full-time worker country at some point?
- Rosenberg – good producing employment is down two months in a row… ultimately the service sector services somebody.. the services sector ultimately services the bot
tom of the pyramid which is called the goods producing sector..and that’s actually a leading indicator for employment… - Keene – corporate behavior seems to have changed..using their cash flow in a different way? is that the new corporate frugality?
- Rosenberg – corporations are also responding to what investors want in this period of heightened uncertainty and aging demographics is that they want an income stream..that’s why the part of the market we like at Gluskin Sheff is dividend-growth, dividend yield and dividend coverage. the reliable large cap, strong balance sheet trade up in quality..the companies that show a consistency in growing their dividends is where we want to be situated right now..
- Fu – is there a possibility these companies may not be able to raise or maintain their dividends?
- Rosenberg – they might slow down the rate of increase, by and large, there is so much cash on the balance sheet, there is so much liquidity, even with profitability going down, my sense is that dividend growth is still going to remain a mainstay for the market going forward…
- Rosenberg – the part of the stock market I like is the part that trades like a bond..dividend yield, dividend growth, dividend coverage…The temptation is always to look at gross returns and not at look at risk-adjusted returns and adjusting for the volatility…looking at all the asset classes and trying to generate equity like returns without taking on capital risk..that’s what corporate bonds have been doing all year….corporate default rate is still at 3% even if the economy is at stall speed…and that’s because the balance sheet is in great shape..
2. 20% correction in next 6-9 months – Marc Faber on CNBC Fast Money – Tuesday, October 9
Marc Faber of the Gloom, Doom & Boom report needs no introduction to the readers of these articles. Here he speaks with FM anchor Melissa Lee and her traders Karen Finerman and Keith McCullough.
- Lee – during your last CNBC interview, you said I just want to have a whole lot of cash because I think that within the next 6-9 months we can buy just about anything 20% lower than it is now. Do you still feel the same way?
- Faber – correct..
- Lee – where do you think you will see that opportunity? what are you keeping on your radar at this point?
- Faber – I don’t think there is a hurry to buy anything but if I have to really choose, I might go for a rebound in Chinese stocks, because the Chinese will also print money after the government changes and you could easily get a 20-30% rebound. I personally don’t like Chinese companies; I would rather play it through the Hong Kong market. Basically I think that QE3 which is unlimited and the bond purchases by ECB, the bailout of countries has been largely discounted by the markets; and the markets have been weakening technically. So I believe that we may have here quite a serious setback.
- Faber – …we need less policies not more policies, we need smaller government – I would love to see everywhere in the world, certainly in the western world, government expenditure and government bureaucrats being cut minimum by 50% – that would turn me very bullish
- McCullough – your call in October 1987 made you a legend in this business..Do you see anything under the hood that concerns you like in October 87?
- Faber – There has been over the last two years a rush into all kinds of assets, high yielding bonds, government bonds, art, high end properties, the Mayfair property market or the Park Avenue property market and equities. And I think that asset prices are actually quite vulnerable in my view.
Rick Bensignor agrees with Marc Faber about a possible rebound in Chinese stocks. But he doesn’t agree about Faber’s prediction of a 20% decline.
3. Chinese Stocks Could Outperform the S&P – Rick Bensignor on BTV’s Taking Stock – Wednesday, October 10
Rick Bensignor is a well-known technical analyst. Here he speaks with BTV’s Pimm Fox.
- …we have been selling into this rally between 1430-1470…we have kinda peaked..and we do think the market has a chance to come off here and that given the entire structure of the market there isn’t a good reason to now put on fresh long exposure….if you want to pay 1,450 for the S&P, all yours…
- …we are not going to fall 20% and create a whole new bear market.…could we fall 5.5%, 10-11%? absolutely…but we don’t think it likely gets much more than that..
- I actually turned friendly today towards Chinese stocks. We think there is actually a decent chance, and this is clearly a counter-trend, out of consensus call, that China stocks have probably found bottom. so using the Shanghai composite as kind of our benchmark, it got down last week to just under 2000, …and when you couple some of these trends together, we actually think some of these Chinese stocks can start rebounding…that Chinese
stocks actually outperform the S&P. We look to find these turns well
before they are obvious to other people….we have enough signals from
models that have nothing to do with each other that are coming in saying
now is the time to start probing cheap, Chinese stocks. - too early for copper…iron ore is probably not a bad thing to start going after…
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