Interesting Videoclips of the Week (November 5 – November 9, 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.

1. “Is the USA going to Cut the Government or Pay for the Government?”

Jeff Gundlach argued (see clip 3 below):

• Is the United
  States going to cut the government or is it going to pay for the
  government? This question really has to be answered….I really don’t think you’re going to get a compromise. I think that’s awfully optimistic. Here we have an election result which basically keeps the contentious aspects of Congress still in place. The White House is still in place. I don’t know why everyone suddenly thinks that just because Obama didn’t have as much support this time four years ago, somehow he’s going to lose any of his enthusiasm for his policies and I really don’t think Republicans, maybe they underperformed a little bit in the governor race. I don’t think they are going to lose any enthusiasm…

David Rosenberg said (see clip 2 below):

• I’m sympathetic to that view [going over the fiscal cliff] because the longer we wait, the longer we kick the can down the road, the more ultimately we follow on the road towards Europe or even towards where Canada was in late 80s or early 90s….there is no doubt we need to get our fiscal house in order and we need to start doing that right now.
• in the next five to seven years, we’ll be in a situation where about 20% of the revenue base is absorbed by interest costs….So something to be said about getting ahead of the problem and preventing the fiscal side from becoming increasingly structural over time. It will make the painful resolution that much more acute down the road.
• I don’t think we should be tinkering with top marginal rates…Tinkering with top marginal rates tinkers with the fundamental incentive system in the economy. There are other ways to create revenues without creating misallocation of resources in the broad economy. On the other side, there’s no question that we have to attack the spending side and the entitlements. so it’s going to come down to Washington moving to the center. If we can, then we are not going to $20 trillion.

What will be the impact on the economy and the markets if we do indeed fall off the fiscal cliff?

• Rosenberg – When you add up what it means for the tax and spending side, you’re looking a the at least a 4% drag for all next year if you average it out…there is no question that if we get the fiscal cliff that we’ll get a recession next year. The only real question is how deep a recession next year. I don’t want to sound overly draconian that it would feed on itself. I think it would be a level adjustment. We certainly have a very weak first and probably second quarter and probably would end up building on there in the second half of the year and beyond.
• Gundlach – the shock to the markets would be pretty monumental if  98% of the investors expect no such shock.

We remind readers of the fiscal cliff comments made about a month ago by Larry Fink, Kyle Bass and Ian Bremmer.

• Larry Fink saw a recession and a negative GDP print in Q1 2013 if the fiscal cliff is not addressed by Jan-Feb 2012.
  
• Ian Bremmer promised “as soon as we get past those election, a deal is going to happen“.
  
• Kyle Bass of Hayman Capital was just as sure that the “fiscal cliff is not going to happen. They are going to vote it down the road another year. Sequestration never works because the politicians are in charge.” 

We wonder if Ian Bremmer and Kyle Bass are that confident today.


2. The U.S. Stock Market

Lawrence McMillan discussed the breakdown of the S&P below 1395 and seemed to suggest that the decline was temporary:

• In summary, the overall picture has taken on a bearish slant with the
  breakdown on the $SPX chart. We would not expect this to last beyond
  Thanksgiving, but there could be some more damage up to that point.

The stock market is getting very oversold on a short term basis with the McClellan Oscillator down to -143 and as Bespoke tweeted, “2.5 standard deviations below its 50-day moving average“. As we have been told, a very oversold market that doesn’t rally is a dangerous market.

Rick Santelli was prescient in his comments about interest rates on Thursday morning, well in time for viewers to buy the 30-year T-bond auction. His short clip titled How Low Can Interest Rates Go is a must watch, especially because of the 3 charts he showed. When you watch the charts, you can see visually why the 10-year Treasury and the 10-Year German Bund are buys and the Spanish Bond is a sell. Rick answered his own question at the end:

• “so can we see a 2% long bond? can we see a 1% ten-year? charts say its still a possibility.”

These are also the levels that David Rosenberg and Gary Shilling see. So far, the Rosenberg-Shilling bullish team is running way ahead of the Gross-Gundlach bearish team.

Featured Videoclips:

1. Steve Hochberg on CNBC Fast Money on Thursday, November 8
2. David Rosenberg on CNBC Squawk Box on Thursday, November 8
3. Jeff Gundlach on CNBC Fast Money Half Time on Wednesday, November 7
4. Marc Faber on BTV Street Smart on Wednesday, November 7
5. Scarlett Fu of BTV on Thursday, November 8

Steve Hochberg is the chief market analyst at Elliott Wave International. He is interviewed by anchor Melissa Lee and her trader team.

• Lee – how do you interpret the move lower in the S&P 500?
• Hochberg– it closed below the 200-day moving average. something else happened, too, in terms of technical analysis. if you draw a trend line off the October 2011 low connected to the June low of this year and all those indexes are breaking down below that trend line; the Dow has already done it. Nasdaq’s done it. S&P is breaking out below it , too. So, again, there is technical weakness under the market. We think the market is rolling over and is in a down phase right now.
• Lee – how far down is that down phase, Steve?
• Hochberg – we’re getting oversold on the short-term basis. but we could continue to go down the June 4 low and the S&P 1266 & 12,000 in the Dow. It won’t be a straight shot down there. We can stairstep and work lower. 
• Adami -Steve what’s your ultimate bottom? I have seen guys at 980 in the S&P. Is there a number to hold out? I’m not holding it to you necessarily. What does Elliot Wave say the ultimate low should be?
• Hochberg – longer term, way down. In our newsletter we showed a long term trend line; 38 years it dates back to the 1974 low; we bounced along the trend line, finally broke below it in 2008. We have rallied back to test the under side three times now. in August 2010, May of 2011 and March of this year. We rallied from the 2002 low in the ABC pattern. We have a long way to go on the down side. It’s not a straight shot. it will be working lower in a stairstep fashion over time. The Nasdaq presents a pretty good opportunity on the down side for the bears if you can pick off your targets.
• Hochberg – …lets focus on one issue that we showed in our newsletter; that is Google. We use the wave principl
  e model to forecast price trends and Google has a pretty clear 5-wave decline from its high; five wave movement in the direction of one larger trend; that gives us 2 pieces of information.
  
• the larger trend for Google is down,
  
• we are in the 5th wave of this decline; when it ends, we are going to have a pretty good counter-trend rebound in Google.
  
• So I think we are pretty much into this wave; GOOG supports are around 637-640; once this 5th wave ends, you are going to have an ABC rally.

2. Recession Next Year – David Rosenberg on CNBC Squawk Box – Thursday, November 8

David Rosenberg needs no introduction. Here he discusses the fiscal cliff with Becky Quick and Joe Kernen.

• Quick – David, what would happen if we went over the fiscal cliff? yesterday we heard from Aetna’s CEO who said he would expect a drop in GDP to negative 1.7% for the first quarter.
• Rosenberg –  I think that considering that that’s where the biggest hit would be in terms of timing, I would expect that the contraction would be a little bit deeper than that. The reality is really two things. When you add up what it means for the tax and spending side, you’re looking for at least a 4% drag for all next year if you average it out. But the overriding problem is that we never really gained true escape velocity in this cycle. The run rate on the GDP for an economy growing into year four is normally 4%, 5%, but the run rate on GDP is really more like 1.5%. So the problem is the starting point. 
• Rosenberg – You go back to the stock market crash in ’87, the economy growing 7% about, 8%, we can absorb a negative shock as we did in 1998 with that Asian crisis and Long Term Capital when the economy is growing at 5% as a base line and you can take a hit. The problem is still the starting point is growth is extremely low and that means there is no margin for error. But there is no question that if we get the fiscal cliff that we’ll get a recession next year. The only real question is how deep a recession next year. The only real question is how deep. I don’t want to sound overly draconian that it would feed on itself. I think it would be a level adjustment. We certainly have a very weak first and probably second quarter and probably would end up building on there in the second half of the year and beyond.
• Quick – There is an argument out there that some people say we should go over the fiscal cliff; that we should take the pain at some point and this would get us back to a point where you really do attack the deficit.
• Rosenberg – I‘m sympathetic to that view because the longer we wait, the longer we kick the can down the road, the more ultimately we follow on the road towards Europe or even towards where Canada was in late 80s or early 90s. Even under an ultra low interest rate scenario, when you’re tacking on a trillion dollars year in, year out on to the national debt, you know, the power of compound interest even at a lower yield, means in the next five to seven years, we’ll be in a situation where about 20% of the revenue base is absorbed by interest costs; If you want to take a big picture, how much will the fiscal flexibility be jeopardized if we don’t start do something right now. I accept the argument that it’s not a good time given how fragile the recovery still is, but I think we’ll be seeing that for the next five years. So something to be said about getting ahead of the problem and preventing the fiscal side from becoming increasingly structural over time. It will make the painful resolution that much more acute down the road. at the same time, at the same time a four percentage point hit to GDP in one year especially given where the run rate is right now, I think that it’s just the size of the fiscal retrenchment over the next year that hopefully will get amortized some what.But there is no doubt we need to get our fiscal house in order and we need to start doing that right now.
  
• Kernen – do you think four years from now we will be at $20 trillion?
• Rosenberg – well, I hope not. That’s not my forecast. I think what will be very critical is the extent to which Washington moves back to the center and that will take sacrifice on both sides. However the Democrats in particular are going to read 50% of the national vote on one side, we know how Bill Clinton reacted to 49% in 1996. He moved to the center. How the democrats view 50%, that’s all they got on the national vote, yet some people would say we built our lead in the senate and house so we do have a mandate. I think what’s been lacking, we need compromise and if we can get it that and understanding on both sides that our taxes will have to go up, there’s no question taxes will have to go up. The question is what sort of taxes. I don’t think we should be tinkering with top marginal rates. It’s beyond just what the stock market is telling you. Tinkering with top marginal rates tinkers with the fundamental incentive system in the economy. There are other ways to create revenues without creating misallocation of resources in the broad economy. On the other side, there’s no question that we have to
  attack the spending side and the entitlements. so it’s going to come down to Washington moving to the center. If we can, then we are not going to $20 trillion. 
• Kernen –are you assuming rates they go up a little or stay where they are?
• Rosenberg – Well, I don’t think interest rates, certainly the short end of the yield curve, will be doing anything. Basically Bernanke has already told you we’re not touching rates for at least the next three years and it could go longer. When you read the classic text books like Reinhart & Rogoff, when you look at the work of McKenzie, you know after you come off a financial collapse that’s gone viral. This is global, not just the U.S. Interest rates will remain low for a long period of time. I am not worried about interest rates. But you keep adding trillion dollars of debt…
• Rosenberg – The range of outcomes is pretty wide and so we have to be fully diversified right now. I would not be taking any concentrated bets across any asset class. I would be perfectly diversified.

3. Apple Down to $425 & High Volatility – Jeff Gundlach on CNBC FM – 1/2 – Wednesday, November 7

• MCC – good call [on Apple short]; are you striking with your target in 400s?
• Gundlach – yes, about 425. I started shorting in April at about 610; first it went down and then it made its way to 700 and now it’s in the lower half of that range. It just seems to me that Apple – when I was speaking with Gary Kaminsky back in September, it’s an over-believed stock. Every meeting I have, everybody owns it and the product innovators, as I said before, isn’t there anymore. I’m struck by this mini-ipad thing, as if that is any kind of a product innovation. Once you start changing the size of your products, I think you’re not exactly innovating; I wonder if you are going start out with the tutti-fruity mini-ipad where it comes out with different colors – and that would be some sort of innovation. The stock kind of got really powerfully vertical at about 425 and I really think that when stocks go vertical and get tired and peak out, it goes back to the point at which it goes vertical.
• Gundlach – I think what is happening today with the Obama win, I think a lot people are starting to realize that maybe as we talked about back in April the capital gains tax increase might take down some of the stocks that have been extremely profitable but have large embedded capital gains. If you are thinking about higher capital gains taxes, may be you want to sell the stocks before tax rates go up…
• Terranova – do you see that given the status quo is what we’re presented with this morning on November 7th, are we closer to going over the cliff or do we get a compromise?
• Gundlach – I really don’t think you’re going to get a compromise. I think that’s awfully optimistic. Here we have an election result which basically keeps the contentious aspects of Congress still in place. The White House is still in place. I don’t know why everyone suddenly thinks that just because Obama didn’t have as much support this time four years ago, somehow he’s going to lose any of his enthusiasm for his policies and I really don’t think Republicans, maybe they underperformed a little bit in the governor race. I don’t think they are going to lose any enthusiasm. but I think it’s possible that this thing gets punted down the road. What bothers me is some parts of the fiscal cliff will be enacted, like funding for Obamacare which is a tax increase on wealthy people. A lot of people think if the Republicans and Democrats just shook hands and smiled at each other they could flip a light switch and make the fiscal cliff go away as if it is pushing a button; it’s a cobbling together of quite a few pieces of legislation. Some of which like the funding of Obama care is not going to be repealed. There will be some impact from tax increases at the end of the year and the last thing that bothers me about all of this, when you survey investors, 98% of them say, there’s going to be a compromise or postponement. I must say I agree with that. I think politicians are always at the 11th hour, they find a way to punt things. But my goodness, what if they don’t punt it, the shock to the markets would be pretty monumental if at 98% of the investors expect no such shock.
• MCC – Howard Dean last night here on CNBC was encouraging the fiscal cliff. He’s like, hey, we’ve got to solve the deficit. do it. Let’s go over it. How bad would it be for the markets? How bad would it be for the economy?
• Gundlach – I would ask questions like that and say, it kind of depends on your time frame and what you mean by bad. there’s short-term bad that has long-term good and short-term good that has long-term bad. and i think you want the answers to be given. Is the United States going to cut the government or is it going to pay for the government? This question really has to be answered. the sooner it gets answered —
  we have to figure it out. that’s the case with all of these asset purchases and financing schemes in Europe. I would say that is the case with all these asset purchases and the circular financings in Europe; when you come up with a solution, you have a short term pain for a long term gain and I sure wish that would happen.
• Gundlach – volatility is what investors really hope for when they are positioned in cash….I really think that we are going to see some pretty significant volatility that enters the market as we deal with this uncertainty and about the fiscal cliff and administration and what they are going to do with tax increases on rich people and also potentially dividends and capital gains. 

Faber on President Obama’s reelection:

• “I am surprised with the reelection of Mr. Obama. The S&P is only down like 30 points. I would have thought that the market on his reelection should be down at least 50%…I think Mr. Obama is a disaster for business and a disaster for the United States. Not that Mr. Romney would be much better, but the Republicans understand the problem of excessive debt better than Mr. Obama who basically doesn’t care about piling up debt. You also have in the background Mr. Bernanke, who with artificially low interest rates enables the debt to essentially escalate endlessly.”

On where he sees the equity markets given Obama’s reelection:

• “You have offsetting factors. The problem with Mr. Obama is that you get more regulation and it’s disincentive for businessmen to hire people. You probably also get higher taxes, so in terms of the economy, he is very negative in my view. But you still have Mr. Bernanke, and you still have because of money printing very high corporate earnings. They are now coming down, but they are still at the elevated level. You have money printing supporting the market and on the other hand, you have an economic slowdown globally which will affect earnings negatively. It is difficult to tell where the market will go because we have so much manipulation. I think, minimum, it will drop 20%.”

On how investors should protect their assets:

• “They should buy themselves a machine gun…I need to buy a tank. Joking aside, look, we have manipulated markets. Whenever you manipulate markets, you will get unintended consequences. I think the reelection is unintended consequence of money printing, that favors the so- called 0.25%. It was easy for the Democrats to attack the wealthy fat cats of Wall Street, the elite, and the privileged people to portray them as a profiteer of the system, which to some extent, they are. Not because they wanted to but because Mr. Bernanke enabled them to be profiteers. We have a situation where you have today Mr. Obama, I doubt he will stay at the presidency for another four years. I think there will be so many scandals, but that’s another story.”

On why he believes Obama won’t make it another four years as president:

• “There is so much smoke. I suppose there is some fire. That is my observation. We don’t know how the world will look in five years’ time. I am pretty sure central banks will continue to print money and the standards of living for people in the western world, not just in America, will continue to decline because the cost of living increases will exceed income. The cost of living will also go up because all kinds of taxes will increase. Like Proposition 30 today in California is of course negative for the Californian economy. That is the state of the world. We have worsening economic conditions, but we have money printing.”

On Speaker Boehner’s comments to Congress today on the fiscal cliff:

• “I am sure that they will solve it. They will increase cosmetically some taxes and they will cut cosmetically some spending and it will all be back loaded 10 years from now. So in reality, not much will happen. But the market tends to rally towards year-end, and I think from a low of around 1360, we could have a rally to January, but I think sometime next year will be again lower.”

On whether he sees the U.S. in recession in 2013:

• “Yes, I think that if the figures were compiled properly. If nominal GDP was adjusted by a proper price deflator, we would probably already be in recession…But I would like to point out one thing about the economy. GDP is not a very relevant figure. It consists of many different sectors of the economy, so you can have some sectors that are improving like housing and others that are worsening.”

On his dollar and euro positions:

• “This is the choice in life. You choose what is less bad. I don’t particularly like Mr. Obama, but I think he is less bad for the world than Mr. Romney. It is a tragedy of life that both candidates did not lose the election. They would have deserved both to lose.”

If you think a picture is worth 1,000 words, start watching these chart segments of BTV’s Scarlet Fu. Here she provides interesting statistics:

• If in Florida, Romney had gotten 24,000 of votes that the President got, he would have won Florida with its 29 electoral votes;
• If in Ohio, 50,000 voters had voted for Romney, he would have gotten Ohio’s 18 electoral votes;
• 56,000 more votes in Virginia would have given Romney Virginia’s get 13 electoral votes;
• 20,000 more votes in New Hampshire would have given Romney 3 electoral votes.

So a total of 150,000 votes in 4 states would have given Romney 270 electoral college votes and the Presidency. 

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