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. Why we like David Tepper
On Monday, December 17, David Tepper told CNBC Squawk Box that a decline in the market would be limited to about 5% if the Fiscal Cliff became a reality on December 31 and if it didn’t, the upside would be a lot. He added that he was buying calls on the stock market because he just would not be able to get very long on January 2 if the fiscal cliff did not happen and his risk would only be the call premium paid if the market fell apart because of the fiscal cliff. This tactic has worked beautifully so far. Kudos to Mr. Tepper for the simplicity and elegance of his suggestion.
This week, he sat with BTV’s Stephanie Ruhle and said simply ” I am bullish” and (see clip 1 below):
- “I think the main thing right now is to be long equities.”.
- “If you look at the markets, they are trading at a really low multiple. 13 handle this year, 11 handle next year on the S&P.”
- “Pension managers and others…. are under-weighted by under 20% in equities, which is just huge. Insurance companies under-weighted in equities. Just incredible under-weights.”
- “I think you will get tighter. You will go very full to extreme value in credit.”
Stephanie Ruhle did not ask him but we get the sense that he is speaking not about next 3-4 weeks but for the balance of the year. We also assume that he would probably protect himself but not be too fazed by a 5% type correction. Unfortunately, Ms. Ruhle did not ask him about other asset classes. His approach in 2012, as he explained on December 17 on CNBC Squawk Box, was to buy securities that had been sold off too hard. So we would have liked to know whether Mr. Tepper would look at 30-year Treasuries for a trade.
Unfortunately, Ms. Ruhle did not ask him and so we don’t know.
By the way, Deepak Narula, the best performing hedge fund manager of 2012 also believes that spreads, mortgage spreads will get much tighter thanks to the Fed with some needing help from somewhere similar to Amerinote Xchange to help with their mortgages (see clip 3 below).
2. Why we like Jeffrey Gundlach
Not content to be known as the new bond king, Jeff Gundlach has proved to be a master tactical trader. He was invited on CNBC Fast Money to discuss his post-earnings outlook on Apple (see clip 2 below).
On Thursday, January 3, Gundlach said:
- “when you’re at the higher end of the range in yields, which you are right now …it is actually a reasonable time to be putting cash to work in the bond market because the prospect for higher yields just isn’t that great with the Fed’s policies.”
This week, he was more direct:
- “I really think it’s time to be looking for corrections across the board in all those things… I think you’ll be looking at reversals to the down side since then. and a decrease, believe it or not, in long term bond yields once again…”
- “I really think that bond yields are likely to fall and stock markets and risk assets are likely to fall also.”
Clear and simple. Now we wait for Chairman Bernanke to speak next week. Does he hint at going slow on QE or does he announce twist-free purchases of Treasuries?
And yes, regarding Apple Mr. Gundlach said:
- “certainly if you close tomorrow below $483, you’re going to see $425 very, very quickly.“
Back in September 2012, Tom McClellan published a comparison between Apple and the old technology whiz company RCA. We urged readers to read it at that time. Today, we suggest you read his article on Apple titled After The Fall, Revisiting Apple and RCA.
3. EM & Fund Flows
According to this week’s Flow Report from Michael Hartnett of BAC-Merrill Lynch,
- Investors still clinging to bonds (but weaker inflows to corporate bonds worth keeping an eye on),
- 9th straight week of inflow to equity funds = longest streak since Q4’10; retail investors buy ($1.8bn) long-only equity funds for 3rd straight week,
- Size & speed of equity inflows argue short-term pullback would be healthy: another $3-4bn inflow t
o Long-Only equity funds next week would trigger “sell” signal from our Global Flow Trading Rule (Chart 1); last “sell” signal = late-Jan 2011 was followed a few weeks later with an 8% correction in MSCI ACWI Feb-March
Despite inflows to EM equity funds, EM has underperformed DM by 490bps since Hartnett’s “sell” signal was triggered in December, the report states.
A similar warning was issued this week by Michael Gayed of PensionPartners in his article Emerging Markets Send Warning on seekingalpha.com:
- The ratio [EEM/SPY] peaked right at the start of the year and has been worsening since, now below its 20 trading day moving average. While possible a move back to retest the averages may soon occur, I wonder if this is more of a larger warning that the strong start to risk assets may soon be over…
A more empirical view came from Lawrence McMillan of Option Strategist on Friday:
- In summary, the market continues to defy the naysayers, as it moves higher virtually every day. Despite the overbought conditions that this uniformity of bullishness has created, one cannot take bearish positions until there is some break in price (and likely also until there is a rise in volatility).
- David Tepper on BTV MarketMakers on Tuesday, January 22
- Jeffrey Gundlach on CNBC Fast Money on Wednesday, January 24
- Deepak Narula on CNBC SOTS on Thursday, January 24
- Ray Dalio of CNBC Squawk Box on Thursday, January 24
- George Soros on CNBC Closing Bell on Thursday, January 24
- Nouriel Roubini & Ian Bremmer on BTV Surveillance on Thursday, January 24
1. Verge of Explosion in Greatness – David Tepper with BTV’s Stephaine Ruhle – Tuesday, January 22
David Tepper speaks, every one listens. This week, the usually elusive
Tepper spent an hour with BTV’s Stephanie Ruhle on her MarketMakers
show. The detailed summary below is courtesy of Bloomberg Television PR.
Tepper on what he’s going to do this year in terms of investing:
- “I am going to come out of the closet right now…we are bullish. David Tepper has never been bullish.”
On why he’s bullish now:
lines the right way. I am saying that for someone in my office because
we play Scrabble and he hated the word I used last night…If you look at the markets, they are trading at a really low multiple. 13 handle this year, 11 handle next year on the S&P.
You have unprecedented money creation here and you have Japan who went
to 2% target last night. You basically have the competing assets. Junk, I
rallied already 40 basis points this year. 567 or some ungodly number
like that. If you look at the multiple on that compared to the
alternatives to anything in credit, there’s nothing close. There’s never been this big of a gap in the history of my life at least.”
On why now is a good time to be long:
you’re sitting here in a 2% to 3% growth situation. You have some very
interesting news last week. The Republicans are not going to play with
the debt ceiling. If they pass legislation on Wednesday, you probably
have five months of relative quiet. So three months extension plus two
months they can play games to extend it further. You really have a
little bit of change in attitude that you will probably not have a debt
ceiling fight. There is no major negative. You have these earnings, this
money growth. You have the Japanese coming on top. There is no other
choice out there. You really have not had this money supply push on a
relatively good economy. I do not think it is really a steaming pile of
garbage, using the G word instead of another word.”
On when we’ll see the shift from credit into equities:
saw some of the shift into equities earlier, mutual fund flows. I know
people are looking for this great shift. But you don’t have to have the
shift. You just have to have all new money going into stocks…People make
money, they invest money. There is incremental money that people save.
The shift will be in new money. And there will be a shift in old money. Pension managers and others are really off sides in how they are set up. Whether you believe a Goldman Sachs report that they’re underweighted by under 20% in equities, which is just huge. Insurance companies underweighted in equities. Just incredible underweights.
So I think either you will have a shift or you will see all incremental
funds move into the equity market over the course of this year. And
then I think you will have a retail shift this year too at some point.”
On the credit market:
is tight. You know, I have shorted tight markets before. I have shorted
full markets before. I do not want to take off my clothes on TV because
your viewership will go way down if I do that. I think you will get tighter. You will go very full to extreme value in credit.
We have traded before in credit at 200 handle in the junk bond index.
We’re probably still in 400 handle. There is room to move there. I don’t
like it because of the absolute yield. I do not like it because I do
think it is a full market and I don’t like it because I think equity
will give you a bigger return. If you short that you do it at your own
peril. I think you can still make money of it. There is so much cash out
there. People need incremental return and they’re not going to get into
the Treasury market. They will not get in mortgage market. There will
still be moving in the credit markets, but it is by far inferior to the equity markets. Not even close.”
On whether Europe should trade tighter than the U.S.:
it’s a credit by credit situation if you’re talking about corporate
credits. It doesn’t make sense for Europe to generally trade tighter
than the U.S in anything. This country is on the verge of just an explosion of greatness.
Do you like that? Explosion of greatness. I told you, I am like a big
Charlie Daniels band right now. Everyone to listen to the song ‘America’
by Charlie Daniels…It’s a great song.”
On how Appaloosa started:
left Goldman Sachs. I was thinking about going to another Wall Street
place. I didn’t want to do that. That was crazy. After you work on Wall
Street it’s a choice, would you rather work at McDonald’s or on the sell
side? I would choose McDonald’s. Over the sell side.”
On why he likes Citi:
- “You can look at the earnings estimates on Citi. We think it has potentially 50% upside from here.
We think, listen, if you ask JPMorgan, come get Jamie Dimon on the
phone. Ask him if there’s one franchise to like to buy in the whole
world. Get him to be honest. He will say Citi’s foreign business. It is unique. He cannot get into it.”
On what’s so unique about Citi’s foreign business:
steady, growing in the right places in the world. You don’t have a lot
of continental Europe. You’re a lot in Asia and other places that are
very good. Mexico. It is a very nice business there. When you talk
about any one of our individual investments and our biggest investment,
they are just not that big. Citigroup is 2% or 1.5%.”
On whether he values liquidity:
- “Yes. I value liquidity a lot. We do like liquidity.
There’s a measure of liquidity and I think it’s not valued in the
marketplace enough in general. We do like liquidity, although you have
to realize that Appaloosa historically is 60% long term gains. We are
long-term holders. But I value the liquidity. I value it because I was a
head trader at Goldman Sachs. In 1998 I found out what liquidity was
all about. There have been other things. These once in one hundred sort
of things seem to keep happening every seven or eight years. I value the
liquidity in that respect. I am a little more willing to be in bigger
positions right now because I think it’s safer right now. I think the main thing right now is to be long equities.”
On whether he would go into structured credit:
are big CMBS players. We have the biggest book of CMBS subs. One of the
biggest of books on the Street right now. It has a lot of upside. It’s a
big investment for us, but it has tremendous upside. We have things in
structured credit. I am willing to put some money, but I am not willing
to put 50% of my book in that.”
On going long subprime last year:
- “We were long subprime. We are a big fund. We have a lot of sh*t in there. Is that a bad word for Bloomberg?”
think there is probably more to go there [in the mortgage space] again
because I thought there was more to go in all credit. There’s probably
more to go in some parts in the mortgage space because it’s cheaper than
corporate credit. I think money will find those spots that are cheaper.
CMBS is cheap to corporate, equity is cheap to everything.”
On what he would have done with his life if he did not end up being a professional investor:
a matter of fact, McDonald’s. I tried to get a job at McDonald’s. I
couldn’t get a job. They would not hire me. It was a problem to get a
hairnet over the afro.”
always said when I grew up I would be a social worker. In some
respects, I really do like some of the philanthropy stuff. I like
getting out there and helping people. That is probably what I will do
after Appaloosa I think.”
On his biggest regret:
- “I wish I would have used Rogaine earlier.”
- “Probably the biggest mistake we made was in ’98 when we lost money in Russia. We did not understand how fast the markets could get illiquid and how dangerous it was to have concentration in some positions.
That was one of the reasons we ask about concentration it is easier to
get in than anything. It’s sometimes hard to get out. In Russia we moved
real fast but not fast enough to not have a loss. We thought that Russia was going to devalue and not default in ’98 and I was wrong. That was a huge mistake. We were down some 20% in ’98.”
On how Appaloosa got its name:
we started Appaloosa we were going to name it Pegasus because everyone
was using Greek names. We filed the name. We paid $300 and they said you
cannot use it because it is taken. Pegasus Funds. Then we said Pegasus
is kind of a horse. We did not want to be the Unicorn Fund. So we pulled
out a horse book. We still have the horse book and the second name in
the horse book was Appaloosa and we chose Appaloosa. The reason we did
the A’s–when we started things are sent out by fax. There wasn’t email.
If you were in the A’s you had a half hour advantage compared to others
at the end of the alphabet and you could trade if you were a small
fund. So that’s what we did.”
2. Decrease in long bond yields & Apple going to $425 – Jeffrey Gundlach on CNBC Fast Money – Wednesday, January 24
- well, I think [$425 in Apple] it’s coming this year for sure. …I think the way it’s looking now, it should probably happen this quarter. I mean, listen to people talking about apple…. this is not the type of talk that goes on at a real enduring bottom in an asset class or stock.… certainly if you close tomorrow below $483, you’re going to see $425 very, very quickly.
- I really think it’s time to be looking for corrections across the board in all those things – the same type of reversal to the upside, we talked about November 16th. I think you’ll be looking at reversals to the down side since then. and a decrease, believe it or not, in long term bond yields once again…
- like I said at the beginning of this conversation, all of these things are really up a lot. and some of them — talk about Google. I mean, that’s — doesn’t even look all that healthy. I know it rocketed higher today but it doesn’t look all that healthy on the charts. I mean, it’s kind of declining tops and then go to something like IBM and it’s done super well today. But you’re looking at something that looks like a triple top at 212.
- Ii think we’re really at a turning point sort of in the short term the other way. and the fact that apple is performing so badly can’t be taken as a positive sign. I really don’t like them [other stock markets elsewhere in the world] either.
- I talked about the Japanese stock market, I love it long-term. You really want to use an ETF that shorts the Yen, but that’s a really extended trade. I would absolutely not add to that at this point. I think it’s a great trade looking out towards the end of this year. but it really looks like that needs to consolidate along with other markets that seem overextended on this new year’s optimism,
- this is the third year in a row that we’ve had the same beginning to the year. and it ends up kind of petering out somewhere in the late first quarter. i don’t like to just use the same road map, because it’s been repeating. but i must respect the fact that it is happening yet again this year. and so I really think that bond yields are likely to fall and stock markets and risk assets are likely to fall also. I’m discouraged also by the fact that gold has been flat since last we spoke. Agriculture, which I like for the long term has been flat since we spoke. It’s not really tainting the corroborating theme of inflation. I think for stocks globally to go up a lot right now from here, you really have to believe in inflation. if that’s the case, buy silver.
3. Mortgage Spreads will trade thru Treasuries – Deepak Narula with CNBC’s Gary Kaminsky – Thursday, January 24
Deepak Narula of Metacapital Management was the best performing hedge fund manager of 2012 with a net return of 41.25%. His returns from 2008-2011 were also spectacular, the return series being 6.65%, 125.38%, 52.61%, 23.61% resp.
This is another superb interview by Gary Kaminsky, a pro himself.
Narula on Structural Opportunities for Mortgage Hedge funds
- It isn’t just us. I would say the mortgage hedge fund industry, the group in aggregate, has actually posted very good performance. Last year, on average mortgage hedge funds were over 20% and it is not the first year. Some of the reasons are really structural. Total Capital managed by mortgage hedge fund managers is probably of the order of $60 billion.That’s in a market that is over $10 trillion outstanding.
- Compare that to long-short equity managers, where there is over a trillion dollars managed by hedge funds. That is a much bigger number and so obviously there are structural inefficiencies that have occurred in the mortgage market that managers have been able to take advantage of. There is so little capital in mortgage hedge funds relative to the size of that market. Most managers are pretty seasoned, they have lived through some pretty tough times through 2008 and probably through 1998. So they have a much better perception of risk and can capitalize on inefficiencies that occur.
- If you look at S&P 500, it has got back to levels where it was five years ago. Even if you were fortunate enough to absolutely nail the bottom of the stock market in 2008, you have doubled your money. If you see how mortgage managers have done, they have done a lot better than that.
Naurla on Fed QE & Housing
Narula called QE as Bernanke’s legacy in his investor letter as Gary Kaminsky told us. Narula explained:
- The way we look at QE is half of it is coming through the mortgage market and so if you look at net purchases by the Fed, $40 billion a month is coming through the mortgage market. and so clearly the Fed has been focused on mortgage rates and helping housing get more affordable and help refinancing pick up.
- We actually, at the beginning of 2012, were more optimistic on housing than consensus. It has played out. Most economists we
re calling for housing to be down 5-7%. They got the magnitude right but the sign wrong.
- Home prices have momentum and that’s the way housing has worked typically. And so we think housing is in pretty good shape.
Narula on where mortgage spreads can go and the subsequent short opportunity
Narula plans to short the same mortgage securities he is buying once spreads reach a level, what he did in 2009 (he was up 125% that year).
- We have a long history on where mortgages, that the Fed is buying, trade on a spread basis relative to Treasuries and other liquid benchmarks such as Treasuries and interest rate swaps.
- Currently, in our opinion, spreads are trading at fair value, agency mortgages that the Fed is buying. But the Fed’s firepower is so large, the net supply of agency MBS this year is going to be a negative number. The Fed is going to buy $500 billion this year and you have got valuations that are historically at fair levels. That’s a very good recipe for putting on a long trade.
- But eventually, the Fed will basically win and will tighten spreads to a level as they did in 2009 where these securities will trade thru Treasuries. At those valuation, yeah, you probably want to short them.
4. Deleveraging in Europe & US – Ray Dalio with CNBC’s Andrew Ross Sorkin – Thursday, January 24
Ray Dalio is the founder of Bridgewater, a $130 billion hedge fund. He started, as he says in this video, with 5 million and a two bedroom apartment – “The world bank gave me $5 million in 1985. That’s when I started”.
- deleveragings have happened throughout time, right? it just didn’t happen in our lifetime before. but it happened in Japan. It happened in the ’30s, happened in Latin America. They happen all the time. How do they work? too much debt relative to income.
- so there are four things that always happen. in deleveragings
- you can either transfer wealth from the haves and the have-nots. So Germany can help Spain. or
- you can write down debts. Because if there’s too much debt you have to reduce it. so you can write it down. But the problem with writing it down is one man’s debt is another man’s assets. so you write down assets. And it feeds on itself and it has a problem. It causes pain.
- the third way you can deal with it, is that you can spend less. So I‘ll borrow less. Austerity. and we go through austerity.
- the fourth way you can deal with it is you can print money. So central banks can come and they can give money to Spaniards who may not be able to pay the dealt, and that helps them do that. .
- the most important thing is that you can have is a good, strategic asset allocation mix. So what the most investor needs to do is to have a balanced structured portfolio. A portfolio that does well in different environments. ..you need to have:
- a quarter of your portfolio, in assets that do well, when growth is faster than expected.
- a quarter when it’s slower than expected,
- a quarter when inflation is higher than expected and
- a quarter when inflation is lower than expected.
- If you put 50% of your money in stocks and 50% of your money in bonds, the problem is, you have about 80% of your risk in stocks, and about 20% of your risks in bonds. and so you don’t have diversification.
- but if you just imagine that you had a long duration bond portfolio or a bond portfolio had about the same volatility of stocks and you went through the financial crisis, most of the decline in your portfolio would have been protected.
- when you think you take a Treasury bond and you leverage it two to one, realize that the average company in the S&P 500 is leveraged two to one. In other words there’s as much debt as there is equity in the company.
- the one thing we’re most confident about is that asset classes over a period of time will outperform cash. that has to be, otherwise we don’t have capitalism.
- I would say if I was to make a big generalization, Europe – their economy will be terrible. And we will have a gradual restructuring and that will go on for awhile and it will be bad. In the United States, I think you’re going to have this shifting to taking on the more risk. In Japan, we are reliquefying the printing of money to get out of that problem and it’s going to be more liquidity brought in. and< b> in China, it’s bouncing back and they have to deal with the fact that debt maybe is growing faster than income.
5. Next 2 years difficult for Europe – George Soros with CNBC’s Maria Bartiromo – Thursday, January 24
Soros on Europe:
- well, I think Germany has done what was necessary to make it clear that the Euro is here to stay, and that’s been a tremendous relief for the markets. So calm has returned. The European banking system, the interbank market, has revived.
- so there’s a general sense of let’s say almost euphoria that the crisis is over. I think that is somewhat premature. Because the fundamental internal inconsistencies in the distance have not been addressed, and actually, therefore, you face political dangers.
- The Euro is transforming the European union into something very different from the original conception which was a voluntary association of equal states, and instead of that, the financial crisis created a two-class system with creditors and debtors and the creditors are in charge.
- The political situation I think is going to get worse. I think the next year, next two years are going to be very difficult. If the European union survives that, it may last for a long time but not for ever.
- I don’t think Europe can live politically with a situation where there’s are a center, namely Germany, and countries like Italy and Spain are condemned to perpetual inferiority.
- I think the biggest danger is that it’s actually potentially a currency war because the rest of the world follows a different recipe from the Germans. Germans believe in austerity, and the rest of the world believes in quantitative easing… and actually that works. Now Japan which has suffered from deflation now for a decade has also switched to quantitative easing, and that is now bringing down or has already brought down the value of the yen.
Soros on USA
- I think it applies to the United States because when you have unemployed resources, putting those resources to work the is really the first objective, and you to re-establish growth for shrinking the debt. and so I think the policy basically pioneered by Bernanke is actually the right policy.
- there is a down side risk because once the economy gets going, then interest rates are going to take a big leap because this is a delicate two-phase maneuver where first you throw more money at the economy and as the economy picks up, you have to take that money out.
Soros is expecting interest rates to spike as soon as there’s clear signs of pickup in the economy.
6. Lack of growth in Europe – Nouriel Roubini & Ian Bremmer on BTV Surveillance – Thursday, January 24
The detailed summary below is courtesy of Bloomberg Television PR.
On the definition of a G-0 world:
- Roubini: We live in a balance of power. The balance of power with conflicts of interest with goals being very different, you cannot reach agreement on fundamental economic and geopolitical issues. It is a more fragile economy because interdependence implies that problems are global, but policies are national. Coordinating among different countries will be increasingly difficult. It leads to political, economic and financial tensions like currency wars that can lead eventually into protectionism.
- Roubini: I say they are less worse than last summer in euro zone. Tail risk has been reduced…The fundamental problem is, look at the unemployment numbers in Spain today, rising even further. They are really shocking numbers. The fundamental problems in the euro zone is the lack of growth, continued recession, of debt sustainability, lack of competitiveness, remain.
On what he’d like to see in the U.S. and Europe over the next 90 days:
- Roubini: For the U.S., we have kicked the cliff down the road. we have the debt ceiling issue. We have a sequester issue. We have a continued resolution issue. I think they’re going to kick the can further down the road. There’s not going to be a grand bargain on spending cuts and revenue increases. They will decide to cut spending by $40 billion and then push the problem another three months. And then every three months they are gong to disagree and have another commission. Until there is market pressure, and there is no market pressure in the U.S., they will kick the can down the road.
- Bremmer: For the next three months, the economics in Europe. are bad, but politics are better for the next three months. In the U.S., the economics are better but the politics are bad. We need to focus on strengths. The Europeans have to focus on maintaining political strengths even with the German election coming up. They have to stay consistent. The Americans have to focus on the economy.
- Roubini: The politics of Europe could worsen. Berlusconi is not going to win the senate in Italy…He already said we’re going to have guerrilla warfare against the government and Monti. We’re going to make the country ungovernable. That’s a risk. The coalition in Greece could still collapse…Greece could still exit out of the euro zone.
Send your feedback to [email protected] Or @MacroViewpoints on Twitter