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. US Equity market
The US indices closed on Thursday at a new post-2008 high. But the action this week was more like a consolidation. The surprise of the week was the huge inflows into equities, 2nd largest ever according to Michael Hartnett of BAC-Merrill Lynch. Our friends at CNBC went to town with it all day Friday.
Lawrence McMillan of Option Strategist sounded a cautious note in his Friday’s commentary:
- In summary, the market is overbought, and we expect a correction. However, if $SPX makes strong new highs above 1475, more side-lined buyers may come rushing in, producing a shot at 1500, despite any overbought conditions.
A more explicit recommendation came from Tom DeMark via Adam Johnson of BTV:
- Sell France, Sell Germany, Sell UK.
What about the US market? There, as is typical with the DeMark-Johnson combo, the prediction is a day too early and not definitive. What does he need for a definitive sell?:
- Thursday was the “12” count, meaning 12 days of exhaustion have been counted. He needs a 13th day.
- Close above September high,
- “Blow-off” move to 1492.
As usual with these DeMark calls, we are left wondering:
- Whether Friday was the 13th day?
- And what if the market doesn’t get a blow-off move? What if the market sells off next week, and then recovers to 1500?
- Does that correction & rally action negate the previous “12” exhaustion days?
We raise these questions because of his similar “could happen tomorrow” or “in 1-2 days” type calls in January, February and March of 2012. They turned out to be wrong.
We don’t want to be unfair, After all, this could be Adam Johnson’s fault and not Tom DeMark’s. Mr. DeMark might be making correct calls to his clients but Adam Johnson might not be privy to them.
For example, we asked Adam Johnson on Friday after the close whether it was the 13th day of exhaustion according to Tom DeMark? He did not reply.
But we should not be so picky. At least, we got 3 explicit Sell recommendations from DeMark-Johnson – Sell France, Germany & UK. Hopefully, they will tell us when the 13th day of exhaustion occurs in the S&P.
2. US Treasuries
Last week, Rebecca Patterson of CNBC Money in Motion said:
- huge overreaction… I think yields are gonna come down; they already started to come down today; I think from 1.93% we will get back to 1.85% in 10-year yield very quickly..
Kudos to Ms. Patterson. It took just 3 days for the 10-year yield to close at 1.85%. It closed the week at 1.87%. But the 200-day is still far away at 1.72%.
The most explicit and unhedged comments came from Jim Bianco on BTV Street Smarts (see clip 2 below):
- I will take bonds; most hated asset class probably in the history of financial markets; 309 million Americans and may be 4 that like it including the Federal Reserve; all it ever does is keep up outperforming; it has outperformed stocks for the last 3 years; I think all of the bad news is in the market because 100% of the people think that rates are gonna rise;
- as far as the safe haven trade, there is no safe haven trade in Treasuries; there is no money going into Treasuries; there is actually outflows out of mutual funds that invest in Treasuries & Govt Bonds;
- I think you would probably be best off in the investment that has been working, the investment that is unloved, the investment that has priced in the recovery for the market
3. Emerging Markets
The Eurasia group surprised many when they picked Emerging Markets as the top risk of 2013. They wrote:
- “For the past four years, we’ve been uncritically thankful for the emerging markets. Set against what seemed like crippled developed countries, emerging market growth kept trade moving, commodities prices afloat, and offered attractive investment opportunities.”
- “But in a tougher overall growth environment where the US economy looks like a better bet and the potential for explosive risk in the eurozone goes away, concerns over emerging markets and their future will again receive closer attention.”
- “Emerging markets will have much more volatility and instability than the advanced industrial democracies.”
Investors clearly don’t agree. This week, EM equity saw an inflow of $7.4 billion – the largest ever according to Michael Hartnett of BAC-Merrill Lynch. These inflows are overwhelming their Sell Signal for EM.
No country in EM matters as much as China. We hear so many people speaking about a hard landing in China. But no one, to our knowledge, has laid out the consequences to the world of that event. Stephen Gallagher of SocGen did so this week on CNBC Fast Money (see clip 1 below). And what are these consequences:
- World GDP will fall by 1.5%-2%; EU GDP will fall by 0.3% and US GDP by 0.2%,
- Taiwan GDP will fall by 4.5%, South Korea and Malaysia by 2.5%, Australia by 1.2% and Japan by 0.6%,
- European equities will fall by 20%,
- Base metals will drop by 50%
4. 2013 Outlooks, Surprises & Risks
The complete list of Wien’s 10 surprises for 2013 is on Blackstone’s website. Below are the most relevant to the markets.
- 2. A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline below $100, disappointing investors. The S&P 500 trades below 1300.
- 3. Financial stocks have a rough time, reversing the gains of 2012.
- 8. Although inflation remains tame, the price of gold reaches $1,900 an ounce as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.
- 9. The Japanese economy remains lackluster and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000…
- 10. European equities, however, decline 10% in sympathy with the U.S. market.
b. Doug Kass – 15 surprises for 2013
A complete list and discussion is posted on thestreet.com website. Unlike Wien, Doug Kass provides detailed discussion & a strategy that is expected to benefit from the surprise:
- 1. The U.S. economy disappoints relative to consensus expectations – Buy index puts in 2013 1st half.
- 2. The 2013-2014 earnings cliff sinks the markets in 2013’s first half – Buy index puts in the first half of 2013; short RTH.
- 4. A tax on securities transactions is instituted in exchange for an increase in Medicare eligibility — its implementation is…negative…for financial stocks and hedge funds. – Short XLF and GS.
- 6. Despite a growing concern that interest rates will rise, the yield on the 10-year U.S. note remains range-bound.– Buy bonds on weakness via TLT; short bonds on strength via TBT.
- 8. Apple’s share price and earnings continue to disappoint in the first half of 2013 – Avoid Apple in the 1st half 2013; buy Apple and short Google in 2013 2nd half.
- 9. The big market winners and losers of 2013.-
- Winners: Ford and AAMC.
- Losers: XLF, MS, C, GS, JPM and asset managers.
- 11. A comprehensive New York Times expose reveals that all Chinese economic data has been fabricated.- Short FXI.
- 12. There is no reallocation out of bonds and into stocks in 2013.- Short TROW and BEN.
- 14. Procter & Gamble splits apart into three separate companies and Avon Products is courted.- Long PG and AVP and out-of-the-money calls.
- Stocks peak, then decline about 20%
- Bonds rebound, but close the year lower
- Japan, Vietnam and China stocks outperform
- Gold closes the year higher
An interesting comment from the always-interesting Marc Faber:
- “I am buying every month, Gold; I would prefer to see a final selloff in Gold to shake out the relatively positive public that holds gold on margin & speculating in gold; then I would increase my position again more meaningfully. But as I said, I will never sell my gold in my life, as long as I have to look at people like Mr. Bernanke and Mr. Obama, and the U.S. Congress and I will always buy every month, some gold.”
d. Eurasia Group – Top Risks of 2013
The Eurasia site provides a detailed discussion of these risks.
- 1 – Emerging markets: not less risky – They divide the various EM countries into 3 categories.
- A – becoming developed,
- B – still emerging,
- C – backsliding
- 2 – China vs information,
- 3 – Arab summer,
- 4 – Washington Politics,
- 5 – JIBs – Japan, Israel and Britain,
- 6 – Europe,
- 7 – East Asian geopolitics,
- 8 – Iran,
- 9 – India,
- 10 – South Africa
5. China-Japan.
The conflict we were most concerned about in 2012 became front page news as Japan & China scrambled fighter planes near the disputed islands. Signs that such a conflict might be much wider than the disputed islands came in a discussion of scenarios explored recently by Japan’s Ministry of Defense. The most interesting discussion involved Japan intervening to maintain Taiwan’s independence from China. We recommend readers to read the Japan Explores War Scenarios with China in The Diplomat.
We have also written about the increasing economic & security relationship between Japan and India. This is explained well in the article Japan and India’s Growing Embrace in The Diplomat by Jeffrey Hornung, Associate Professor at the Asia-Pacific Center for Security Studies in Honolulu, HI.
While the world remains focused on the possibility of Iran becoming a nuclear power, the real question in our mind is when does Japan build an arsenal of nuclear missiles. Apparently, most insiders in Asia know that Japan is capable of “going nuclear” in a week. But when does Japan accept that China’s growing might in conventional weapons required Japan to get offensive nuclear weapons? The real decision lies in Washington, we think. And it might depend on the speed at which the might of the Chinese military capability grows.
6. India & NonPakistan
This is the theater that frightens most observers except perhaps Indians & NonPakistanis. A few years ago, Pentagon ran a number of India-NonPakistan war games. Every single game managed by American & European analysts went nuclear at some point. In contrast, none of the war games managed by Indians & NonPakistanis went nuclear.
That doesn’t mean it won’t in the future. The greatest risk comes from NonPakistan’s development of tactical nuclear weapons designed to be used On NonPakistani soil against an invading Indian army – nukes against non-nuke infantry, or a mass assassination option. We refer those who are interested to Pakistan’s Tactical Nukes in The Diplomat.
This is important because of this week’s warning from Stratfor:
- Thus, closure for the United States in Afghanistan may well lead to conflict between India and Pakistan down the line.
The Stratfor article refers to an extensive discussion about how NonPakistani terrorists will be freed from drone attacks and from US pressures on Islamabad once America withdraws from Afghanistan. These hordes could then switch their attention to attacking either NonPakistani regime or India or both.
The real question is whether & when USA & India decide to act together to seize NonPakistan’s nuclear weapons. The two countries have conducted over 50 joint military exercises over the past few years mainly, in our view, to practice interoperability for this purpose. America doesn’t need special forces of the Indian Army in any other region or against any other country except NonPakistan.
This is a remote, very remote contingency. There is no chance of this scenario as long as Islamabad’s Panjabi-dominated Army has secure control of all military bases. If and when that changes, then all bets are off.
* Pak means pure, spiritually pure and Pak-i-stan means the Land of the Pure. This was always laughable but now, especially with the massacre of over 100 Shia Muslims this week, we just can’t call it the Land of the Pure even for diplomacy’s sake. Unlike the derogatory term Na-Pak, the term Non-Pak is not. The first is a negative, the second ,ours, just a neutral term.
Featured Videoclips:
- Stephen Gallagher on CNBC Fast Money on Thursday, January 10
- James Bianco on BTC Street Smarts – Wednesday, January 9
- Sean Egan on BTV Taking stock on Thursday, January 10
1. Impact of China Hard Landing – Stephen Gallagher on CNBC Fast Money – on Thursday, January 10
Stephen Gallagher is market strategist and head of research at SocGen. As he says,
- “we’re doing the exercise, you got to be prepared. it is one of the big global risks, without question. the potential black swan.”
So what would be the impact on the world if China does experience a hard landing?
- World GDP will fall by 1.5%-2%; EU GDP will fall by 0.3% and US GDP by 0.2%
- Taiwan GDP will fall by 4.5%, South Korea and Malaysia by 2.5%, Australia by 1.2% and Japan by 0.6%
- European equities will fall by 20%
- Base metals will drop by 50%
- Oil drop will be limited to $75; Gold goes up and falls back down.
And when does this landing occur?
- “it’s this year. they’re trying to push the economy from a cap x led growth to a more consumer led model. So, you got a lot of pieces moving all at the same time. It really is down to this year.“
But as he also said:
- “some of the recent data does look encouraging. we are getting signs of bottoming out“
2. I will take bonds – James Bianco on BTV Street Smart – Wednesday, January 9
Jim Bianco of Bianco Research and Bruce Kasman of JPMorgan were in a panel discussion on BTV Street Smart. Bianco was asked to comment on Bonds:
- Bianco – I will take bonds;
most hated asset class probably in the history of financial markets;
309 million Americans and may be 4 that like it including the Federal
Reserve; all it ever does is keep up outperforming; it has outperformed
stocks for the last 3 years; I think all of the bad news is in the
market because 100% of the people think that rates are gonna rise; the
Fed’s out there with 85 billion a month of a printing press; I just
don’t think they are gonna rise unless we have a change in Fed policy… - Bianco – as
far as the safe haven trade, there is no safe haven trade in
Treasuries; there is no money going into Treasuries; there is actually
outflows out of mutual funds that invest in Treasuries & Govt Bonds;
all the money is going into corporate bonds; and I will agree with Bill
Gross that corporate bonds are a little overdone because if you look at
corporate bond spreads, they are highly correlated with the stock
market; corporate bond spreads are gonna narrow that means the stock
market is going up; if you think stock market is gonna struggle,
corporate bonds aren’t gonna go anywhere… - Bianco – I think you would probably
be best off in the investment that has been working, the investment that
is unloved, the investment that has priced in the recovery for the
market and one last thing real quick – rates can go up for a lot of
reasons;
Bruce Kasman dismissed inflation fears by arguing:
- Kasman – I think inflation is moving lower; I think over the next 6-9 months, inflation is going to be
running at 1-1.5%; short of any uncertainties around what happens in the
energy space.. I think inflation is going to be quite low here…it
will keep the Fed accommodative and will be a plus overall for
long-duration fixed income assets….
3. Rise in Debt Ceiling Not a Major Event – Sean Egan on BTV Taking Stock – Thursday, June 10
This is a conversation between Sean Egan of Egan-Jones, John Manley of Wells Fargo Funds & BTV’s Pimm Fox.
- Egan – all the major economies, US, UK, EU & Japan, are all doing the same thing at the same time – printing a lot of currency. So basically we are in a soft currency war as we speak.
- Manley – It’s the best story for Gold that I have heard. Gold is a currency. But I don’t think we get inflation right away. Inflation requires that wages go up and it is still hard for me to see how wages go up; wages don’t go up and prices do, that short-circuits the whole process. So I think inflation is still a ways off.
- Egan – That’s right. We have had excess capacity both in labor and in capital in terms of utilization. We also had a deleveraging globally whereby we have austerity measures being put in place in most of Europe, also to a lesser extent in the US, it has reduced the demand for money, the velocity of money, you don’t see it showing up in inflation at the current time. You also have a lot of the population retiring too; that’s another factor holding things down and any sort of inflation, That’s why Gold hasn’t been doing much over the past year.
- Egan – when the Fed is purchasing between 70-80% of the securities offered by the Treasury, you have to assume the real signals being sent by interest rates are not accurate. That doesn’t really matter at this point. I think the central banks have provided a floor underneath the problems in Europe, underneath problems in UK. In Japan, the central bank is doing what it needs to that is to push down the value of the Yen so their export sector is in better shape and their balance of trade doesn’t turn negative again. I think the theme over the past 12 months has been the extraordinary efforts of the Central Banks. a lot of old-time investors have been very uncomfortable in the environment because… the difference now is that it is happening in all the major markets simultaneously and so it is affecting everything at the same time there isn’t the normal discipline — when Brazil Argentina or Chile was printing a lot of currency, there used to be capital flight. Now there is no place to go. Because all the major markets are doing it simultaneously.
- Egan – I think a lot of the old fashioned investors missed the move last year because they assumed that there was going to be some major negative fallout from the interventionist efforts of the central banks. Now, conditions are different. With the huge amount of printing, I think there is a natural move to the riskier assets…just a little asset allocation from fixed income to equities will go a long way…
- Egan – We don’t consider the rise in the Debt ceiling to be a big event; we think it will happen; the Republicans in the House aren’t going to be able to get much from their negotiations, they weren’t in the last ground; they probably won’t this time because they won’t want to do what Newt Gingrich type stopping the government..I don’t think much will come from it; a lot of the problems have been cleared away…
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