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. They’re Backkkk!
They being macro concerns in Europe, of course. The man who triggered this rally surprised the markets with his dovish comments about Europe. The Euro, supposedly on its way to 1.38, stopped, at least paused. That was a discordant note. Then you heard Japan’s Finance Minister Taro Aso saying that the Yen has fallen fast and may be far enough for now. Whether this was for G20 consumption at their next meeting, we can’t say but this was another discordant note.
Brazilian Finance Minister Guido Mantega added his voice:
- “It is useless for the European Union to try to get out of the crisis by exporting more to the United States, Asia or even Brazil…. We are battling over the scraps. We are elbowing each other to compete in a very restrictive market. I think the most important discussion at the G20 will be the return of stimulus policies.” .
Frankly, the EU could care even less about what Brazil feels than Bernanke did. That is sort of what Mark Grant of Southwestern Securities (see clip 2 below) told Rick Santelli (who is the brand here, CNBC or Rick?):
- “I think you’re going to start seeing a significant weakening in the euro because Draghi is indicating, is throwing it out there that he’d like to see a weaker euro. I think that’s coming, and I think you started that today.”
Todd Gordon, resident technician of CNBC Money in Motion, came in on Thursday morning and suggested shorting the Euro. But Mark Newton tweeted the opposite call for the near term on Friday:
- “Pullback in EUR/USD this wk still part of uptrend 1.325-1.33 SPT w/tgts near 1.38, so don’t believe Europe’s problems are immediate concern.”
You might agree with Mark Newton if you believe that a currency tends to weaken as its central bank pours in more liquidity and conversely, shrinkage of a Central Bank balance sheet would act at least as a brake on its currency’s downward slope. Is there a central bank that is even thinking about shrinking its balance sheet? Yes, argues Tom McClellan in his article ECB’s Shrinking Balance Sheet:
- “…few news stories are covering the really important development in Europe, which is the shrinking size of the European Central Bank balance sheet.”
- “The U.S. Federal Reserve has been doing its part to inflate the banking system, most recently with its announced program to purchase $40 billion per month of mortgage backed securities (MBS). But the Fed’s total balance sheet size of $3.02 trillion pales in comparison to the size of the ECB’s €26 trillion balance sheet, which equates to $34.6 trillion as of December 2012. While the Fed’s holdings have increased 6.7% since the September 2012 Jackson Hole conference, the shrinkage of the ECB’s balance sheet over that same time period has more than made up for the Fed’s money printing.”
Not only the ECB is shrinking its balance sheet, the EU is adding fiscal drag as well. Read what Stratfor writes in their article Ominous Budget Cuts Constrain EU Integration:
- “For the first time, the European Union is cutting its multiyear budget at the behest of the core countries subsidizing the bloc’s poorer members, which had advocated for increases. The 2014-2020 budget is expected to amount to 960 billion euros (about $1.3 trillion). The negotiations highlighted diverging national interests within the European Union, which could fracture further as a result of the budget cuts.”
Then you have the fiscal drag from the upcoming sequester, that is if the Republicans have the fortitude to go through with it. We are not the only ones to wonder about that. Larry Kudlow himself asked that question of House Republicans guests on his show. And Politico tweeted on Friday that Speaker Boehner was passing out copies to his members of Krautheimer’s Op-Ed about calling Obama’s bluff.
If we do get spending cuts either through sequestration or via other equivalent spending cuts, then we will get a combined US-EU drag. That cannot be positive for Gold. May be that’s a reason why Jim Rogers answered emphatically “absolutely not” when asked “would you buy Gold here”? (see clip 3 below).
2. U.S. Treasuries
Surely, the prospect of a combined US-EU drag should be bullish for the long end of the Treasury market. The 30-Year & 10-Year yields dropped 5bps & 7bps resp. But that’s just a trifle compared to the almost unanimous calls for rates to go up and keep going up.
This week, both Jeremy Siegel of Wharton, and Jim Rogers exhorted investors to sell or short long maturity Treasuries. At least, Jim Rogers was honest enough to admit he has been stopped out of his shorts a few times and expressed surprise that his short 30-Year T-bond position is making him money (see clip 3 below). And Bill Gross reappeared on CNBC to recommend 2-5 year Treasuries and to avoid long duration Treasuries.
All this negativity prompted Jim Bianco to issue an APB or all-points bulletin to his readers:
- “As regular readers know, we have listed literally hundreds of bearish stories on Treasuries. So, we are officially issuing an all-points bulletin for any story, link or even rumor of someone that is bullish on Treasuries. If you see one, send it in!”
3. U.S. Stock Market
This week, the US High Yield ETFs went negative for the year joining other asset classes that are now negative for 2013, US corporate bonds (LQD), emerging market equities (EEM), Hong Kong stock market (FX
I), the Australian Dollar to name a few. Yet, the US stock market indices remain resolutely at or very near their YTD highs. So are the US Indices decoupling and breaking out or are they just the last domino to fall?
Last week, Laszlo Birinyi told BTV that there is 50% chance S&P will reach 1,600 sometime this year. This week, he told CNBC SOTS that the S&P 500 may consolidate around 1,500:
- We would not be too cavalier or comfortable with 1,500 & 14,000….While we have a five year high, we are not ready to uncork the champagne, although we have put some on ice.
Jeff Weiss of Tejas Securities used to be a frequent guest on Financial TV. He appeared this week on CNBC Squawk Box to state:
- “the primary trend of the market is up, the fuse was lit in mid-November with… fairly powerful reversal formations and the key now..is to manage risk and realize that initial support on S&P is 1470-1480 intra-day area….we now need as many weekly closes as we can get above the 1500 area in the coming Friday, closing periods.”
Lawrence McMillan of Option Strategist sums it up simply:
- “In summary, the bears have had plenty of chances to knock this market
down, but so far have failed to do so. The fact that none of the
indicators has rolled over to sell signals shows that the bulls remain
in charge.”
The one difference between this week and the prior weeks of 2013 is that macro is beginning to matter again. Larry McDonald of New Edge spoke about this in some detail on CNBC Fast Money (see clip 1 below). His conclusion:
- “I would sell this rally just because out of my 17 Lehman risk indicators, a lot of the sentiment indicators are screaming sell. But now, the systemic ones are starting to say sell.”
Let us go back Tom McClellan’s article about ECB’s shrinking balance sheet:
- The reason why this is important is because there is a very strong correlation between the combined size of the ECB and Fed balance sheets and the movements of the world’s stock markets. When the balance sheets are growing, that is overwhelmingly a bullish factor for stock prices.
- When balance sheets stop growing or start shrinking, it is a little bit more complicated. Past episodes of shrinking balance sheets in 2008, 2010, and 2011 all were associated with big drops in the SP500 and other indices.
- As 2013 gets underway, the SP500 is continuing higher and challenging its 2007 all-time high, but it is doing so in an environment when the combined balance sheet size has not been rising.
- Is this stock market strength with no balance sheet rise a sign that the stock market and the world economy are finally able to proceed on their own, and without central bank stimulus?
- Or is this just another example of what we saw in early 2010, when the stock market continued higher for a few months after the faucet was turned off?
- So to bet on the hypothesis that the stock market can now fly on its own is to say “it’s different this time”, which is one of the more dangerous phrases for investors to ever utter.
4. Apple & Banks
The most notable action this week came from David Einhorn who announced his lawsuit against Apple. Einhorn wants Apple to give cash back to shareholders and he asked Apple to issue a perpetual preferred. He did it on CNBC pre-market and it prompted smart traders to jump on the stock. Later that afternoon, Apple announced that they are looking at Einhorn’s idea and several other ways to make better use of their cash. That drove the stock up and the rally continued on Friday. Now all eyes are on Tim Cook’s comments during the upcoming technology conference.
Financials have done well in 2013 with Goldman as the leader of the pack. But Bank of America is down in 2013. Still Meredith Whitney loves it, as she told BTV Surveillance on Thursday:
- “I think that Citi does ok, but I think Bank of America is the stock to own this year without a doubt. There is so much financial leverage with that name. They will return I think over $4 billion in buybacks. It could be $5 billion in buybacks this year and really move the needle. I think that stock easily goes to 15 in the next six to nine months.”
5. China’s Risky Maritime Strategy
This is the title of a Stratfor article about the Chinese Navy locking on to a Japanese ship near the disputed islands. We have written about the danger from PLA becomeing increasingly hawkish and somewhat independent of the Party Leadership. In this article, Stratfor discusses a deeper and riskier strategy:
- “In truth, along with the increasingly provocative military actions in the East China Sea, the newly inaugurated political leadership has not hidden its intention to safeguard its maritime periphery. There is thus an alternative explanation.
- By distancing itself from military actions, Beijing gives itself the option to continue to apply political and diplomatic pressure on neighboring countries, Japan included, over the disputed waters.
- In the meantime, by appearing as though it cannot rein in the military, China can warn its neighbors, as well as the United States, that if they do not meet Beijing’s demands diplomatically, it could lead the Chinese military to take action that the Foreign Ministry cannot control.”
Why are they doing that? Stratfor writes:
- “This may be in part due to a need to focus its populace on an external threat at a time when the Communist Party feels pressured on the domestic front.”
Is this beginning to sound like 1930s Japan? We sure hope not.
Featured Videoclips:
- Larry McDonald on CNBC Fast Money on Tuesday, February 5
- Mark Grant on CNBC Santelli Exchange on Thursday, February 7
- Jim Rogers on CNBC Closing Bell on Thursday, February 7
1. Systemic Indicators starting to say Sell – Larry McDonald on CNBC Fast Money -Tuesday, February 5
Larry McDonald, Senior Vice President of Credit Sales & Trading at New Edge, is also the author of a book on Lehman. As a result of the Lehman crisis, he has developed 17 indicators that measure risk. In this clip, he says his systemic indicators have begun to say sell.
- you think about the last 100 years, the great financial panics of 1907, crash of ’29, famous panic of 2008 with Lehman. There’s typically a ten-year period of normalization for investors. So, what happens here is, you have a period where investors have an easy quick hand on risk off. and in each time, 2010, ’11 and ’12, credit spreads widened in Europe. Bulls fought it and then we rolled over hard.
- Think of asset managers around the country – these guys do a great job analyzing stocks. You have to focus so hard on managing stock positions, you’ve got to do deep company specific research. And what happens is, as the macro picture fades away, a lot of people stop focusing on it. Now, the macro picture is creeping back in with this political risk.
- What’s happened each year is credit spreads on the Sovereigns widen, each time. Each time we had the big risk off, the Sovereigns widen, that leaks over to the Corporates in Europe and a week or two later, it eventually hits U.S. financials and then U.S. equities.
- Now, we’re about 30%, 40% through that cycle this time. We had a massive blowout in Italian yields – 40 basis points on $2.4 trillion of paper. That is a colossal move. So, in this case, you’ve seen the leak over into subordinated financials in Europe. So, the banks in Europe, have felt it. So far, the banks in the U.S. have not felt as much.
- The interesting thing in that dynamic is, Spain and Italy. In the next 30 days, we have a massive corruption scandal in Spain. Mr. Rajoy potentially will be knocked out of office. In Italy, we have elections. and a rising Berlusconi. And the last time he was in office, we had 7% yields and a massive pull-back. the problem is, it all comes down to this sentence. “when Draghi says I’ll do whatever it takes”, he didn’t think he was going to have new governments in Spain and Italy seven months later.
- I would sell this rally just because out of my 17 Lehman risk indicators, a lot of the sentiment indicators are screaming sell. But now, the systemic ones are starting to say sell.
2. Severe Ramifications for markets – Mark Grant on CNBC Santelli Exchange/SOTS – Thursday, February 7
Mark Grant of Southwestern Securities is well respected for his views, especially on Europe.
- Santelli – Mark, you were just listening to Mr. Draghi, and many of your comments, along with many traders on this floor, everyone was wondering when a big salvo to lower the value of the euro will be emanating from Europe to keep up with the Japanese. Has that day arrived?
- Grant – no, the day hasn’t arrived yet. I’ll tell you what has arrived. The way the EU works with the 17 people and the 17 countries in the major zone and the 27 around it. I think you’re going to start seeing a significant weakening in the euro because Draghi is indicating, is throwing it out there that he’d like to see a weaker euro. I think that’s coming, and I think you started that today.
- Santelli – okay. now let’s go back a couple of days, and I’ll paraphrase. President Hollande of France on Tuesday in front of one of these european groups that have been getting together, basically said the following. he said, hey, “do we really want to stick with this kind of market driven exchange rate value, or do we need to rethink that?” Any thoughts? of course, consider the source. it isn’t the bastion of capitalism, but it really looks to me like the battlefield of what’s happening in Europe is definitely going to be in the foreign exchange markets.
- Grant – I think that’s true, rick. i don’t think there’s going to be any big announcement about it. I definitely think you’re going to start to see the euro weaken. you point out surreptitiously, but truly Hollande is a socialist, and he likes the market when it does when it’s supposed to do for France, and he doesn’t like markets when it goes the other way. So I think there’s going to be a lot of pressure at the summit meeting today to see what people can do and the central banks can do to lower the euro against the dollar and against the yen.
- Santelli – one of my least favorite words in the English language of late is the word qualitative. We heard Charlie Evans use it several times in his discussions with Steve Liesman. I like Quantitative. So what has happened quantitatively, not opinion, to Spain, Italy, Greece. What has their debt done throughout this process where we’ve seen funding pressures ease? I know you have a big opinion on this.
- Grant – you’re right, I have an opinion on that. You’ve seen the fundamentals of Spain, Portugal, Ireland, Greece, Cyprus weaken dramatically. You’ve seen a tremendous amount of more debt, the other side of the coin, … but the easing done by the central banks which have poured money into the European countries and into America, by the way. So there’s been a tremendous amount of little blue and green pieces of paper that have to be put somewhere. So if you want to point to one place and one reason why we’ve seen a drop in yields, it’s
because money has to go someplace, and it is pushed down the yields of the sovereign there and in the united states as well. I think we’re about reaching the end of that course, and I think it’s going to have severe ramifications for the markets.
3. Buy Russia, Short 30-Year Treasury, Don’t Buy Gold – Jim Rogers on CNBC Closing Bell – Thursday, February 7
Jim Rogers is a renowned investor and even a more interesting speaker. He is also very clear in his opinions.
- Russia – I am buying Russia. Russia is terribly depressed. I am buying the bonds, the currency and the stocks. I have been bearish on Russia for 46 years. I first went there in 1966. I changed my mind. For the first time in 46 years, I have decided to invest in Russia. Everybody is pessimistic on Russia. Russia is changing. Putin is changing though.
- Japan – Japan is down 75%, 75%. They are gonna continue to print money. Its not good for the world. It is making markets go up. In the meantime, the Yen is collapsing but the stock market is going thru the roof. The American market is near its all time high. The Japanese market is 75% below its all time high. There is a lot of momentum and I am not very good at trading, short-term trading. But why couldn’t it double? Why couldn’t it go to 20,000 if it prints a lot of money?
- Government Bonds – I am short Government bonds. I have shorted them 2-3 times, been stopped out. I am actually making money at the moment which surprises me. But I am making money on my bond shorts. May be its the end of the 30-Year bull market and if it is, I will make a lot of money. Stocks may go up too. But I don’t see how this can last too long.
- Street Smart – Sell bonds. Short long term US Government Bonds right now. That’s probably my main US investment and I am long the Dollar. Bernanke doesn’t understand economics, he doesn’t understand finance, currencies. All he understands is printing money. He doesn’t know anything about what’s going on in the world.
- Mexico – Oil is drying up. Oil is running out. They have a young population. The Government gets 40% of its money from oil. I wouldn’t put your money into Mexico much less mine.
- North Korea – yeah, North Korea is fabulous. The only way to invest is to buy stamps or coins, North Korean Gold & Silver coins. That’s a fabulous, fabulous opportunity.
- Gold – [ in response to would you buy Gold here?] Absolutely not. I own Gold but I wouldn’t buy it here. I am not selling but I would not buy here unless I were buying North Korean coins.
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