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. A Better 2007 Or 2007 All Over Again?
Finally, the Dow exorcised the ghost of 2007 and closed above 14,000. It was eerily reminiscent of October 5, 2007 when a decent non-farm payroll number finally cleared that hurdle. That year, the Dow proceeded to close above 14,000 for 4 out of the next 5 days. The 2013 Dow still needs a percent or two to break above the October 2007 high.
The key question is whether the stock market decisively breaks through the old Dow high for more than a couple of days or whether it at least backs off to breathe. The majority of TV gurus unequivocally think this is a breakout. They do expect a refreshing pause though. Only Bob Doll, now of Nuveen, stands out by recommending putting new money right now in a dollar cost averaging manner without worrying about a pullback. Below we give a sampling of opinions from a number of strategists and investors.
This move from its bottom in 2009 has been led by the credit market. And so it behooves to ask the message of the credit market. And who can opine better on credit markets than Bonnie Baha, manager of $1 billion for the bond king Jeffrey Gundlach?(see clip 1 below) :
- Baha: There is a bubble in credit..I was just thinking this morning when you look at investment grade credit or high yield it sort of looks like 2007 all over again.
If it is anything like 2007, you should be selling financials. That reminds us of what Charlie Gasparino reported on Fox Business on Friday afternoon:
- one trade may not mean anything…we hear this from sources within the bond market that he, [David Tepper], went out and put out for bid $400 million of financials of hybrids of 3 financial companies,…, put it in your investment mindset, a guy who liked financials may be turning bearish … the financials could have some headwinds here…
On the other hand, Tepper could simply be booking profits given the rally in the credit market. He did say equities are much cheaper than credit. But Signor Gasparino got us thinking. Now perhaps some of our anchor friends at BTV/CNBC could ask Mr. Tepper and tell us viewers.
Ethan Harris of BAC-Merrill Lynch told CNBC to toss this week’s GDP report in the waste basket. We go farther and suggest that the payroll report and the Fed statement be tossed in there as well. Because nothing matters right now except Big Mo.
2. U.S. Stock Market
Below are opinions in brief from a number of strategists and investors:
2.1 Laszlo Birinyi to Bloomberg – January 31
- “There is a more than 50% chance the SPY will top 1,600 this year as investors pour money into equity mutual funds and corporate profits beat estimates. Birinyi said “We are positive, there has been a reversal in the public’s attitude as they have begun to buy mutual funds instead of sell them.”
2.2 Ralph Acampora on CNBC Dow 14,000 Special – February 1
- “Maria, I think that’s just the beginning of the move in financials, and I think technology will play a game of catchup. It’s quality. Quality leadership, and that’s so very, very important. I know people on a short-term basis are concerned, and i can understand that, but there’s absolutely, absolutely no speculation, and that’s what ends the bull market is speculation. We’re not even there. the public’s not in the market, so there’s a lot of room left.
2.3 Bob Doll on CNBC Dow 14,000 Special – February 1
- “I don’t think its over…look fiscal cliff, we didn’t fall of it, we postponed the debt ceiling, earnings have been quite good, macro economic data generally pretty good..don’t fight the Fed and all their friends, monetary reflation party and investors are tired of zero on their cash…stocks are the place to be..what you need to be careful is duration, long duration of bonds and cash is going to return zero…”.
Maria Bartiromo asked him ” have I missed it? Should I be putting new money to work now or do I wait for dips?” Mr. Doll answered:
- “I think you don’t be smart about it and you just dollar-cost average”
2.4 Michael Hartnett in BAC-Merrill Lynch Flow report – January 31,
- Equity inflows $18.8bn this week = 3rd largest on record (data since 1992);Retail buys long-only equities for fourth straight week ($2.7bn); Flows trigger a “sell” signal from our contrarian Global Flow Trading Rule.Last “sell” signal, late-Jan 2011, was followed a few weeks later by 8% correction in MSCI ACWI.Bond flows still resilient but notable deceleration of flows to IG bond funds.
Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
2.5 Tom DeMark on Apple & Stock Market on CNBC FM-1/2 – February 1
- It is going to be surprising. If you look at Apple’s entire decline, the most number of consecutive down days has been 3. If we look at the last three days, apple had 3 consecutive down closes but in a very narrow trading range. That typically is indicative of a market turn. The fact that we had a gap downside, such a significant gap downside, I would not be surprised, it would not be outrageous to expect a gap up on Monday on what technicians refer to as island reversal could occur. The stock could open up on Monday. The direction of a market is typically determined on Mondays. So we could see an upside on Monday and produce an island reversal.
- The stock market which we thought would top at 1492 has definitely exceeded our level but we think it could still turn down on Monday.
2.6 Doug Kass on CNBC Futures Now: – January 29
- “I
believe there is a possibility that we are making a yearly high in
January. Tome, market participants are ignoring conspicuous headwinds
and rationalizing the irrational…. our monetary policy is effectively
shooting blanks, fiscal policy is going to shift to a fiscal drag. The
market probably has a fair market value of 80-90 S&P points below
where it is now. That would imply a decline of 6%-7%. We are in the
process of making an yearly high for the year.”
2.7 Byron Wien on CNBC Futures Now – January 31
Byron Wien argued that there is a major sell-off in the works and explained:
- 4Q GDP number –
that was very disappointing. I think earnings are going to be down this
year., profit margins are peaking, revenue growth is going to be
relatively slow. I think the market is being driven now by the ample
liquidity that the Federal Reserve is providing. So the market can
continue to go up… but eventually the corporate fundamentals take over and they are going to be disappointing.
2.7 Charles Biderman with CNBC’s Rick Santelli – January 28
Mr. Biderman is the founder and chairman of Trim Tabs. Here he addresses record inflows into stocks this January and warns:
- seven of the last nine months record of top 10 inflows into equities were at market tops, January through April of 2000 and interestingly, December of 2007 was a huge inflow month.
- during those seven months were companies were net sellers. well, January this year, companies started selling more shares than they were buying. buybacks has been the sole source of taking cash stocks higher or flow shrink actually charts and now we’re seeing float growth in the market and this week, looks like a $10 billion week for new offerings from companies. So we’re starting to see big selling by companies, very few cash takeovers…
2.8 Lawrence McMillan of Option Strategist – February 2
- “In summary, the market is overbought, but until there is some breakdown in the price of $SPX and/or some rise in the price of $VIX, the bull market can continue.”
3. Inflation & Rise of Interest Rates
Below are opinions in brief from investors who are bearish on interest rates:
3.1 Sam Zell with CNBC’s Gary Kaminsky – January 31
Very few people understand real estate as well as Sam Zell. His view of housing is very different from the sunny scenarios of so many:
- “I am less optimistic about how terrific this housing recovery is. I think there is a significant number of houses that are still “in purgatory”. If we are going to have somewhat of a recovery, interest rates have to go up. I don’t understand how big commitments can be made to fixed income in this environment.”
3.2 Kyle Bass with CNBC’s Gary Kaminsky – February 1
- “I think cost push inflation is coming. I know the pundits will say the money hasn’t moved. It will once the qualitative perceptions of the participants change. I think to protect yourself you need to own productive assets and you need to own anything like an apartment complex or an oil well or something or a global business that is a productive business that sells things in various different currencies and if you really want to protect yourself you put long-term fixed rate debt on these businesses. just don’t put too much debt on these businesses.
3.3 Michael Sonnenfeldt with CNBC’s Gary Kaminsky – February 1
Michael Sonnenfeldt is the founder of Tiger 21, a group of 200 of some of the world’s best and wealthiest investors. His posture:
- I and the other members of Tiger, high levels of cash, less fixed income. the fear that interest rates will rise. but we’re starting to allocate more to private equity and public equity with historic numbers in private equity. 20% across the board allocated to private equity where a lot of America’s wealth has been built for individuals. there is a movement back towards equity. As I say, it’s not a stampede. It’s measured because there’s still a lot of concerns about some dangerous issues out there.
3.3 Bill Gross with CNBC’s Maria Bartiromo – February 1
- we like stocks relative to bonds. stocks are in a 6-7% world and bonds in a 3-4% world. We like global stocks that can take advantage of a weaker dollar. in terms of the bond market, TIPS.. we are going to get inflation not in 2013 but in 14, 15, 16, then you want to be in TIPS, some of the money out of the US in Mexico, Brazil, Italy – they have much higher interest rates and decent balance sheets and I think you want short-intermediate maturities in the US
3.4 Tobias Levkovich in his report – February 1
- Reasons Why the Credit Market is Vulnerable: We are concerned about rising Treasury rates for four key reasons:
- (1) the backward-looking nature of the investor that has increased credit exposure most aggressively in recent years,
- (2) record high mark-to-market risk in the credit space,
- (3) record low breakevens, and
- (4) the very crowded nature of long credit positioning.
3.5 Martin Feldstein
on CNBC Squawk Box – January 30
- Once the market begins to focus on the fact long rates are going back up, we’re gonna be looking at a 4% or 5% 10-year Treasury instead of a 2% 10-year Treasury.
4. Bulls on Treasury Bonds
Treasuries rallied by a point or so in the immediate aftermath of the payroll number. But then the selling began and intensified in the afternoon. The close was was ugly, very ugly. Who can be bullish in the face of action like this?
4.1 Bonnie Baha on CNBC Fast Money (see clip 1 below):
- “Bonds oversold, you know, Jeffrey [Gundlach] has said that at around 2% he likes the ten-year relative to other risk assets. When you’re seeing junk bonds print with 3% and 4% yields, 2% on something that’s risk free doesn’t look too bad.”
4.2 David Rosenberg in his report – January 29
- Bond Selloff overdone sentiment on bonds is universally negative, which actually is one reason why this latest jolt in yields is unlikely to be sustained
4.3 Tom DeMark on CNBC FM-1/2 – February 1
- “The bond market produced a “buy” signal two days ago.”
Featured Videoclips:
- Bonnie Baha on CNBC Fast Money Half Time on Thursday, January 31
- Martin Feldstein on CNBC Squawk Box on Wednesday, January 30
1. “Like 2007 all over again – Bubble in Credit” – Bonnie Baha on CNBC FM-1/2 – Thursday, January 31
Bonnie Baha oversees $1 billion at Double Line capital, the fixed income management firm founded by Jeffrey Gundlach. She speaks plainly in this segment:
- Are stocks overbought? I would say getting awfully close. Look in both financial markets you have markets that have gotten way ahead of the fundamentals in the economy.
- Bonds oversold, you know, Jeffrey [Gundlach] has said that at around 2% he likes the ten-year relative to other risk assets. When you’re seeing junk bonds print with 3% and 4% yields, 2% on something that’s risk free doesn’t look too bad.
- Look, we are going into a bond picker’s market. When you look at last year the trade was buy anything rated CCC. High yield was up 15%, that’s an equity-like return. It’s almost mathematically impossible to see that again this year especially where spreads are unless you think Treasury yields are going to go down much, much lower.
- I would not say avoid the market completely, but be careful, and the ETF trade, we’re starting to see flows out of the ETFs. It’s gotten overdone, by definition those passive ETFs mimic an index where the largest are the least credit worthy borrowers.
- [is there a froth in investment grade market?] – There is Tremendous froth. Look at the Barclay’s credit index, the industrial corporate index. It has a duration of around seven years and yielding like 2.5%. You know, certainly what’s bothersome and it does tie into high yield with investment grade is look at the Dell story. We may or may not see an LBO come from Dell but we’re in the low rate world where you don’t need investment grade rating to have access to the markets. I‘m afraid we’re in for some real dislocation and credit degradation because of that.
- There is a bubble in credit. look, I was just thinking this morning when you look at investment grade credit or high yield it sort of looks like 2007 all over again. There you had real estate market where people were getting loans to buy homes that had no business qualifying yet the money just kept coming their way. We’re looking now at a high yield market in particular where it doesn’t matter the credit quality. They can issue a CCC PIK Toggle, good luck getting your money back, and it flies off the shelves. It’s almost like we’re getting to that re-pricing stage again in the credit markets that we saw in real estate markets simply because people are getting money that probably shouldn’t be able to borrow at such low rates.
- … the high yield market on the other hand has been really more of a retail based fund, retail based sector, that’s where you may see more rotation especially if we get a few credit scares.
2. Martin Feldstein on CNBC Squawk Box – Wednesday, January 30
Professor Feldstein is one the most respected economists in the country, a professor at Harvard, chairman emeritus at NBER etc. Here he speaks with CNBC’s Becky Quick and her colleagues:
- Feldstein – I think the Fed is actually helping the housing sector. I‘m not sure that is such a good thing. Because we have had a housing boom and bust in the past. That’s what drove us into the recession in 2007. I’m afraid that house prices could depend on these extremely low mortgage rates which will turn around when the Fed stops its quantitative easing policy.
- Quick – That’s fair concern. We did speak to someone who said we’re looking at higher prices across the board but these aren’t real buyers, but investors jumping in. All of these things have a way of changing the valuation and distorting things. The big question becomes when does the Fed step out and what happens to the valuations when they do?
- Feldstein – At some point, the Fed is gonna have to start raising long term interest rates. They say that’s the so-called exit strategy. But if we take long term bond rates back to anything like a normal number, right now you have negative 10 year real rates. We take that back to a normal number, that’s gonna mean higher bond interest rates, higher mortgage interest rates, pressure on the stock market and pressure on house prices. So this could be a kind of false bounce back in house prices.
- Feldstein – Orderly [exit] is fine but it still has to mean higher interest rates. Once the market begins to focus on the fact long rates are going back up, we’re gonna be looking at a 4 or 5% 10-year Treasury instead of a 2% 10- year Treasury. That’s gonna have an important impact on mortgage rates and on house prices and the prices of other interest sensitive assets.
- Quick – when the Fed was first reacting to the financial crisis, most people said this was exactly what they should be doing. When did you think it was too much?
- Feldstein – I certainly thought that what they did in 2008, when the financial sector was essentially dysfunctional, banks wouldn’t lend to each other, total drawing up of credit, I thought the Fed did the right things. When they started the quantitative easing, that was probably a good thing. After a while, the risks out-weigh whatever the benefits are. Clearly, as we saw with today’s GDP number, pushing up housing, although it’s fine for home building, creates some jobs, it is not enough to get the economy moving.
- Greenhouse – Professor, you previously argued QE2 was an important driver of stock prices and ultimately economic performance in the fourth quarter of 2010. Assuming that relationship still holds, that is to say quantitative easing can drive stock prices higher, why wouldn’t what the fed is doing now be as good for the stock market & the economy as we thought qe-2 would have been?
- Feldstein – I think that in the beginning they were able to get an artificial lift to the stock market or if you want to be more optimistic, say the stock market was undervalued and so they could get it to a more acceptable or equilibrium level for the stock market but you can’t keep pushing it up just by driving or keeping interest rates down especially as the market begins to ask, what will happen next? aren’t we going to see an exit at some point in which interest rates have to rise?
- Feldstein – I‘m not sure when it’s going to happen. could be 2014, could be 2015. Of course, everybody is super smart, everybody knows they’ll get out before it happens. That’s what they said in 2006 and 2007. Turns out when the market goes, it goes very fast.
- Quick – If the Fed is able to unwind things and start to raise rates or at least get out of the balance sheet because the economy is significantly improving, would that be enough to calm some of the fears of investors and not have those kinds of crashes, especially when it comes to stocks?
- Feldstein – well, what worries me is the possibility inflationary pressures could build up when the economy is still looking at high levels of unemployment. With almost half the unemployed out for six months or longer, a large number of people on temporary layoff, with lots of people who have part-time jobs even though they’d like to work full-time it will be a challenge for the Fed to raise interest rates in a timely way. I think that could lead to inflationary pressures which would contribute to higher long term rates simply out of expectations of inflation.
- Kernen – down a tenth of a percent. if you were still running the nbr, would you call it at recession yet?
- Feldstein – no. the nbr is very careful when it times recession peaks. Remember, it’s got be sustained and deep. So we never call a peak until six months after that date and it can’t just be a couple of months of negative numbers,
Kernen – Then what would call the last four years? you have a name for it?- Feldstein – very weak growth, very very weak growth. I mean, I’ve been saying this past year, we’re going to be lucky if we get to 2% real GDP growth. A lot of people talking about numbers 3, 3 plus in 2012. Now, at least we have official numbers for all four quarters and we’re far short of 2%. We are far short of 2% for final sales. and the consumer is still keeping up consumer spending by a relatively low level of savings. And now, the consumer will get hit with higher payroll taxes. So it is going to be hard to see how consumption will continue to strengthen the economy in 2013.
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