Interesting Videoclips of the Week (May 11 – May 17, 2013)

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. “Tepper changed the equation”

Trust Jim Cramer to say it succinctly and in this case correctly. The markets seemed worried about the tapering of QE discussed by Jon Hilsenrath in his article on last Friday evening. That may be why the Dow closed down 26 points and the S&P was flat on Monday. Then David Tepper spoke on Tuesday morning. He made QE-tapering into a positive just as he had made bad economic data into a positive on September 24, 2010.

This was a “dominant, dominant strategist talking”, said Cramer and he was right again. S&P futures began going up as he began speaking at 7:45 am and the S&P ended with a 16 handle rally after the opening. If this isn’t dominant, dominant, we don’t know what is.

Look, the single best call for this year was Tepper saying buy on December 17 on Squawk Box. If you listened to him and simply bought Dec 2013 calls straight up or with a short put way out of the money to finance the calls, you have enjoyed this year so far without the slightest worry.

Later that morning, Lazslo Birinyi came on CNBC SOTS and said he was buying December 1700 calls. He also talked about S&P 1900 as a number, but not as a target. Frankly, the way the stock market is behaving, no target seems crazy. Recall that the Nasdaq 100 went up 100% just in Q4 of 1999.

2. Is Tepper being “conditional”?

Frankly, yes. Just as he was in January 2013. His case depends on the economy remaining strong. He does not have any doubts though.

“economy is getting
better, autos are better, housing is better, it continues to improve,
they can’t find enough people in housing, that’s the only thing holding
it back right now….”
“the private sector seems to be in pretty good shape. As soon as the sequester is over, it’s going to be really interesting second half of the year. you see Goldman picking up forecasts, other people picking up economic forecasts..”
“you’re kind of an early stage economy, very similar to an early stage economy, probably have years to run in an early stage economy. we don’t have inflation, capacity utilization is low, so you have room there. unemployment is high. you have room there. we have a little bit of room to run. we just had the early sector of the economy is moving. you had big rallies is housing. banks have recovered. … eventually we will have renaissance in US manufacturing.”

In other words, his entire case is based on the economy recovering. So far, the early stage or the interest-rate sensitive sectors have rallied. He states that the second half of 2013 will be stronger and post-sequester growth will add a kicker. Manufacturing does not matter at this stage, he seems to say.

We saw this conditionality in the stock market this week. When jobless claims came in much higher on Thursday, the stock market sold off in the afternoon (yes, down 42pts in the Dow counts as a sell-off now). Then on Friday, leading indicators for April came in much stronger and U-M (go blue) sentiment was up big. So Friday gave us a 17 handle rally in the S&P to 1667.

So as long as the economy maintains its pace, it actually may make sense for the Fed to taper off a bit of QE. And thanks to David Tepper, that may not sting much. This is now so pat that inquiring minds may actually wonder whether David Tepper was “sent” by Bernanke to get the markets ready for a June QE-taper. As the man said, “June is not a bad time to taper it down“.

But before that comes the next Employment Report on June 7. A strong number may well get the markets mentally ready to accept a June taper as even more bullish. A weak number would really make it interesting. Until then we intend to watch Jobless claims.

The real question is what happens if the stock market simply ignores Bernanke warnings about a tapering and even ignores the first taper. If you remember 1999, the market paid little attention to Greenspan’s earlier rate hikes.

Michael Novogratz of Fortress feels differently about the market’s reaction to Fed tapering QE (see clip 2 below):

“the moment the Fed
starts moving, the stock market’s going to go down, a decent bit. The
rally’s going to end. you’ll get a correction. 10%? 15%, a lot of
people will get squeezed in between now and then. it’s been a wall of
worry market. people haven’t bought in yet. that’s why the market
doesn’t go down. once everybody buys in and the Fed moves, everyone will
sell.”

3. Being called “stupid” by David Tepper

Last week, we expressed serious concern about the way JGBs were being sold off. We called it the single most important event of that week. David Tepper dismissed these concerns as stupid:

“it’s finally going back up a little bit. everybody is excited. oh, my god, they are falling. Japanese markets are going to hell. 80 basis points. stop. stupidity is running wild.”

We are not taking it personally. Heck, Tepper doesn’t even know we exist. He is probably addressing the cognoscenti like Rick Santelli. And we wouldn’t mind if he did and called us stupid to our face. So many have done so that it doesn’t even register. But we stick to our stand. We cut our investment teeth on Q2 of 1994 when the bond market got destroyed and Cisco, our favorite stock then, was cut from 37 to 19. The experience has instilled in us a very healthy respect for a big break in the bond market.

Bill Gross said this week that leverage in today’s bond market is 2-3 times what it was in 1994. And we bet that the leverage in the JGB market is a multiple of the leverage in the US bond market. We would be absolutely petrified if the JGB market broke down. It was a relief to see Rick Santelli share our concerns about the JGB action.

And it seems that Japanese authorities also shared our concern. Because they stepped in on Japan’s as Michael Novogratz said:

“look at what the Japanese did last night. Their rates which were stunningly low, their
5-year was at 12 bps; now they’re nervous it’s at 30. You know, they
came in and did four times the amount of buying they normally do.

Their intervention worked. JGB yields not only stabilized but they fell a bit on Thursday & Friday. So now we can go back to the “Tepperian” view.

4. The U.S. Treasury Market

David Tepper was lukewarm about the long end of the Treasury market:

“it [excess liquidity]either has to
go in the economy, which, you know, it probably will go somewhat in the
economy, it has to go to the short end of the curve trade better, make
the long end of the curve trade better, there is not that much paper, we
have this excess and it has to make stocks trade higher…the
problem with the long end of the curve is you might be worried some of
that might go into the economy and, you know, it might stimulate the
economy with a little bit of surge right here.”

Michael Novogratz had a different viewpoint:

“I think we’ll be in a range the entire year. I do not think ten years could take out 2.30% this year. It will be a 1.60%-2% range…..The Fed is buying and not just the Fed. The
Chinese took in $250 billion of reserves in the first quarter, 75% of
those goes into Treasuries. That’s like QE-4, you know. Everybody’s
buying Treasuries.”

5. The U.S. Stock market

David Tepper is long term bullish:

“it’s one of those times where the indexes are really cheap, they really are low. Next year the S&P, we kind of have it in the low 13s in next year’s numbers. 3%, 4%, run 20 times. crazy stuff.”
“I have this other
chart. This is a blog by the Fed. you can’t probably see this thing….
the high points are 75, 82 and now. those are the cheapness of the
market or equity risk premium. It is basically saying that when the
premium is high, historically you get better returns after that. One of
the all time highest equity risk premiums in history.”

Tepper’s chart is below, courtesy of CNBC.com. Just a small point, the risk premium is as dependent on interest rates as it is on stock prices, earnings. So if interest rates change dramatically, the risk premium can change quickly, particularly if the interest rates used are 10-year or 30-year rates rather than short rates.

David Tepper’s fear of a crazy overshoot like 1999 was described differently by UBS’ Art Cashin on Friday morning:

“…either they are going to say, Ok, we are pretty overbought, we are going to pause here, take a look and see if you can have a correction when everybody is going to buy the dip,
or, if they don’t pause here, you run the absolute risk of, because you are at that kind of fulcrum point, of going parabolic…this could turn into a rocket shot because the stocks that have the heaviest shorts have raced ahead further than the S&P and the Dow, which means the pressure is there.. these guys are going to crumble if they keep moving up…. shorts are probably having their blood pressure checked by the minute… they have begun to cover in a variety of other areas…if they do, we could get parabolic and it would be lovely to see…”

Lawrence McMillan of Option Strategist wrote on Friday:

“Stocks continue to rise almost daily. $SPX has gone on a tear since
successfully testing support at 1540 about a month ago.(April 18th).
This latest upside breakout now leaves the 1623 area as minor support.”
“In summary, the market is getting frothy now, as overbought conditions
build up. But that doesn’t mean it will collapse, or even turn bearish
any time soon. Overbought does not mean “sell.”.

Tony Dwyer, one of the most bullish strategists on the street, calculates his price target at 1760 (16*$110 in earnings). But as he said on BTV Street Smart on Monday, May 13:

“I happen to think the market is going to correct between 3-5% pretty quick here…”

Tom McClellan also talks about an overbought condition in his article this week with a possibility of a “meaningful top”:

“the 10-day Open Arms Index is at a fairly high level on this inverted scaling, and such readings are reliably associated with meaningful tops for stock prices.”
“When a high chart reading like the current one (i.e. a low raw reading) appears after a meaningful decline, it can sometimes be a signal of strong upward initiation for a new uptrend. But when it appears late in an uptrend as it is doing now, it is more often a sign of conclusion for the advance.”

We would be remiss to not include the correction-cum-3-year downtrend forecast from Steven Hochberg of Elliot Wave:

“if you look at S&P’s rally, you can see a five-wave pattern to the upside….when that fifth wave is complete, the market always will reverse trend and correct at least that previous five-week advance. We think the correction will be a little bit bigger than that, but right now, we think we’re at the end of the fifth wave and ready to reverse to the downside.
it could be a three-year down trend….well, the three years, a long-term forecast by bob protector, the president of our company, based on long-term cycles and time relationships between previous waves we’ve looked at. so 2016, give or take, is where we see the next major buying opportunity. there will be bottoms and rallies along the way, but i think the decline will be pretty persistent into that time period

6. Gold & Art

You hear so many people talk about support & resistance in Gold. But Michael Novogratz takes a very different view:

I personally think gold is toast. When you think about it, if you were a gold bull and you got quantitative easing and qe-7, nothing did it. we peaked out at 1900. that’s why it was at 1900, the anticipation of all of this. if you run the Gold chart over the Nasdaq chart over the Nikkei chart in 1989, they are identical. Once bubbles pop, they go all the way down.
gold bubble has burst… you have tried everything to get it to go back higher and it won’t go higher…so it will go lower…
Gold was a classic bubble, the story that you can fit all the gold in an olympic sized swimming pool, such a compelling story, all the gold ever mined in an olympic sized swimming pool or a 30 meter-cube…bubbles come around with spectacularly good stories that are believable…once everybody believes it, there was no one to buy…it would not shock me to see gold back at $500.

Novogratz thinks Art is even a worse bubble than Gold…

“Art is 100% a bubble. it has all the markings of a bubble….the new painting doubled in price. Prices have gone parabolic. you go to any of the art shows and stuff that was even the cheap art; it was $10,000 2 years ago, now it’s now $80,000 and the expensive art has gotten crazy.
“the Fed has this policy of trickle down. it’s a trickle down monetary policy, helping the rich get richer and the rich are getting tremendously richer because asset prices are going up around the world. what the hope there is as the wealth effect kicks in and you spend more money and it generates growth of the economy. we haven’t seen that part in a dramatic sense yet. so the middle class is still suffering, the working class is really suffering, but the wealthy are getting wealthy..apartments in New York are flying and art has been the tip of that spear.”
“and all the wealth from China and Russia. you also have the illegal money or the dirty money, the laundering. and that’s what’s really giving this turbo charge to the art market. All bubbles pop, and they come down a lot further than people think. These $90 million paintings, they might be worth $8 million some day.”
“one thing you learn is that you don’t try to pick the top of bubbles, it is a very dangerous game, but once it cracks, when you see the real cracks in it, then you can sell. Sotheby’s, Christie’s will be the direct shorts at that point. I am not short now,…”

Bernanke sees this too. He also sees junk bonds trading with a 4-handle yield. But what does he do? Does he dare to prick the bubble just when the real economy may be trying to recover? Or does he just try to talk the bubble down? Or does he simply say, forget about it!

Featured Videoclips:

David Tepper on CNBC Squawk Box on Tuesday, May 14
Michael Novogratz on CNBC Squawk Box on Wednesday, May 15

1. I am definitely bullish – David Tepper on CNBC Squawk Box – Tuesday, May 14

I’m definitely bullish…. it’s so overwhelming… economy is getting better, autos are better, housing is better, it continues to improve. They can’t find enough people in housing, that’s the only thing holding it back right now…
Australia just eased, ECB just eased, Korea just eased, Japan is in massive easing mode, These United States of America, we just are just amazed at the way these numbers work. as we go out further.
the Fed i
s going to purchase $85 billion of Treasuries and mortgages a month. it is over a trillion. so over 500 in six months. What’s happened and what’s really amazing is that if you look at the numbers, over the next six months because of tax increases, budget cuts, growth in the economy and Fannie Mae and Freddie Mac paying back, the deficit over the next six months is shrinking massively; the next six months deficit will be well under 100, probably closer to 85.
we have over $500 billion we’re going to buy over the next six months. Now we only have a deficit less than $100n the next six months. The net issuance versus refunding is a little over 100. That means we have 400 billion, 400 billion that has to be made up. So basically think about this. That’s being taken out of the market, out of the bond market. $400 billion is now in your hands, my hands and other folks’ hands. and there’s a few choices. It either has to go in the economy, which, you know, it probably will go somewhat in the economy, it has to go to the short end of the curve trade better, make the long end of the curve trade better, there is not that much paper, we have this excess and it has to make stocks trade higher.
the problem with the long end of the curve is you might be worried some of that might go into the economy and, you know, it might stimulate the economy with a little bit of surge right here. basically, afterwards, we also have to cut back because the deficits in the future will be less than this trillion dollars.
so if we don’t taper back we will get into this hyper drive market. So it’s like backwards of arguments on TV. To keep the markets from going up in a steady pace, the Fed has to taper back. Because if you look at the numbers, it’s so tremendous, These numbers are so tremendous that you can have the market sort of in a hyper mode potentially. I don’t know where the money goes and you know who else doesn’t know where the money goes, the Federal Reserve of the United States of America.
in a way you like to have a smooth market not two up too fast. so this worrying about tape thorring, there is no worrying about tapering.
if there is a true taper, there better be a true taperor. Else you are back, I think, in the last half of 1999. and so guys that are short, they better have a shovel to get themselves out of the grave. Because if you don’t have that back to have a smooth market move. these numbers we’re talking about are tremendous. i think the fed doesn’t know the effects. what they do know is that they have to move the program down.
. they should taper it down. June is not a bad time to taper it down. If you don’t taper it down, you could go crazy. I don’t know that. They don’t know that. It’s just a possibility. You have to expect some of it. The question will be if the market does the numbers they should be fine. because they know how the flow of money is. they should be fine. the market should expect some. the question is you’re not getting anything until June 19th. that’s a long time. so you have this excess of money in the system.
so i don’t have any fear and then you go beyond that. you look at the budget numbers. we have six wall street firms budget numbers and stuff. next year the average is about $600. and the next two years after that, 600 million deficit. and the next year is $500. you can’t run a trillion and have big gaps for the whole year.
the first half of the year, you know, October to March, you basically have most of your spend something most of your tax receipts. and second half of the year, April to October or April to September 30th. So if you’re the Fed, what should you be doing? Taper off in the first half of the year and be bigger in the second half of the year. So you have this balance of flows.

Valuations

I have this other chart. this is a blog by the Fed. you can’t probably see this thing…. the high points are 75, 82 and now. those are the cheapness of the market or equity risk premium. It is basically saying that when the premium is high, historically you get better returns after that. One of the all time highest equity risk premiums in history.
look, here’s the joke. to me it’s a joke. I don’t know how fast the economy is going to grow. It feels like it’s getting better. Besides the ECB is calling off austerity. If ECB is talking about banking union after the election, you will probably see more movement by the government.
2-year extension in Spain & France for austerity, …next year you’re still low 13 for estimated earnings. Say you are 3% treasuries, at some point they can go up in yield, if they don’t change this, they will never go up in yield.

US best market in the world?

I think every place is the place to be in the stock markets in the world. I think you have taken out the disaster case, Doesn’t mean you wont have some potential riots in Europe because of high unemployment, pain in Europe is pretty bad.. But you have the ECB and powers that be a little more pro growth.. . you have the ECB and the powers being a little more pro growth. You do have it turns a little bits, which is good.

we’re long Japan. From pretty much the beginning of the year. It’s pretty good for us…. there’s massive restructuring of a lot of Japanese companies, whether Sony, some of the real estate companies over there….so many companies restructure and increase the value. Besides that, if you look at earnings estimates, you know, at 105yen,…. you’re taking very low multiples with a very low interest rate, a few structural changes by those companies there, even though that market has moved a lot, you still can have a lot in there.

Economy shows early signs of recovery. Stock Positions

the private sector seems to be in pretty good shape, . as soon as the sequester is over, it’s going to be really interesting second half of the year. you see Goldman picking up forecasts, other people picking up economic forecasts. really interesting stuff. so i actually think, you know, it’s all worth it.

let’s look at this economy for what it is. You were in a depression state when we went through the Lehman collapse. You’re kind of an early stage economy,…probably have years to run in an early stage economy. We don’t have inflation, capacity utilization is low, so you have room there. Unemployment is high, you have room there. We just had the early sector of the economy is moving. You had big rallies is housing. Banks have recovered. probably more in the U.S. Eventually we will have renaissance in US manufacturing.

listen, we think, you know, it’s one of those times where the indexes are really cheap. They really are low. Next year the s&p, we kind of have it in the low 13s in next year’s numbers. 3%, 4%, run 20 times. crazy stuff.

yeah. my biggest position is Citibank.…We have a certain amount of the U.S. banks which are good sectors. We don’t own commodities because we think the Dollar is going to be strong for a little bit.
However in the 2nd half of the year, if we continue to have a strong economy, the way it usually works is later on we’ll have as more growth picks up, we will have commodities pick up sometime in 2014. Little early for them right now and commodity like things.. I think general manufacturing, tech is very cheap, you have to be very careful because there is a lot of obsolescence..individual sort of game….

Interest Rates

for mortgages, without the Fed, the market has a net shrinkage of mortgage paper. Okay, so there’s a little bit of shortage. There’s no new issuance of non-agency paper.… the mortgage market is are getting better and better and better.

I think that it’s really a question of how good the economy gets and how fast the economy gets better. I hate to use this word because it will come back to haunt me in life. for all these bears out there, we may be, a little bit of goldilocks right now. We just may be there. Because of the stuff we talked about, interest rates won’t go up as fast..Probably the Fed doesn’t want rates to go up.. it’s just a smoothing mechanism to go up at a slower rate.
You are going to get historically fairly low interest rates. You have no inflation at all on the horizon. so you’re going to go up but the question is when are you going to go up? We are a bit nervous with bonds because of this cash here to be quite frankly short anything… I don’t like bonds long term. but good luck shorting them.

Just like the Japanese trade. It’s finally going back up a little bit. Everybody is excited. Oh, my god, they are falling. Japanese markets are going to hell. 80 basis points. stop. stupidity is running wild.

Horse Manure Story & Economy

I told a story years ago, horse manure story. it was a story about the 1890s there was a big problem in the world about horse manure. There were so many horses in the world, basically pooping in the cities. Times of London wrote an article basically saying in 50 years the horse manure would be nine feet high on every street. They had a conference in 1898, first urban conference in new york city was supposed to last two weeks. disbanded after three days because they couldn’t figure out the answer to this horse manure problem. the answer was, cars came along.
these guys looking at this economy, they don’t want to say the economy is better. They didn’t get how much the taxreceipts are up, how much budget cuts happened. That’s why we have this $400 billion thing in these six months.…this is tapering, there’s no hand wringing over tapering. There is no handwringing. There should be no handwringing, You should invite it. The market is going up. The question is how fast it goes up.

we slowed down global warming a little bit although there’s still a problem potentially depending how you believe it. The natural gas in the U.S. is still carbon, but it slows down.
But, look,…the U.S. is going to have this great manufacturing renaissance. Everything that is energy related will be manufactured in the U.S….when the world has a need to it. at 3% world growth you won’t see it. When the world picks up to 4%, you are going to start seeing it. So people who say I haven’t seen the renaissance of the United States, give it a little time. That’s just the way the numbers work.

Apple

We still own apple. We cut our stakes in the beginning of the year I guess around 500 sort of area. and then, we still have a position in Apple. Bought a little bit below 400. Just a little bit. it’s okay right here. it’s okay.
I, along with everyone else is waiting to hear what they have to say as far as do they have something revolutionary in the horizon? If they don’t have something great and fantastic, make a bigger screen for goodness sake. By the way, while you have this great, you know, sort of itunes, … eco system. make a cheaper phone. It can have a very high multiple.
if you don’t have it that way, go that way. If you don’t have the Steve Jobs around to do the revolutionary sort of thing, do the evolutionary thing….if you don’t have the next greatest thing you can still be a very, very successful company. you have the best eco system
Now, if they don’t do either, we’ve got a problem. It’s like, Houston, we’ve got a problem. So September, if they don’t have either, I hope I can move fast.
you know, Apple is another position. Citycorp is more than twice the position of apple, for instance.

Fed

They did do something; they did the sequester; that was a pretty big deal in a positive way…If you look at the numbers, in 2015 or 2016, it looks like we will be at a 3% deficit. With nominal growth, the debt to gdp will be coming down.
but the thing is, when you look at the numbers you have a chance in the next couple years, the debt to gdp will come down. there’s a problem with saying that because the numbers will pick up again. . you have to do something. hopefully Obama will do something with the entitlements now while the Democrats are in there. We have no problem in the next two, three, four, five years. There is no problem. The Debt to GDP will come down. It is down in 7, 8, 10 years when it really starts picking up again.

Should we borrow money and fix the country’s infrastructure?

things that need to get done, get done. People will say they have this, that in China. Yes they have 30 airports that they don’t need. That’s fantastic. That’s not what we should do. When we need things we do things in this country. Should we do more infrastructure? yeah. If we can fix the entitlements, and what do I believe & it is not in any of these numbers, this mfg renaissance which may come in 2015, 2016 as we get the world’s supply and demand a little better, you will pick up tax revenues.
I was with another really great hedge fund guy, actually does more commodities sort of stuff. He was over in china. and he said the Chinese were complaining. He said the United States are so lucky, they just have this energy thing. He said that’s because God blesses America, you atheists.

What would make him less bullish?

there’s always things that can happen to make markets go down. Middle east is a little bit of concern. You can get a 5% drop because of the war,…I don’t see that happening but it could happen. North Korea settled down a little bit. I guess if SARS like hybrid swine flu.
there may be some people in the summertime in Europe because of the high unemployment. hopefully after the German elections they make moot. But if they don’t, if the economies don’t pick up, it’s going to be tougher to hold together. They are seeming to recognize that. More and more they are recognizing that. the Germans are giving in to some of that thought.

U.S. Housing

I think the only thing holding it back is — from what we hear, to get the people back in the labor force.…people move on in life…housing will pick up. It’s not going to back to where it was. Nor should it go back, it’s not good for the economy. But hopefully, you have housing picking up. You read about the price increases and the demands there. Like I said, I do believe we’re in the early stage. It feels like an early stage recovery. Bears can’t stand that. They can’t stand it.

2. Michael Novogratz on CNBC Squawk Box – Wednesday, May 15

I think Dave’s right. The central banks are flooding the markets with liquidity. Inflation continues to fall, which leaves the Fed feeling fat, dumb and happy. They are not nervous….All your inflation indicators are going down, growth going up. It’s a perfect storm for them. And so, yeah, they’ll talk about tapering and I think they’d like to, but it’s not any rush. and so you’ve got lots of liquidity, decent growth and stock markets going up.

the moment the Fed starts moving, the stock market’s going to go down, a decent bit. The rally’s going to end. You’ll get a correction – 10%? 15%. A lot of people will get squeezed in between now and then. It’s been a wall of worry market. People haven’t bought in yet, that’s why the market doesn’t go down. Once everybody buys in and the Fed moves, everyone will sell. If you’ve been long the whole way and you’re making lots of money, it’s probably a good time to take your chips off the table.
and if we get one piece of light data, we’ve got industrial production that comes out today, if that’s light fixed income, people are going to say, hey, Nirvaan.
As long as the inflation indicators keep pointing down, the Fed is sitting back with a cigar in one hand and bourbon in the other. the market could go a lot higher between now and then. If you look at the European stock markets, the charts are breaking out today. People are going to get squeezed into the markets. there’s a lot of cash on the sidelines.

listen, Europe’s got a growth issue, the ECB is working on it. People think they’re behind the curve. I’m not positive. Spanish bond yields come down every day. Last time I was on this show, I think they were 150 points higher than they were today. Italian bond yields come down. In a lot of ways, ECB is doing what they can do. Europe’s got a strategy, which is time. Time healed the U.S. banks and time will in time heal Europe. And I think that’s their strategy. So I don’t think they’re in a big rush to do anything different.

you know, revenue’s continuing to go lower and earnings continue to stay okay. I think that’s the story here. This is multiple story, not an earnings story and we are not expensive. You look at the stock market today versus where it was in 2007, right? earnings are higher and there’s no alternative investments.

Interest Rates

I think we’ll be in a range the entire year. I do not think ten years could take out 2.30% this year. It will be a 1.60-2% range.

look at what the Japanese did last night. Their rates which were stunningly low. Their 5-year was at 12 bps; now they’re nervous it’s at 30. They came in and did four times the amount of buying they normally do. There’s financial market repression going on in every major government bond market. The Fed is buying and not just the Fed. The Chinese took in $250 billion of reserves in the first quarter, 75% of those goes into Treasuries. That’s like qe-4, you know. Everybody’s buying Treasuries and so you’re holding government bond yields down to try to generate inflation and, you know, that’s the plan.

I think, listen, the Fed buying certainly has driven Treasury yields a lot lower than they would normally be. You’re going to see some sell-off if they’re tapering because we’ve got strong growth and inflation is coming back, Yields will be a lot higher. Are they 200 basis points higher? No, they’re not because I don’t see us shockingly coming from an era of deflation into inflation.

the Fed is buying it [Treasuries], the Foreign Central Banks are buying it. and, you know, different insurance companies will buy long and from an asset liability match.

Japan equities or U.S. equities? Sustainability of Nikkei Rally?

Japan….we have 13 years of malaise in Japan where no one believed in it, no one invested in it. You’ve got dollar/yen on the move, Nikkei on the move, people way underinvested. None of the Japanese believe in this yet. I was just in Japan two, three weeks ago, and the Japanese banks were selling equities not buying. They haven’t been buying dollar/yen and rarely do the Japanese get it right, as a group of investors.
I think one of the interesting stories there is that part of the Obama Administration second term will be pushing trade; it’s going to allow the Japanese to say, yes, we’re going to open our markets. it’s not our decision.

Buying Japanese Stocks

Japan’s the second largest market cap collective in the world, the third largest economy. They’ve got a demographic problem, no doubt. But lots of great companies. They’ve got companies that aren’t expensive at this point. It was a wildly depressed market for a long period of time and they’ve got a central bank that is trying a quantitative easing program four times the size of ours. And if you look at the playbook of U.S. quantitative easing and move it to the Japanese story, dividend stocks are going to do well there, the exporters with dollar/yen moving from now 102, by the end of the year, 115, 120.

BRICS

… it’s a relative gain in Japan. Listen,… to me the biggest worries are the BRICS, which have been this wonderful story for years, They’re going to be a crummy story for a while. And it might be a five-year developed markets over emerging markets.

Does he like any emerging market? Brazil?

I hate Brazil. They’ve got stagflation, all kinds of problems. It’s gotten way too expensive to do business in Brazil. They’ve got labor market inflation, tight labor market, not enough supply.
India a little bit, okay. Just because it had done so poorly for so long and making some marginal progress as the price of gold goes down and the price of oil goes down. You know, helps their current account situation.

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