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. Fed Panicked!
No male husband on earth has ever been able to get away by telling his female wife that she misunderstood what he said. But, with the new era launched by the U.S. Supreme Court this week, old rules for husband-wife conversations may have changed forever. Clearly, the Fed collectively thought so. Because they argued all week that the market misunderstood what Bernanke had said. Almost every one from the Fed came out this week to criticize the market for feeling what it should not feel. And the market didn’t say to the Fed “don’t tell me how to feel!”
Whether it was from these Fed-head statements, whether it was from a peak in volatility or whether it was from a complete liquidation of bond positions (see section 4 below), the bond market did settle down. That let all other markets settle down. Again, the old adage that investors should stop panicking when central bankers panic proved true.
We are traditionalists and so we are still outraged at the damage caused by Chairman Bernanke in his, dare we say ignorant, comments in his press conference on Wednesday, June 19. It is this outrage that led us to ask last week whether the next Chairman of the Fed should be a Bond Trader and not an Economist.
But today, we will be content to include below the eloquent sentiments expressed by Rick Santelli on Thursday, June 27.
- the market. short term, as managed and controlled as it appears and is, in a short-term world the market can still flex its muscles, but when it does, it isn’t necessarily strategic. As a matter of fact, I can almost guarantee you it isn’t strategic. Do you know what it’s about? It’s about money, okay? because nobody likes to hold their money more than people that play the markets; they want to hold it and they want to protect it and if something happens, they don’t want to lose any of it. So when it comes to all the talk about the Fed and what they didn’t say and what they may have said and the fact that we just don’t get it. You know, we just don’t get it. We’re not quite bright enough to get it. We get it, maybe they don’t get it. Long term, $3.5 trillion balance sheet, there’s a lot of battles they’re going to win, but when it comes to short term, when it comes to capital preservation when it comes to market efficiencies, how markets move, why they move, and who makes them move, they don’t get it. now, that bugs me a little bit. 3.5 trillion. I didn’t elect any of them. It bugs me a little bit. they need to get that. and don’t dismiss short-term market moves because whether you’re talking about a flash crash for the fact that we are still at a 2.51% yield, the landscape can be permanently adjusted by those short-term moves. They’re very, very important.
2. Two Critical “If True” Comments about the Future of QE4ever
This week, we came across two extremely interesting comments about the future of QE4ever, simply the most important issue in global financial markets. These two comments are diametrically opposite and probably lead to diametrically opposite investment tactics.
The second “If true” comment was from Ron Baron on Friday morning on CNBC Squawk Box:
- this past week, I was at a dinner, maybe 14 or 15 managers, investment managers, one of my friend’s apartments; the speaker was Tim Geithner, the former secretary of the Treasury. He was explaining how he thought that it wasn’t likely that the interest rates were short term would rise any time soon and he meant for years and years. Then he also said that as far as the ending of quantitative easings, he thought that was going, when it ultimately began, was going to take five years to wind down the bond purchases
Five years to wind down the bond purchases? 60 months to wind down monthly stimulus of $85 billion? Heck, they could simply announce a cut in stimulus of $1.5 billion per month and end QE4ever in 56 months. If they announced that, credit markets will fly to the moon as they did from 2004 to 2007 during Greenspan’s promise of a hike of 25bps at every Fed meeting.
So why would Geithner say that? Ron Baron expressed his own doubts on Friday:
- I always believed that when people are telling me something, they’re telling me something for a reason. He was telling me also presumably to try to calm the market. But as I said, that doesn’t mean that’s what’s going to happen. That’s his opinion of what’s going to happen. He was giving the reasons why. He was one of the people who was involved with saving the world with Bernanke.
The first “If True” comment came from Jim Bianco this week on Wednesday, June 26. If his comment reflects the reality at the Fed, then that changes the discussion completely. Bianco wrote:
- “We believe the market fears, and has since May 22 (Bernanke’s JEC testimony), that the Federal Reserve had an epiphany that QE did not produce the wealth effect they were hoping for. Instead it has distorted markets.”
- “So it’s not that the Federal Reserve has lost control, it is that they never believed they were in control in the first place. They thought the rally in risk (the stock market) and bonds was based on expectations for the fundamentals, and not on central bank liquidity. As such, they went way too far with QE, thinking it was a good idea (because their DSGE models told them so) not realizing, or refusing to believe, they were turning markets into liquidity junkies.”
Wait a minute. This is what Bill Gross meant when he said “Fed is driving in a fog” after Bernanke’s press conference on June 19. So where is the meat, Mr. Bianco? Bianco wrote:
- “Now, we believe, the level of anxiety within the Federal Reserve to just get out of QE ASAP is palpable. So, the Federal Reserve says they are “data dependent” but they are really back on a calendar and want to get out of QE no matter what the data says.”
If this is true, it would change everything. This is jerking the Bernanke put right from under the market’s feet. If they get out of QE in an improving economy, then stocks go up while bonds tank & rates shoot up. If they get out of QE in a slowing economy, then rates fall, bonds rally & stocks crater.
Is Jim Bianco correct? Is that why the Fed is trying desperately to convince the market that ending QE is not the same as raising interest rates?
3. Have the laws of Arithmetic ceased to apply in the Fed’s Kitchen?
Our title is a throwback to the great cross in My Cousin Vinny in which Vinny asks
“So, Mr. Tipton, how could it take you 5 minutes to cook your grits when it takes the entire grit eating world 20 minutes? … Perhaps the law of Physics ceased to exist on your stove?”
That’s what we wanted to ask the Fed-heads when they said over and over again that ending asset purchases or QE is not tightening & that it is totally different than raising interest rates.
We are simple folk and we think simply. Asset purchases or QE adds stimulus to the financial system and eases monetary conditions as does lowering interest rates. Conversely reducing asset purchases removes stimulus and tightens monetary conditions as does raising interest rates. So increasing QE from $85 billion to $95 billion is an addition operation for liquidity while decreasing QE from $85 billion to $75 billion is a subtraction operation for liquidity.
This is simple arithmetic. So why doesn’t the Fed see it? Is it because, as Jim Bianco wrote this week?
- Let us translate what Lacker is saying … the level of bond purchases (how much they own) is more important than the flow (how much they buy each month). Bernanke referenced this repeatedly in his press conference last week:
- Dudley and Lacker repeated Bernanke’s line of reasoning, that is they believe that level of assets they hold is a bigger influence on prices than the flow they are buying. So they Federal Reserve believes they can cut back on their purchases, with a promise not to sell and market prices should not move on the change in flow so long as the level is not reduced.
This is why they think the laws of Arithmetic don’t apply to their QE-kitchen? Bianco seems to share our disbelief and wrote:
- The market does not think this way. The market thinks the change in the flow is far more important than the Federal Reserve thinks. The Federal Reserve’s argument that the level will not be reduced (Lacker above), or the funds rate will not be hiked (Dudley above) is missing the point. The market is focused on flows and the Federal Reserve is not going to change that. Saying that does not matter, or that flows or rates matter more misses the markets point.
Then why is the Fed so strenuously engaged in arguing the unarguable? Is it because, as Bianco says (see section 2 above), the Fed wants to get out of QE no matter what the data says?
Is that really why Fed Governor Jeremy Stein said this week?:
- “The best approach is for the committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting – as salient as these releases may appear to be to market participants,”
This is a tautological statement if the next couple of payroll numbers come in strong. Then the Fed and the market will be in sync. So does Stein really mean that they may make a decision about cutting QE in, say September, even if payroll numbers for July, August & September come in weaker?
How could they justify that? By arguing that they must give primary weight to the strong numbers accumulated since they began QE4ever in fall 2012 and dismiss weaker job numbers as temporary. And they would do regardless of how weak they might appear to market participants. This interpretation fits with the Bianco comment about the Fed being desperate to get out of QE no matter what the data says.
This is getting too deep for us. Thank goodness we are not Fed watchers. You know what? The markets will render their judgement on Friday, July 5. Them we understand and them we will follow.
4. U.S. Treasuries
Bond Market Liquidation was the title Michael Hartnett of BAC-Merrill Lynch chose for his report this week, an apt title given the data:
- “Bond liquidation…trading rally: record bond redemptions of $23bn … second largest as % AUM and Treasuries rallied 5% in 6 weeks & HG losses ended after the October 2008 capitulation … Record weekly outflows in Munis ($4.5bn), Investment Grade ($4.9bn), High Yield ($6.8bn), MBS ($1.3bn) and, in particular, EM debt ($5.6bn).”
Details in the report confirm what Jeff Gundlach said in his conference call on Thursday that Treasuries had actually outperformed other fixed income over the past 4 weeks. According to Hartnett’s report, US Treasuries fell by 2.1% while US investment grade fell by 8.8% and US High Yield by 18.6%.
The volatility in the bond markets was another sign of liquidation. Below is the chart of MOVE for the past two months. Such peaks in volatility usually result in at least a short term rally.
Whether it was the peak in MOVE or whether no one was left to sell, interest rates changed their behavior on Monday to close down in yields, up in prices. Veteran technician Jeff DeGraff called Monday’s move as a short-term reversal on CNBC Fast Money on Monday, June 24:
- I think it’s important to the keep it in perspective and context. here’s a long term term going back to 1986, the long term downtrend, the secular downtrend back when I got into the business, it’s still intact and actually comes into play all the way to 4%. So we have a long way to go even before we break that secular downtrend. If you take that most recent decline which started from the peak in 2007, you are talking about getting up to 2.95% before you break that more cyclical downtrend. So I think getting through 2.50%, it puts that 3% in play. I think we’re going to have to struggle to get there. I think we are close to some type of temporary low in bond prices high end yields, … short-term daily reversal today. hopefully, that’s a part of the process here
Many tweets argued for a meaningful bottom in bonds. Below are a few just as example:
- Paul Schatz @Paul_Schatz18m on Monday, June 24 – “Going out on a
limb that the bond market just bottomed and is about to begin a
meaningful rally. Bond proxies and like stock sectors follow”
- Ryan Detrick, CMT @RyanDetrick3m on Wednesday, June 26 – “Consensus bulls on bonds is just 28%, nearing some major lows in $TLT going back to 2009”
- Tsachy Mishal @CapitalObserver3m – “3 bond sentiment indicators are at extremes seen once every few years 1. DSI 2. Credit Suisse 3. Consensus $TLT $TNX”
- PIMCO @PIMCO3m on Friday – GROSS: “We like bonds here. They won’t make you rich but the May/June experience is unlikely to be replicated in 2013”.
Helene Meisler, a colleague of Jim Cramer on RealMoney, posted a comment on Tuesday morning:
- “Yesterday I noted the Daily Sentiment Index was at 5% and I showed a chart of other single digit readings. Remember that means that 95% are bearish!”
- “This morning I see that the JPM client Treasury survey shows all managers show the largest drop in net longs in two years. Among active clients they went from 15% to 0% long!”
Given the extremes in sentiment, is this week’s rally just a short term event or will it last for the intermediate term? The history of last several years would argue the latter but next Friday’s payroll number will really be the determinant.
5. U.S. Stocks
Lawrence McMillan of Option Strategist has
written in public about his VIX-Spike Buy signal. Having read it,
we asked CNBC Fast Money & Closing Bell on Monday to invite him or
at least check with him if his signal was triggered on Monday. They didn’t,
unfortunately for CNBC’s viewers. Because, as you read below, his signal
was triggered on Tuesday and did create a 40-handle move in SPX this
Mid-morning on Tuesday, BAC-Merrill Lynch sent out a communication via Michael Hartnett stating – Equity Buy Signal Triggered. They wrote:
- “Breadth Rule triggers contrarian “buy” signal for global equities. 43 out of 45 markets now “oversold“, i.e. trading below 200dma & 50dma. Historically, “buy” signal followed by 6-7% gains in subsequent 4-6 weeks. Last buy signal on 6/1/12 nailed the low (stocks then rallied 30% trough-to-peak …) .”
- “The rule is contrarian and argues solely for a short-term bounce in equities.”
- “A sustained rally normally requires policy changes to force shift in investor behavior. Two further caveats: Breadth Rule failed once, in July 2008, when deleveraging across asset classes caused meltdown in equity markets; the two markets that are not currently in buy territory are the two largest, US & Japan.”
A similar sentiment was expressed by Jeff DeGraff on CNBC Fast Money on Monday, June 24:
- … the other thing I would add today, 55% of the S&P 500 made a 20-day low. We look at that 50% threshold as a capitulation environment. that looks very interesting to us …
- if you go through and look at our rankings, where we have the strength, in our model it is still financials, discretionary scores well. look, the trends in financials are still strong, very, very important. all the uptrends in financials, you have the highest percentage other than utility and reads, the highest oversold names in financials we think that ends up as a pretty good opportunity … financials have held up. that’s important. if they break down on a relative basis, then we have a problem
Lawrence McMillan wrote the following in his weekly summary on Friday.
- The speed with which $SPX fell — 63 points in two days — meant that it
sliced right through support areas without stopping. There is support
at 1560 — this week’s low on $SPX. Furthermore, there is important
support below there, at 1540, from a series of lows back in March and
- Equity-only put-call ratios have not given confirmed buy signals yet.
They remain on sell signals. Market breadth was strongly negative
for the three recent large down days. On this rebound, breadth has
recovered. The breadth indicators are now on buy signals.
- In summary, this rally has been fueled by oversold conditions, which no
longer exist, and by end-of-the-quarter window dressing. Bullish signals
are building up, but it would take buy signals from the equity-only
put-call ratios and a break of the uptrend in $VIX in order to give
intermediate-term buy signals.
6. Munis – Meredith Redux.
Over the past 3-4 weeks, we have discussed the absolute carnage in Municipal Closed End funds. Many of these funds closed on Friday June 20 with 5-78% discounts to their NAV. It was interesting to hear Jeff Gundlach focus on Muni closed end funds in his conference call on Thursday. He said he had bought a few for his Doubleline portfolio and said he would “really recommend” buying such funds. Of course, most of these rallied strongly this week and no longer trade at a real discount to their NAVs.
The title of this section comes from an article titled Meredith Redux from Cumberland Advisors. This was posted on Tuesday and was just in time for this week’s terrific rally. The title, of course, refers to the sell off of a couple of years ago that was widely attributed to Meredith Whitney. This is a detailed & sensible article that should be read in entirety. A couple of excerpts:
- “In our view, the July rollover period for munis will have to bring some stability to the muni market and crossover buyers. Traditionally, taxable buyers come into the tax-exempt space in early summer. We are already starting to see some deals being pulled from the market. This is how the muni market usually self-corrects. Meanwhile we are acting opportunistically.”
- “This is the best opportunity to buy munis for Cumberland portfolios in over two years. We are lengthening durations and maturities of portfolios as well as locking in higher yields.”
7. Gold & Silver
Michael Hartnett of BAC-Merrill Lynch wrote on Thursday evening:
- “20th straight week of outflows from precious metal funds totaling 21% of AUM is humongous and capitulatory”
Almost on cue, Gold (GLD) rallied 2.8% on Friday after being down in the morning. and Silver rallied almost 6%.
Both Tom McClellan & Jim Rickards argued strongly for a major rally in Gold on Thursday, June 27 (see clip 1 below). Tom McClellan provided a very interesting parallel. If this proves correct, the move in Gold will be big:
- “what we are seeing
in gold is the same pattern of the decline in the last two years that
we saw in the stock market from 2007-2009, and it is the same emotional
play that’s going on. and people are falling out of love with the stocks
back then, and people are falling out of love with gold now, and we are
reaching the climax point equivalent to the 2009 low for the stock
- “I have upside targets of $2800 and $4400 based on the technical studies …”
Jim Cramer gave voice to a bullish call on Gold by technician Carley Garner on Mad Money on Friday:
- “Looking at the monthly chart of gold futures, Garner notes that historically, gold futures have a strong tendency to find a seasonal low at some point in July, typically in the second half of the month. … That suggests we’re just a couple weeks away from the moment when the calendar says gold should bottom.”
- “Also, Garner is seeing bullish signs in the Relative Strength Index or RSI. For gold, the RSI is now below 30 and that’s the lowest reading in more than 13-years, and when this indicator is down that low it suggests that gold has become seriously oversold.”
- “Garner says similar patterns are presenting themselves in the Williams %R indicator. Specifically, she says the Williams %R just dipped below 30 for only the third time in the last 13 years, which suggests to Garner that gold is now oversold. On the last two occasions where the percent-R indicator dropped this low, gold prices rapidly recovered to post substantially higher highs.”
- “All told Garner’s analysis suggests gold is at or near a bottom. Therefore, she suggests buying gold on dips, especially if it drops below $1,200 an ounce. That’s largely because Garner sees strong support at $1150 and then again at $1130.”
The most interesting action in this sector came from gold miners. The two ETFs, GDX & GDXJ, began their rally on Thursday, a day before Gold & Silver did. In just two days, these two ETFs rallied almost 10% off of Wednesday’s lows.
8. “Soft” EM Buy Signal Triggered
This is also from Michael Hartnett of BAC-Merrill Lynch:
- “Soft” buy signal triggered for EM equities after $6bn outflows; EM equities rallied 10% and outperformed DM … after last soft buy signal in Feb’11; probability of EM equity bounce increased by record EM debt outflows.
Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
In his conference call on Thursday, Jeff Gundlach also suggested that Emerging markets could outperform
S&P 500 over the short term. But he added that he would only use a basket of EM equities and he wouldn’t “play around” with Brazil.
- Jim Rickards & Tom McClellan on CNBC SOTS on Thursday, June 27
- Bill Gross on CNBC Street Signs on Thursday, June 27
1. Why & Where can Gold go? – Jim Rickards & Tom McClellan on CNBC SOTS – Thursday, June 27
Jim Rickards is a senior managing director of Tangent Capital & author of Currency Wars. Tom McClellan is the editor is of McClellan Financial Publications.
- Rickards – well, it depends on the Fed policy, and the reason it is going down lately is because the Fed is tightening; real interest grates have gone from 70 basis points negative to 50 bps positive – 120bps increase in real rates. Gold likes negative real rates, in other words and what has happened is that inflation down, and nominal rates up. and so that is bad for the gold. If you say that Fed continues the tight policy, then the gold will continue the trade down ..
Case for buying Gold right now?
- Rickards – well, the fed is going to back off. they are not going the taper, and later this year, they will increase the purchases, because deflation is winning the tug of war over inflation. and deflation is the fed’s worst nightmare, and in the next two months they will make it clear they won’t taper and increase the purchases later this year and trying to get negative real rates and that is bullish for gold.
- McClellan – what we are seeing in gold is the same pattern of the decline in the last two years that we saw in the stock market from 2007-2009, and it is the same emotional play that’s going on. and people are falling out of love with the stocks back then, and people are falling out of love with gold now, and we are reaching the climax point equivalent to the 2009 low for the stock market.
- McClellan – there are lots of reasons to be in love with gold right now, and the biggest one is that everybody else is falling out of love and nobody seems to like it. The commercial traders if you look at the commitment of the traders’ data, and the commercial traders are at the most bullish since the 2001 low. they usually get proven right. it may take a week or two before it starts to matter, but it is a hugely bullish condition for gold, and I’m expecting a really large rebound.
How do we know we have put in the lows?
- Rickards – well, right time to buy is when the fed starts to ease up, and they are tightening the monetary p
olicy, and that is the most important thing. they can’t do that, because deflation is the worst nightmare. they gotta to loosen up. I own the gold and buy gold and recommend it for the clients and not more than 20% of the investable assets, but the destination for gold is $7,000 an ounce, but the Fed continues to tighten and it could trade down to $1,000 on the way to $7,000, and that is important for the investors to know.
- McClellan – I have upside targets of $2800 and $4400 based on the technical studies, but we could get to 7,000 maybe later, but the biggest reason that the thing we haven’t had is that Orange county, California, blowup moment like we had in the 1994 bear market in gold. Orange county, California, went bankrupt and that marked a low for the bond prices, and the moment that we see a big major gold producer announcing that it is curtailing the production or going out of business, that is the moment that we mark the low in gold. I expect to have any of those announcements any minute.
- McClellan – well, we are getting down to the production price of gold right now, and they won’t continue to produce gold unprofitably for long.
- Rickards – that is a good fundamental analysis, and also looking at it geopolitically, china announce they have acquired over 4000 tons of gold and that is a catalyst as well. why is china buying the gold if it is so worthless.
2. 2.20% on 10-year Treasury yield – Bill Gross on CNBC Street Signs – Thursday, June 27
A sort of spirited conversation between Bill Gross & CNBC’s Amanda Drury. You can see that Bill Gross was visibly taken aback a couple of times.
- Sullivan – Is the liquidation trade in bonds over?
- Gross – yeah, we think so, Brian. We never can be sure because liquidation is a function of fear and fear can take hold of markets at various points in time that certainly happened in terms of the bond market. but in terms of value, 2.50% on a ten-year certainly a value to us. Based on the interpretations by Fed officials in the last few hours, the last few days, the last week or so walking back that Bernanke press conference, I would suggest there is lots of value on the front end of treasury curves, and therefore an attractive value in ten-year values at 2.50%. We think 2.20% is the new normal on trend recoveries as opposed to 2.50%.
- Drury – you joined us last Wednesday, that was Fed day, and when I asked you where you thought the ten-year would end the day, you said 2% or lower. are you sticking with that given the moves we’ve seen over the last week?
- Gross – lower depends on the economy; right now we’re a 1.5% economy, 1% inflation. we have nominal gdp of 3%. To think that the Fed can basically tighten in terms of reducing their purchases and, therefore, produce a new higher range than 2% – 2.5% for ten-year treasuries to me and to us is very questionable in terms of what they’re actually doing. There is no rationale for it. Inflation is 1%, they need to get it back to 2%. Come on, Fed, let’s keep on going in the direction you’ve been going.
- Drury – when do you believe the tapering is delayed to, then, Bill?
- Gross – certainly in late 2013 at the earliest. and will we be dependent on next Friday’s number in terms of unemployment and the participation rate and all the technicals that go with it? certainly. that’s part of the problem. what the fed has done is induce a lot of volatility, not just on employment Fridays but a lot of volatility day to day in terms of the numbers until markets move back and forth. a ten-year treasury, which is subject to nine years’ duration and to price risk basically has to adjust to that. what the fed is trying to do in the last 2-3 years in terms of reducing that volatility and reducing that term premium, in one quick press conference and one quick press conference & one quick statement, they’ve basically eliminated all of their progress.
Should Investors panic and jump off the bonds ship?
- Gross – it’s not time to
jump the ship, and that doesn’t mean we want to keep our customers on
board in terms of being captive, but there is value at this point. if you
were going to jump the ship, it should have been six weeks ago,
basically, when Pimco suggested that a bear market was beginning but
that bonds would return 2 to 3% for the next five or ten years. I think
investors should expect that, but the shouldn’t jump ship in anticipation of a
May and a June typhoon.
What does America need from the Fed?
- Gross – the financial markets need ballast and they can’t be top-heavy. What we’ve seen the past month and a half is a top-heavy market in terms of expectations for growth which the Fed hasn’t validated. So, yes, let’s run a portfolio, let’s run an economy, let’s run a Federal Reserve that’s not top-heavy but that’s ballasted so it can survive a storm.
Yep! That’s why we nominated Bill Gross as one of our candidates to be the next Chairman of the Fed.
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