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.
The Bernanke Fed will deliver its statement after next week’s FOMC meeting and then Bernanke will take questions. This is an extraordinarily significant event for global financial markets. But have the markets already priced in what Bernanke is likely to say about his plans?
It is amazing how much has changed in the markets since Bernanke made his “misunderstood” comments on May 22. That was an ebullient period with stock markets very near or at all time highs. It seemed only logical that Bernanke would try to cool things down. On May 25, we wrote:
- “Frankly, we think Bernanke intended the confusion he caused. It is better for the market to worry about a yellow traffic light today then come to a rapid halt when the traffic light suddenly changes to red. And if the markets worry about the traffic light changing to yellow, then hopefully the markets won’t charge to the intersection all reved up.”
- “Every stronger than expected piece of data will make the stock market wait and wonder about the QE-taper coming early. And every weaker than expected piece of data will lead to a sigh of relief but with increased worry about the state of the economy. So, in either case, the stock market will worry more and perhaps pause more. Sort of a reverse Tepper corollary of 2010?”
- “If this is what happens, then Bernanke will have pulled off a tapering of market fervor without reducing his flexibility in any way.”
Given the fear in global markets, given the sell-off in risk assets, including long duration US Bonds, Bernanke can take comfort in having pulled off a “tapering of market fervor without reducing his flexibility in any way“. Kudos to the Chairman.
A similar point was made by a Bill Blain of Mint Partners (brought to us by BTV’s Scarlet Fu) this week:
bond ‘correction’ of the last few weeks may yet prove a good thing. It’s
taken the sting out of frothy asset bubbles. The last few weeks have
seen investors firmly reminded about dangers.
- “the hard landing that we are seeing now is far better than a crash we might have had otherwise.”
Recall that for two weeks prior to Bernanke’s comments on May 22, the deep worry was about Japan’s bond market blowing up. The huge spike in JGB volatility was plain scary. On Wednesday, May 15, Japanese authorities stepped up and bought four times the amount of JGBs they normally do. Their determination was enough to assure us and so we wrote on May 25:
- Frankly, we still
worry but not so much. Because it is clear now that both Prime Minister
Abe and BoJ boss Kuroda are panicking. They will throw whatever they
need to throw at the JGB market to cool it down. Central Bankers are the
sole exception to the certainty of Gambler’s ruin, at least in the near
Lo & behold, the only major asset class that is unchanged since May 22 is the JGBs. The 10-year JGB yield on May 22 was 88bps. On Friday, the 10-year JGB yield closed at 85bps. Clearly, Abe-Kuroda have managed to stabilize the JGB market proving the old adage that when central banks panic, investors should stop panicking.
Will Bernanke essentially deliver this outcome for his own Treasury market? One loud and so far right bear on Treasuries seemed to tweet a yes answer on Friday afternoon:
- Keith McCullough @KeithMcCullough3m – Long Bond $TLT acts like Bernanke is going to pussy foot next wk instead of signaling what he should
But what has been the result of Abe-Kuroda stabilizing the JGB market? The Nikkei is down 10% and the Yen up 9% vs the Dollar since May 22. Actually the drop of 10% in the Nikkei understates the condition of that market as Bespoke Investment Group described in their bluntly titled article, If the Japanese Market is Open, They’re Selling . The chart in that article is actually scarier than the excerpt below:
- Anyone who has been watching the Nikkei over the last month has noticed that the Japanese stock market has routinely been selling off throughout the trading day. … In fact, over the last twenty trading days (a period going back three days before the index peaked), the Nikkei has closed more than 1% below its intraday high 13 times! We haven’t seen that type of intraday selling in the Nikkei since the Financial Crisis, and before that, December 2001. In the 1990s, there were multiple occurrences where the Nikkei saw this kind of intraday selling, but keep in mind that the 1990s weren’t exactly a good period for the Japanese stock market.
Guy Adami of CNBC Fast Money voiced his conviction on Friday afternoon:
- “I think Japan is out of control. I don’t think they can put the genie back in the bottle there. … ”
3. Bernanke’s Choices for next week
Regardless of what Bernanke wants to do, he will have no choice, we think, but to stress data dependency. The U.S. economy is on a steady path until proven otherwise. The ebullience in the markets has evaporated. So it would be very hard for him to come across as steadfastly hawkish. And that is not where his heart is any way.
He would also find it difficult to be very dovish and hint at greater QE. To do so, he would have to reduce Fed’s forecast for US growth for the rest of this year and next. That might also scare the US stock market, his leading indicator of & chief weapon for U.S. economic growth.
So it seems to us that Bernanke will strive to maintain a balanced approach based on incoming data but somehow manage to signal that he is not in any hurry to “taper” at least not until much much later this year at the earliest or until all of us are able to see the whites of the eyes of a U.S. recovery.
Josh Brown of CNBC Fast Money came to a similar but more eloquently stated conclusion on Friday afternoon:
- “the big money this week, U.S. wise, what they did was something very simple. They called shenanigans on this idea that the Fed’s going to come out and tell us that they’re doing some kind of taper or cessation of buying back assets.
- Look at what bounced and what went up – Defensives, Utilities. Treasuries had their first green week in the last seven. Look at the Reits, up 3.5% off the bottom, look at the utilities bouncing on the 50-day moving average. when you think about what big money is doing, they’re saying, we got a shock to the system, but the truth is we still need yield. We’re coming back to the old playbook. it was fascinating to see that in the context of every other sector red Monday through Friday.
But if Josh Brown is correct, then the Treasury market must have bottomed, right? But more on Treasuries in Sections 5 & 6 below.
The most direct comment of the week came from Steve Grasso of CNBC Fast money who said:
- “what’s is he gonna say? he already owns 20% of the MBS market, 90% of Treasury market..where does he go from here? At this point, it is Sell the Fed. … I think they’re totally out of bullets. I don’t think it really matters what they say. we’re at a point now in the markets, where bad news is bad …”
He was, we believe, going to add “and good news is bad” before anchor Scott Wapner shut him off. If our surmise is correct, then Steve Grasso is also a believer in the Reverse Tepper Corollary we described in our article on May 25 – good news is bad because it leads to an early QE-taper and bad news is bad because it damages the fundamentals of the stock rally.
But remember, Tepper the man thinks taper of QE is bullish because he believes U.S. economy is in a “goldilocks” state – meaning a steady 2% growth with decent earnings and a regime of low long term interest rates – not too hot, not too cold with just the right amount of QE.
That’s what Bernanke will try hard to “guarantee” next week. And that “guarantee” will be tested in the markets on July 5, the day of the June payroll report.
4. U.S. Equities
The most passionate of bulls has been the veteran Ralph Acampora. His veteranship (!) was confirmed this week when he changed his opinion between Tuesday and Friday. On Tuesday, June 11, he said on CNBC Futures Now:
- I think the June
lows, kind of interesting to me; the summer rally season starts when the
market makes a low in May or June. I think that June 6th could have
been the low.
- I thought we were
going to have a deeper correction, this could have been the 5-10%
correction which honestly I would welcome. I was pleasantly surprised on
Friday when we had the 2nd biggest up day of this year. And now we get
hit with this foreign news, this central bank news and the market
stabilizes. So, yes, it could be the end of the correction. I need to see new highs though.
But on Friday afternoon on CNBC Closing Bell, Acampora appropriately modified his stance:
- on a
short-term basis, we’re creating a series of failed rallies. So I’ll
give the market the benefit of the doubt. but one thing I want to say
emphatically, that the June 6th lows, on all of the averages and all the
s&p sectors, have to hold. if not, this correction will go a little
been looking for a long overdue correction. this is it. and if it stays
in this tight trading range, well, that’ll be fine. If it decides to go
a little bit lower, I can live with that. I’m starting to see even in
the short period of time the sectors that are doing better than the
S&P are technology, industrials. that, to me, is a sign of
confidence. I’m with it.
Lawrence McMillan also changed his view a bit from last week’s sell signal comment:
- “In summary, $SPX is trading rapidly between 1600 and 1650. A breakout
in either direction would be significant. Maybe “Sell in May and go
away” really IS going to work this year, much to the chagrin of those
who have already declared that it didn’t.”
The 1600 line is important to Dan Nathan of CNBC Fast Money as well:
- “big number 1600, we bounced 1,600, we bounced off it twice in the last couple of weeks here. that’s the line in the sand. I think we’ll hold that line probably before the Fed meeting. but again, what has been going on? What has been coming out of the Fed since May 22nd. It’s been a lot of language that’s causing volatility. So I don’t expect a ton of clarity as far as the markets are concerned before Wednesday’s press conference.that will be the line in the sand next week, but if we break that after the meeting, I think we see 1550 quickly.”
5. U.S. Treasuries – opinions
We are used to economists with one-hand & other-hand logic. But we are not used to investors who scoff at buyers and yet suggest buying might be profitable in the same breath. Scott Minerd of Guggenheim Partners seemed to do precisely that on Friday. First he said:
- “given where treasury yields are today, that unless you think somebody is going to take you out at a profit in the future and that mostly that investor is thought to be the Federal Reserve, there is no real economic reason to purchase Treasury securities relative to other things that are available in the market,”
Almost immediately he said:
- “I tend to think that our trading range now on the ten-year note is probably between 1.8% and 2.5%”,
Surely, a drop from 2.3% to 1.8% can be an economic reason to purchase 10-Year Treasury, isn’t it? Minerd then offered fundamental reasons to buy Treasuries:
- … this massive backup in rates of 50 basis points which is about, you know, 25% given the level of interest rates we started at. we are starting to see housing activity stall out, mortgage applications dropping off and refinancing applications dropping off, and housing is in and of itself directly and indirectly contributing to about two-thirds of GDP so when you see the last GDP number at 2.4% and housing is at least 1.5% of that, if housing stalls out, and I‘m not talking about it falling off a cliff, I’m talking about just the activity, flattening out where we don’t have any home price appreciation or growth in construction, then what we’re going to start to see is that the economy is going to stall and if the economy starts to stall rates are going to come down …
Seems to us that Minerd has himself offered fundamental, economic and timely reasons to buy Treasuries while simultaneously calling buyers as ponzi suckers. But then, we are simple minded and don’t understand the profoundly sophisticated logic of a Scott Minerd.
In contrast, we have no problem understanding the words of Bill Gross and Gary Shilling:
- Gross tweet on Wednesday before the 10-year auction – #Fed’s not raising interest rates for years. That makes intermediate #Treasuries a buy at 2.0%+.
- Shilling on BTV Surveillance on Wednesday affirming his sub 2% target for the 10-year treasury yield.
6. Did the Treasury Market Bottom this week?
We have to address this point head-on given what we wrote in the last two articles:
- June 1 – “The payroll number comes in much stronger than expected and bond yields shoot up on June 7. That would just about make everyone bearish, both fundamentally & technically. Just as bearishness becomes universal, Treasury prices could ironically bottom the following week, say on June 12, the date of the 10-year auction. … This is not just wild speculation. Empirically speaking, when Treasuries have suffered steep sell-offs in May, the 10-year auction in June* has usually marked the bottom or near bottom in Treasury prices.“
- June 8 – As we wrote last week, when Treasuries have suffered a steep sell-off in April-May, they have tended to bottom in June. This seems true whether stocks keep rallying in the 2nd half as in 2009 or not as in 2007.
This week’s action in rates was supportive of a June bottom in Treasury prices and a short term peak in interest rates. Both the 10-year and 30-year auctions were ugly, the 30-year auction especially so. But yields on most types of bonds peaked for the week on Thursday morning, a couple of hours before the 30-year auction. The 30-year Treasury actually rallied after the ugly auction on Thursday afternoon. The closing peaks of Treasury rates were 2.235% on the 10-year & 3.375% on the 30-year were on Wednesday, June 12, the day of the 10-year auction.
The action is closed end funds in muni, preferred, high yield & em sectors was similar with a nasty sell off on Thursday morning to close up on Thursday. The exception was EMB, the EM sovereign debt ETF which began rallying on Wednesday, a day before the other bond ETFs. They all continued to rally on Friday.
Whether the yield peaks on June 12-13 are short term tops in rates remains to be seen. A man named Bernanke will have a great deal to say about that next week and the markets will decide for themselves in the next couple of weeks.
Another piece of data that might suggest a short term peak in rates is in the section titled Complete Washout in Bonds from this week’s Flow Show by Michael Hartnett of BAC-
Merrill Lynch (see section 9 below).
7. Dollar, Euro, Yen & EM
One of the strange consequences of the Bernanke comments on May 22 has been a weakening of the U.S. Dollar which has fallen about 4% since that date. In case, you think this was due to weakening US economic data, you might want to read what David Woo of BAC-Merrill Lynch said on Friday on CNBC SOTS:
- the big story of the last couple of weeks is that we have seen a massive exit from EM which has been benefiting G3 across and to the extent that the market was short the Euro, and particularly short the yen, these two actually benefited more than the dollar. So in my view, this has been a position liquidation story that has driven the dollar weakness against the euro and the yen, and to the extent we think that tapering expectation is going to be very much alive going into next week and beyond, this is a great opportunity to sell the euro against the dollar.
- as I said the stronger Euro and the stronger Yen is position of liquidation, and now the position liquidation has basically run its course. this creates great opportunities, and great levels to actually establish the dollar long against these two currencies.
This call by Woo fits with the big call made on the same show by Alan Ruskin of Deutsche Bank:
- on the multi-year basis, this [dollar rally] is the beginning of the long-term trend and anyway to upwards to 20% on the trade-weighted basis and a large appreciation, but it is slow. What you are seeing here is that the initial phase as the Fed retracts from the QE, you are starting to see initially people that are selling bonds and the initial instance and the dollar will appreciate slowly.
What does this strong Dollar call mean for Emerging Markets? David Woo explains:
- … emerging markets in some sense is facing a perfect storm. I mean the combination of China getting worse and the U.S. doing better actually is a bad combination for emerging markets. Think about it. most of them basically do, make a living selling to China, but at the same time with the current deficit by attracting the highly mobile capital and U.S. doing better with the higher U.S. rates weakening the opportunity for investment. Right now, to the extent with a big sell-off and not many people have managed to get out of the long EM position, it is no doubt that after next week if the tapering expectation does not come down, I suspect that the EM will remain vulnerable.
Sounds reasonable but is Woo’s short term case dependent on rates rising in the U.S.? What if interest rates have peaked in the U.S.? That may be why Woo’s colleague, Michael Hartnett of BAC-Merrill Lynch, has begun thinking about a buying opportunity in EM equities (see section 9 below).
8. Gold & Silver
Clip 1 below summarizes the bullish views on Gold expressed by Tom McClellan on CNBC SOTS this week. On Friday, after the weekly release of CFTC data, he published a detailed article titled Gold COT Data Show Bottoming Condition . His charts tell the story better than the excerpts below:
- Commercial traders of gold futures are showing one of the most bullish conditions in years. They are usually presumed to be the “smart money”, and so when commercial traders move to a lopsided net position as a group, it usually means that prices are going to be moving in their chosen direction.
- In the chart above, the current reading is the commercials’ lowest net short position (as a percentage of total open interest) since 2001, which was when gold prices were just starting a multi-year uptrend from below $300/oz. The message here is that commercial traders as a group are convinced that gold prices are heading higher. They usually get proven right, eventually, although sometimes we have to wait around longer than we might wish for “eventually” to get here.
- One insight that I recently shared with our Daily Edition subscribers is that when the 3-week rate of change of total open interest drops below around -12%, it is usually a pretty good indication of an important bottom for gold prices.
- But history says that it should be associated with a meaningful price bottom, which tells me that we should get some meaningful amount of a price rally from here.
9. “EM Buy Signal coming soon” & “Complete washout in Bonds”
This week’s Flow Show by Michael Hartnett of BAC-Merrill Lynch is interesting and could prove significant.
First his EM comments:
- An exodus from EM assets: weekly redemptions from EM equity & debt funds of $9bn = 3rd largest ever (exceeded only in Mar’07 & Jan’08 ).
- EM buy signal coming soon: $8-10bn of EM equity outflow next week triggers first “buy” signal in over 2 years (EEM bounced 10% in 6 weeks after Feb’11).
(courtesy – BAC-Merrill Lynch & Michael Hartnett)
Bonds $14.5bn outflows (second largest on record for second straight week).
$6.5 outflows from HY bond funds (2nd largest ever) (Table 2)
$2.5 outflows from EM debt (2nd largest ever); but Chart 2 suggests pace of outflows still trailing market sell-off
$1.5bn outflows from govt/tsy funds
$1.7bn outflows from munis (largest in 2013)
51 straight weeks into floating-rate debt ($1.5bn)
The last point might be the strongest signal for a short term peak in rate rise expectations. The one exception to the Bond washout case is EM Debt. Hartnett points out that there is still scope for further outflows from EM Debt because the pace of outflows is still trailing the market sell off.
- Tom McClellan on CNBC SOTS on Wednesday, June 12
- Larry McDonald on CNBC Fast Money on Thursday, June 13.
1. Lumber, Stock market, Hindenberg Omen & Gold-Sliver – Tom McClellan on CNBC SOTS – Wednesday, June 12
Lumber & Housing – a one-year lag
- there’s been a whole lot of discussion about what people are calling a huge divergence between the lumber prices going down so sharply but the HGX or that the Philadelphia housing index is aloft for the most part, and they are saying it is warning of us big problems to come in housing, but the problems are not showing up, but it does not explain the true relationship between those two.
- if you look at the coincidence basis, there is some slight correlation but you will find the true relationship you have to do some more magic on the chart . I like to shift forward the lumber price plot by a year, and it reveals that whatever lumber does now, that is what the housing sector will do in a year from now.
- We have a correlation that
works going back a couple of decades and at some point when you see
enough correlation, you give up wondering why it is exactly a year.
lumber sits at the intersection of demand from housing, but also supply
from the mills, and lumber mills are terribly slow in being able to
respond to changes in prices, because it takes a long time to bring back
into operation a mothballed mill. so you got a lot of economic forces
of transportation, labor, electricity costs all coming into play in
lumber and housing demand and why it is a year, I don’t know, but I
celebrate that I get the answer a year ahead of time a lot more bull market in the housing sector left to do, and especially after a bottom for overall market that I’m expecting to come this fall probably in September.
- well, we know that the lumber future prices topped earlier this spring of 2013 and that means that we should expect the real top for the housing sector in the spring of 2014 because of that one-year lag. so while lumber prices are already signaling trouble ahead, it is not for another year ahead.
- Housing stocks should continue the rise into February or March of 2014, and then the effect or the echo of the big drop of the lumber prices can be felt in the housing sector, but it is a one-year lag. It is nice to have a one-year leading indication of what is ahead of us.
- … the Hindenberg omen has correctly told us about every major stock market decline going back 30 years, and it has incorrectly told us about problems at other times. So you have to accept that it is going to cry wolf sometimes. i wouldn’t call it a signal,I would call it an alert. it says to keep the ears up and watch for trouble. watch for conforming signs of a down trend. I think we are seeing those now, now that the Hindenberg omen has triggered twice in just the last week. It comes from when you see new highs and new lows both coming to a high level at the same time with a few other conditions being met and a sign that there is rotation going on. it is a good message to listen to. It is not a message to take at full faith every time and can’t be the only thing one ever watches,but it is nice to have a message to tell you that hey, something is different right now, and you need to pay attention.
- what we are seeing is the data from the commitment of traders report, … we are seeing the levels of commitment by commercial traders that have paired their shorts down to such a low level that we have not seen this reading since 2001 and you remember gold bottoming at $260 in 2001 and starting a great rally, we are seeing the same sort of expression of commitment from the commercial traders that we saw in 2001 and that says that we have a multiple year trend for gold and silver at a time when people are roundly hating both of them, and saying that gold will never go up gap again and gold is for losers or suckers, and that is the kind of attitude and muttering that is a great marker for a historic bottom which we believe it to be, and gold has a lot more years to go up.
2. QE’s ticking time bomb – Larry McDonald on CNBC Fast Money – Thursday June 13
Larry McDonald of NewEdge is a veteran of Lehman. He both remembers and understands the 2007 conditions well. Here he speaks with the CNBC Fast Money crew lead by anchor Melissa Lee.
- Lee – ticking time bomb is pretty incendiary. would you agree with that?
- McDonald – we have a QE conundrum. The more QE they do, it is increasing currency volatility, and bond price volatility worldwide. This week we had the largest spiking currency vol since Lehman on a percentage basis. If you think about the banks around the world, they’re long a lot of currency risk in a lot of bonds. So it sets up a really strange dynamic. lastly, the last time we had this type of really sharp currency in bond price volatility was right before long term capital. it sets up those dynamics.
- McDonald – this isn’t a joke but you think about the movie Frankenstein, there’s a scene in the movie where when Frankenstein starts to get up and attacks the doctor. The side effects of QE manifests themselves around the world. Those side effects, the market is starting to play games with. That’s really what I’m telling clients, with the emerging markets dead, QE has forced capital into weak places in the world. and it’s really the opposite of capitalism. Capitalism should put money in strong hands. So we are very careful of some emerging markets debt and levered companies in the markets.
Guy Adami then asked a superb question, the one question that is all-important to markets worldwide.
- Adami – I am a big believer that there is a derivative book out there somewhere whether it is in Asia or Europe that is on the verge of blowing up – its almost, if you think about it, by almost definition has to be out there somewhere. It just hasn’t happened yet. Do you believe in what I believe that there is a book out there that is not positioned for the volatility?
- McDonald – Absolutely. When we have this type of a move, we have always seen this in our careers, its 2-3 2weeks later, a month later we’ll see the news and it will be in the headlines. think about Bernanke coming to year-round. He’s exiting. Think what’s going on in the last month is he really doesn’t want to throw everything on Yellin’s risk seat. Think about back to ’87 you had Volcker leave and Greenspan coming in & that’s where everything was really left to him..I think . Bernanke wants to put a little fire hose on the fire here before he leaves.
- Lee – we are out of time but I can’t let this statement go, the notion about this book that’s ready to explode out there. are we going to see the ripple effect of that? if this exists is this going to pose a risk to our system?
- McDonald – It would really create a risk-off in the markets. I would say enjoy these rallies; I trade the rallies by fear though. If it does creates a nice fear moment, at your greatest moment of fear do the opposite of what you want to do. Buy fear. The people that bought fear the last four years made the most money.
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