Interesting Videoclips of the Week (August 3 – August 9, 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.

Last week, we wondered whether Bernanke had merely punted on the taper or whether it was game over for his taper. The question was prompted by the following statement in the FOMC statement.

• “… inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable”
•     “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term”

We all know that Bernanke’s enemy number one is deflation or deflationary expectations. Therefore, we believe that, as long as inflation is trending lower, Bernanke-chaired Fed will not taper.

This week, Byron Wien joined in dismissing the possibility of a taper on CNBC SOTS on Tuesday, August 6. His reasoning was based on economic growth:

• well, one of the things that the policy makers have to reflect on is that the economy is only growing less than 2% with all of the monetary easing that we have done. furthermore, I don’t see any reason for tapering whatsoever. We are not at the inflation target of 2%; we are not at the unemployment target of 7% or 6.5%, so there are no signs in terms of the macro factors that would indicate that the Fed should stop easing. Moreover,  I think the economy needs that, because there is no fiscal stimulus, and we are totally dependent on the monetary stimulus to keep the economy humming along at a very modest 2% growth rate.

The day before, Dennis Gartman dismissed inflation and insisted on CNBC Closing Bell on Monday, August 5 that the Fed should worry about deflation:

• we are growing one whale of a large crop; we are also going to have a huge soybean crop; but corn being the dominant input to meat production, to cattle and livestock, turkeys & chicken & such, we are gonna close to at least 14.5 bushel corn crop and the oldest rule in the book is that a large crop always seems to get larger; we have had adequate rains, we had great weather and we are going to have a very large corn crop putting downward pressure upon food prices for a long period of time; throw into that the fact that next year you are going to have an extraordinarily low fertilizer price with what happened last week in Potash; that’s gonna come to fruition very quickly in Brazil, low prices are going to increase production there & we are going to have even a larger corn crop next year because of fertilizer prices; so on balance, food prices are going to stay under pressure for a long period of time..that’s going to take pressure of the Fed to worry about inflation.
• you don’t have a problem with inflation; you have a problem with deflation. And that’s what the Fed is worried about.
  

And David Kotok is even more bearish about inflation than Dennis Gartman (see 2.1 below):

• “I believe the trend of inflation is headed towards 1% and may go under it“

Yes, we did hear esteemed Fed members like Evans, Fisher & Lockhardt address the taper issue this week. But, following Bill Gross, we only listen to Bernanke, then to Yellen & finally to Dudley.

By the way, what would happen to treasury yields if Bernanke tapers as inflation is trending towards 1% and as growth trajectory flattens? That depends on whether you think tapering is tightening or not? We do and therefore we think tapering-tightening into a slowing economy would push yields lower and not higher. 


2. Bond Market.

The Treasury market behaved well this week with the 10-year yield closing below the key level of 2.60%. But taper probability did not move much based on the 5-year yield which stayed around 1.36%. The biggest move was in the 30-year yield which fell by 6 basis points to 3.63%.

CNBC’s Betty Quick described the consensus opinion as “aversion to Treasuries” on Friday morning. The aversion word certainly describes the views expressed by Byron Wien (see 2.3 below). But we did find two actual investors, David Kotok and Marc Faber, who dared to go against the deeply held convictions of Ms. Quick and Mr. Wien. Marc Faber is only buying long duration treasuries as a trade (see 2.4 below) but David Kotok considers today’s pricing of long duration municipals as a “gift”.

2.1 David Kotok on BTV Street Smart on Tuesday August 6, 2013

• “I happen to be in a more restrictive mode these days because I don’t think we are going to launch into robust recovery and I believe the trend of inflation is headed towards 1% and may go under it.“.
  
• “and so the bond market I think has got it wrong.. In fact I think the bond market is a buy here especially in the Muni world,
  
• “I took cash up in the last week or two weeks first time in a long time..  double digit cash.. high for us”
• “5 year target is one way to do it – we would do it another way for individuals we raised tax exempt municipals which are a gift… they are being given away nearly free – the yields of very high grade munis are between 4-5%, close to 5%; taxable equivalent yield on something like that is 9-95% ; depending on your tax bracket it could be 10%; think about it?
  
• where am I going to put my money – AA, AAA quality credit and compound the equivalent of 9-10%? I don’t know the stock market delivers that expectation; I don’t know that real estate does; … you see this picture and you say I need to shift balance; in most accounts we actually took stocks down in favor of raising bonds.. in balanced accounts I lowered the stock side and raised the bond side…

Our views are irrelevant but we do concur with Mr. Kotok. In fact, we recall an investment conference in the summer of 2000 when everyone was bullish on stocks and bearish on bonds. At that time the closed end Muni funds were yielding 10%-12% in taxable equivalent yields. That was a great buying opportunity.

2.2 Louise Yamada on CNBC FM on Tuesday, August 6

•  structural bear markets for interest rates have run 22 to 37 years. generally the reversals from falling rate cycles to rising rate cycles are very slow, multi-year saucer like affairs which is exactly what we’re getting over a two-year period. you are breaking the 2007 down trend which is the first step; you’ve broken out through this level of the base. that came in around 2.41%.
• so now you’re in a trading range between 2.41% and 2.74%. So, again, you could see a consolidation within that range which I think would be constructive. but we’re looking for higher rates further out. If you go to 2.71%, all bets are off — we see 3%, ultimately 3.50% and then you get a large amount of resistance around 4%.

2.3 Byron Wien on CNBC SOTS on Tuesday, August 6

• No, you are not going to buy any bonds; I am not recommending any purchase of Treasuries.

2.4 Marc Faber on CNBC Futures Now on Thursday, August 8

• “Now I believe along
  with Gold, the bond market is oversold;  near term the bonds could
  rally. As a trade, I would consider buying some Treasury Notes.”

On Friday, CNBC clarified this call to say Faber was recommending buying long term Treasuries.

3. David Tepper vs. Marc Faber & Carter Worth

Stephen Weiss, a CNBC Fast Money contributor & a golf buddy of David Tepper, reported Mr. Tepper’s views about the stock market on Monday.

• “David Tepper telling me that stocks are still reasonable, in his words, probably still the only place to be. Made it clear that he’s still long. Maybe not quite as bullish as he was, because of the move we’ve had, but he made it clear, if I was super bullish before, I’m just bullish now. So clearly, David Tepper thinks quite highly of the U.S. stock market at the current time. Asked about Europe, as well. we’ve been hearing from a lot of people, …  looking for opportunities in Europe. I asked David about Europe, where he said Europe is bottoming, but that does not mean there can’t still be problems.”

Marc Faber, another well known investor, is bearish and expects a 20% decline by this year-end. He sees a parallel to the rally in 1987 which went up till August 25, 1987 and fell apart (see section 4.5 below).

4.1 Louise Yamada on CNBC FM on Tuesday August 6

• you’ve seen the market break out here through the all-time high, through 2007, 2000. generally when you see something like that after a structural bear market you could call it a new structural bull market. There is always the caveat that it’s Fed led and whether or not we can sustain that is not question. Right now, August is probably a quiet month. We can see a pull back here. There are some minor divergences coming in but I think you see maybe a ten percent trading range above the 1560 where we broke out through the 2007 peeks. So we’re constructive unless the June lows break.
• It’s the June low that’s important in terms of holding. That’s approximately a ten percent pull back so if we were to see consolidation above that breakout level you can have a series of ten percent bull backs and move up maybe later in the fall. Then if we see more divergences, we would get more concerned.

4.2 David Rosenberg on CNBC FM on Tuesday, August 6

• I think over the near term, the very near term, I can see the market struggling. I‘m sure that comes as a big surprise, but I think we’re fully  priced right now. You have price earnings ratios bumping against cycle highs. market vane sentiment is at 64% bumping up against cycle highs; margin debt is up 32 percent year/year. I think there’s a lot of good news priced into the market right now. My sense is that the economy is weak, earnings and revenue growth are back in low single digits, we have to deal with the tapering issue and that’s a matter of when, not if. and the the market is battling against bond yields that are up 100bps from where they were a few months ago.
• I could see the market struggling over the next couple of weeks and months. I don’t think we’re going to go into a sustained bear market unless we fall back into recession or ythe Fed actually starts to tighten liquidity.. The overall bull market conditions are in place but in terms of a correction, my work shows that at this stage of the liquidity and business cycle, the market is usually up at an 11% or 12% annual rate. Going in to today’s action we were up 18% for the year. I think it would perfectly normal and I would say healthy for the market to enter into a near term corrective mode but that opens up another lag in terms of a buying opportunity. …Of course it’s a two edge sword because if the markets corrected significantly the Fed wouldn’t bother tapering off and put those concerns onto the back burner. My sense is that the markets will undershoot and overshoot.
  

4.3 Byron Wien on CNBC SOTS on Tuesday, August 6