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. Taper Schmeper – Game Over for Bernanke!
The entire market expected a taper of $10-$15 billion from Chairman Bernanke on Wednesday, September 18. They got zero. Actually, they got an easing, but more on that later. Bernanke, as he did on July 30, was explicitly clear in his statement:
- ” the tightening of financial conditions observed in recent months, if
sustained, could slow the pace of improvement in the economy and labor
- “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
The 2nd statement was the principal reason cited by Bernanke in the July 30 FOMC statement. So we wrote in our Taper Schmeper section on August 10:
- “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.”
Now look at the first Bernanke statement above. He is telling us, as explicitly as he can, that he is petrified by the violent spike in Treasury market rates that drove 10-year yields from 1.6% to nearly 3%, the fastest and most explosive rate increase in our investment lifetime. Bernanke knows better than all of us that such interest rate spikes can tackle our leveraged economy harder and faster than the toughest & fastest middle linebacker of all time. Is Bernanke the man to taper now and risk another spike in interest rates? He is known as “helicopter Ben” and not as “out of control 18-wheeler Ben”.
Put these two together and you get the conditions under which Bernanke will taper in the near future – financial conditions (interest rates) need to ease AND inflation has to exceed 2%. Do you see that happening in 2013? This is why we think it is Game Over for Bernanke’s taper.
Michael Hartnett of BAC-Merrill Lynch was oratorical in his “Bubbling his way out of trouble” report on Thursday:
- “They won’t taper until… a rise in bond yields coincides with a rise in mortgage applications, in our view. The summer reversal in housing activity was a likely signal to the Fed that the macro is still too fragile to withstand even a small tapering. We believe tightening is unlikely to happen until higher bond yields, bank stocks, housing activity and corporate “animal spirits” all signal in unison that policy has traction“
Doesn’t his “until” conditions sound like “if wishes were horses” conditionality?
2. An Angry Man & Reaffirmation of our own Boycott!
Back in early summer, we stopped quoting what Fed officials were saying. The sole exception being Chairman Bernanke of course. We found that listening to Bullard, Plosser, Evans, George, Kocherlakota, Fisher & company was at best a waste of time and at worst dangerous. Steve Grasso of CNBC Fast Money had put it succinctly on August 23 “the more you listen to the Fed, the more confused you get.”
What Chairman Bernanke did outraged many in the investment community who were caught on the wrong side of the markets on Wednesday afternoon. For once, the damage to positions was smaller than the damage to Fed’s credibility, to Bernanke’s self-imposed mission of transparency. That feeling was expressed eloquently by CNBC’s Joe Kernen on Thursday morning:
- “What’s the point in sending out all these emissaries…we have heard from so many different Fed players weighing in over the past two months; there is a reason that bond yields went up because they were signalling this was going to happen… the whole world was waiting for this; that was just an accident, that was just an echo chamber?”
- “I won’t believe them next time; they lost credibility. I don’t think we can figure out anything now, no signal will be clear enough from here on out. If this is transparency, then I want to go back to Greenspan. … I expected him to be inscrutable.. When you tell me straight out you are going to do it and then you don’t”
We concur completely. And we reaffirm our decision to boycott all appearances by all Fed officials except Bernanke and Yellen. The rest are just emissaries sent to sucker us like a modern pied piper.
3. Non-tapering is Easing! Hyper-drive market in Q4?
Let us be clear. Bernanke’s action is not neutral. It is actually an easing. We discussed this back on August 17, 2013, when we quoted David Rosenberg’s following statement on CNBC Closing Bell:
- “if the Fed doesn’t taper soon, they’ll be buying up a greater share of that flow of new debt issuance. So by not tapering, what they will do, I think inadvertently, is engage in a passive easing in monetary policy, which I don’t think they want to do”
David Rosenberg proved to be wrong because Bernanke did it. Larry Fink is worried as he told Maria Bartiromo this past Wednesday (see clip 5 below):
- “I’m surprised. I’m surprised because I think at the same time the Fed was going to be tapering, the Treasury was going to start reducing issuance, which is going to because deficits are shrinking. So what I’m worried about now is the Fed is — is going to be buying maybe more than than 100%, 110%, 120% of all debt issuance. I think that will create more of a bubble issue in the future and will make it more difficult to unravel this“
So what will this mean for Q4 2014? David Tepper told us his views back on May 14:
- “so if we don’t taper back we will get into this hyper drive market … you are back, I think, in the last half of 1999“.
But his statement this week seemed more restrained:
- “The Feds non-taper and forward guidance should give a clear message of what the Fed wants. They are not worried about inflation in the next few years and want growth first, growth second, and growth third. With the stabilization of Europe, the apparent pickup in China (note higher dry bulk index) and a U.S. economy still on reasonable footing, despite a slight slowdown in housing the Feds apparent heavy leaning to a growth policy should lead to a pretty favorable environment for the markets.”
A comment that reads “pretty favorable environment for the markets”? That’s not the David Tepper we have seen on TV. Come on Joe Kernen & Stephanie Ruhle. Invite him on your shows and let him speak unchained by lawyers.
Even the normally cagey Stanley Druckenmiller was more explicit on CNBC Squawk Box on Thursday:
- “it is great for gold and on intermediate basis it is great for risk assets“
What do we mean by “unchained”? As Paul Richards of UBS told CNBC FM -1/2 on August 16:
- “Imagine what the stock market will d
o if he pauses in September. I think you’re going to get a huge rally and I think it would be global but more U.S. focused. The money being attracted to Europe, a lot of it would come back to the U.S. I think we could see a 10% rally in the fourth quarter.”
Michael Novogratz of Fortress was even more restrained on CNBC Closing Bell on Friday (see clip 4 below):
- “we think if there’s one trend, it’s probably stocks continuing to go higher, fixed income market probably trades both sides, as do currency markets.”
4. Two contrary opinions
Not everyone was sure that stocks would be the primary and largest beneficiaries of Bernanke’s easing on Wednesday.
Scott Minerd of Guggenheim Partners was explicit on BTV Street Smart on Wednesday:
- “it results today in a monetary easing because it is going to drive interest rates lower and it is telling me we have a lot more market volatility “.
- “It is good for equity investors;it is even better for bond investors; the Fed didn’t act because it realizes that the forward data on economic activity doesn’t look so good especially on housing and because of that .. we are going to see a lot downward pressure on rates that is a better place to go with your money right now rather than into stocks because if you believe the Fed and there is this sort of downward pressure on growth, that’s not gonna be good for earnings in the near term and equities are getting a bit extended; it might be time to take money off the table…”
- “we have actually been getting long [bonds] over the last 6 weeks; when you look at the data, this is the worst bear market on record on a percentage basis in the last 50 years; rates are up over 100% from their lows; there has never been a period of time where you had a 20% increase in rates over a 200 day period where you haven’t had a meaningful rally afterwards; there are only 16 instances in last 50 years where that occurred and this is one of them and we would expect rates trending very close to or may be even below 2% before this rally is over;given the high spreads over Treasuries, corporates and high yield are also relatively safe bets“
Paul Schatz of Heritage Capital was brave in expressing similar heresy on Friday in the presence of Maria Bartiromo and Bill Griffeth on CNBC Closing Bell:
- “I somewhat agree already that the next two to six weeks I think we see the largest decline, maybe of the year. I certainly would not be putting money to work today. Absolutely not. We raised cash over the last week, two weeks. some of the biggest cash we’ve held all year. and I think that continues, for us at least until mid to late October.”
- “Frankly, on a risk/reward basis. I would much rather own bonds than stocks. I think bonds have been decimated anticipating the Fed. I wish the Fed tapered a little bit only so you could buy bonds on the taper. Longer term I do not think the taper is appropriate or it’s the right course. I do not believe the economy or the market can stand on their own two feet. I think Bernanke sees the same thing.”
- “We have more problems in Washington. Once Washington gets by and the next Fed meeting goes by, I think the Dow soars way past 16,000 in q1 of 2014.”
5. U.S. Equities:
Stocks exploded to all time highs in most indices on Wednesday after the Fed statement & Bernanke Press Conference. But as Jim Cramer had warned before and again after the Fed meeting, the euphoria was quickly replaced by concern about the fight in Washington. Both Dow & S&P gave up all the post-Fed rally by Friday’s close.
The importance of the Fed event made some of America’s greatest investors speak up. We begin with the biggest:
5.1 Warren Buffett with CNBC’s Becky Quick on Thusrday (see clip 1 below):
- they’ve moved a long way. they were very cheap five years ago. ridiculously cheap. that’s been corrected. they’re probably more or less fairly priced now. I don’t think — we don’t find bargains around. but we don’t think everything — things are way overvalued, either. we’re having a hard time finding things to buy.
5.2 Carl Icahn with CNBC’s Maria Bartiromo on Thursday (see clip 2 below):
- yeah. I agree with him completely. again, at the risk of being immodest, we’re up 30% this year. yet we have a huge hedge on. on our our long side we did better than 30% because i agree with what warren buffett said. i think that right now the market is giving you a false picture. the market tells you’re doing well. i don’t think a lot of companies are doing well. they’re taking advantage of very low interest rates; so you dont have to be a financial genius to understand if I can borrow at 3-4% and buy assets, may be my own stock that is yielding 9, 10. or 11% I am going to make a lot of money and in one sense or another that is what is going on. But I do think at 17 times, you have to be pretty well hedged ….
5.3 Lee Cooperman via CNBC’s Scott Wapner on Wednesday:
- “he told me if the ten year continues to rally that stocks will rally as well. He reiterated the fact that he thinks that bonds remain overvalued. He thinks that stocks are starting to look a little stretched as well. he calls them in his words modestly overvalued. He said if they keep going up they are taking away from future gains.. He said the idea that the economic is still too weak to taper and the market goes up and has its limits. i think it’s fair to say that it’s positive on the market and that it is fully valued”
Comments of Stanley Druckenmiller, Michael Novogratz, David Tepper were covered in section 3 above.
5.4 Tony Dwyer on CNBC Closing Bell on Wednesday:
- “we’re buying it. I think we’ve been high on the street this entire year. We’re high on the street next year. Inflation allowed them to keep curve steep, kept economy and earnings growing. Not a lot of people left in the busin
ess that have lived through multiple expansion phases. … the market is acting just like it did during initial valuation expansions of the 1984 to 1987 and 1994 to 1997. I guess now that the Federal Reserve is — this decision is out of the way, we turn our attention to earnings.”
- “the four sectors that outperform each time are financials, industrials, health care. In this cycle we’re favoring information technology, even though they did it back and forth over the last two cycles. we can make a lot of fundamental excuses and come up with a lot of academic things. money is flowing into the market because of the success in the equity market and backdrop. Which means until that ends, until you get into a pain zone, that’s going to continue. Ultimately our target next year is 1955 so we’re more focused on that than what’s going to happen in the next 15 minutes.”
5.5 Louise Yamada on CNBC FM on Friday:
- “well, first of all,… the up trend is intact. there’s no question about it. … June low would be the level that would be of concern if that were broken and that comes in around 1575…”
- “however, there are some momentum divergences developing, … we’re about four months with some negative momentum divergences, which is definitely worth watching, because divergences can stay in plate from four to six to nine months prior to a market pullback.”
- “there are a lot of stocks that probably could consolidate here some more. and move higher, but remember, we also talked about many of the dow stocks having come out of ten year bases back in 2012, consolidate the home depots, the walmarts, the disneys of the world. and perhaps advance higher. that consolidation period could take us into a trading range into the end of the year.”
5.6 Lawrence McMillan in his Friday summary:
- “$SPX exploded to the upside after the Fed’s announcement that they were not going to taper, with both new buying and short covering entering into the fray. With $SPX now at new all-time highs, it has positive momentum, but is also extremely overbought. This latter condition will eventually lead to some sell signals, but perhaps not right away.”
- “In summary, the bulls are in charge. Even though they have expended a lot of energy to get to this point, it is likely that prices will still move higher before sell signals eventually appear from the overbought indicators.”
5.7 Ralph Acampora was true to his discipline and tweeted the following on Thursday morning:
- Ralpa Acampora CMT @Ralph_Acampora – Dow Theory: the DJIA & DJTA both recorded new all time closing highs = re-confirmation of the primary bull market…. Technical Discipline: my negative stance made in early August was negated yesterday – “Never fight the primary trend“
6. U.S Treasuries:
Treasuries were among the largest beneficiaries of the Fed non-taper because they held their post-Fed gains of Wednesday into Friday’s close. Yields dropped across the curve this week with 2-year yield falling by 12 bps. 5-year by 22 bps, 10 yrs by 15bps and 30-year by 7bps. And the 30-10 yr yield spread closed at 103bps, above the QE threshold of 100bps.
Both the 5-year & 2-year yield closed at 1.48% & 33bps well below their closing levels of 1.6% & 40bps on July 5, 2013 – the day Treasury yields exploded up with the stronger than expected payrolls number. The 10-year yield closed at 2.74% just 1 bps above the July 5 level of 2.73%. The 30-year yield closed at 3.77%, 7 bps higher than the July 5 close of 3.70%.
Louise Yamada discussed this difference between the short-end and long-end of the yield curve on Friday:
- “interest rates cycles historically ran from 22 to 37 years. we are 32 years into our falling interest rate cycle. and for the first time, we have something here that looks like a base, approximately two years in the making. you have penetrated a seven year down trend.”
- “it’s impressive the 10 and the 30 really didn’t respond to the Fed’s decision as much as the two or five. and I think you could pull back to the breakout level, which is around 2.4. you could come a little bit under it, 2.3, into this area. and do some backing and filling sideways.”
- the one interesting thing historically is that interest rates cycles from falling rates, transitioning to rising rates have been very slow, multiyear, saucer like affairs, because there have been deflationary pressures in place. 1946 was the last rising rate cycle beginning. and that was 14 years after the bear market low in equities. so i think that we’re beginning it here. the 30 year actually has a four year base in place. and over time, we’re looking for a rising rate cycle,
The Muni closed end funds began rallying on Monday and had a marvelous Wednesday afternoon. The charts of three NY closed end funds tell the story better.
All these three still deliver a 6.5%-7% triple tax-exempt yield and trade at a discount to NAV.
- Warren Buffett on CNBC Closing Bell on Thursday, September 19
- Carl Icahn on CNBC Closing Bell on Thursday, September 19
- Stanley Druckenmiller on CNBC Squawk Box on Thursday, September 19
- Michael Novogratz on CNBC Closing Bell on Friday, September 20
- Larry Fink on CNBC Closing Bell on Wednesday, September 18
- Jim Chanos on BTV Market Makers on Tuesday, September 17
1. Warren Buffett with C
NBC’s Becky Quick – Thursday, September 19
Was he surprised by the non-taper?
- only because I’ve been reading every place people expected something. I didn’t have any great expectations one way or the other. and it doesn’t really make any difference to me in terms of our business or investments whether it’s zero or 10 billion or 20 billion. some day it’ll stop. maybe it’ll go the other direction.
Was QE-3 not as effective as earlier programs?
- I think that’s right. Probably why it’s being continued. It hasn’t done the job yet that they they hoped it would. but I don’t think it’s been harmful. What you see in the economy is just this gradual increase, which has been going on ever since the fall of 2009. Every now and then people think it’s accelerating. Sometimes I think it’s decelerating. Just kind of creeps along.
- I don’t want to say it isn’t working — it’s hard to say what would have happened if they’d gone the other direction. The economy is improving. But I think probably Bernanke was hoping to see an acceleration of the rate of improvement. And what he’s seeing, I think, is a continuation of more or less the same rate. Maybe if they hadn’t been doing it, you’d have seen even less than 2%. who knows.
Who should be the next Fed chair?
- I think Bernanke. I think if you’ve got a .400 hitter in the lineup you don’t take him out. He may want to leave. but i think, since the panic of five years ago, he’s done a terrific job. I think he ought to get a chance to play out a little more. I don’t think that’s necessarily going to happen. that’s what i would do [ask him to stay on].
- Yeah. I don’t have a second choice. I don’t know. I don’t know Janet Yellen at all. I just don’t know enough about the various candidates to come up with a second choice. I know Bernanke in my view is very, very good. I would not trade him away anymore.
- Whoever has that job, at some point is going to have to do something that’s pretty much unprecedented starting with a $3.5 trillion balance sheet, still growing. It’s easier to buy than to sell. … the last half of this game is very different than the first half. But I think Bernanke ought to be given a chance to play the whole game rather than just the buying end of it.
- I don’t think it’s impossible that five years from now that you have a $3.5 trillion Fed balance sheet. They may take it back to where they’re not going one direction or the other. But I don’t think it’s impossible that they just decide they’ll sit at $3.5 trillion like they used to sit at $1.5 trillion.
- well, the lower interest rates are, the more assets are worth, basically. To the extent that QE-3 is keeping interest rates lower than they would otherwise, it probably keeps asset prices higher than they might be otherwise. Interest rates are a terribly important variable in the valuation of assets.
- [stocks] they’ve moved a long way. they were very cheap five years ago. Ridiculously cheap. that’s been corrected. They’re probably more or less fairly priced now. we don’t find bargains around. but we don’t think things are way overvalued, either. We’re having a hard time finding things to buy.
2. Carl Icahn on CNBC Closing Bell – Thursday, September 19
- yeah. I agree with him [Buffett} completely. Again, at the risk of being immodest, we’re up 30% this year. yet we have a huge hedge on. I think that right now the market is giving you a false picture. the market tells you’re doing well. I don’t think a lot of companies are doing well. They’re taking advantage of very low interest rates; so you don’t have to be a financial genius to understand if I can borrow at 3-4% and buy assets, may be my own stock that is yielding 9, 10. or 11% I am going to make a lot of money and in one sense or another that is what is going on. But I do think at 17 times, you have to be pretty well hedged
- I think Real estate is ridiculously overvalued; It is just absurdity, I really cant understand it; when you look at this urban centers and you look at the rents these businesses pay to be in NY; I think real estate is coming again to a top of a bubble.. I am not a real estate guy
- Apple is very undervalued. Warren talked about 17 times, you look at the multiple of Apple, it is much lower than that; they are making a great deal of money; they are 450 billion; take away cash and you have 300billion; they are bringing in 45 billion a year on that and on top of that if they buy stock, you can get that to 3* earnings; but I think the market is very overvalued
3. Stanley Druckenmiller on CNBC Squawk Box – Thursday, September 19
- I was surprised to hear Steve not mention the term financial conditions. Bernanke didn’t specifically open with interest rates, he opened with financial conditions. And it’s my understanding last time I checked the stock markets at an all-time high and it’s up 200%, whatever the amount, it’s up over a number of years. and the way the fed calculate financial conditions, i read a piece this morning, it’s probably accurate, fits my intuition that financial conditions are slightly higher than they were in June according to the Fed model. … certainly a stock market at an all-time high would suggest that we don’t have a problem with financial conditions.
- I was surprised. Look, i don’t really care about surveys, those people aren’t betting with their real money. The big money was betting that they were going to taper. Otherwise gold doesn’t go up $50, dollar doesn’t get killed, stocks don’t go crazy.
- I agree with Paul Gigot’s article this morning. I think they lost their nerve. and I think it’s the tragedy here is I think they had a freebie. they had telegraphed tapering. It was in the market, they could have started the process, get us off the dope. It wouldn’t have cost them anything because it was in the market. and to me, they blew it. And the problem here is when you look at what happened in June, okay, to the financial markets, the first response to this, this is going to make it so much harder for the next chairman to start the process than have we not been through this fiasco the last three or four months.
- well, I don’t believe in transparency. … I was at Pittsburgh national bank in 1979 pr
e cell phones, pre-cnbc, all this stuff. I wake up and I’m managing money. I wake up one Sunday morning and Fed has raised rates 200 basis points on a Saturday night. Paul Volcker, to me the greatest Fed chairman in history broke the back of inflation, set up a period of long-term growth,Bundesbank ran the operations the same way. Transparency has led to more volatility and more confusion. Look at what just happened with this forward guidance stuff. they were trapped by their own dots that you guys have outlined the last few days. they wanted to be transparent on forward guidance, but then,oh, many I god, if you take what their own forecasts spit out, fed funds are supposed to be 3% in 2016; so now what do we do? I’m with Volcker, what you do is just stop all the talking and do your job like he used to.
- look, my concerns with QE are probably more well documented in the press than I would like. I had a little press tour four months ago for other reasons and made some comments about the fed. let me just sort of crystallize what my concerns with qe are. first of all, I’d like to say that qe-1 when we had dysfunctional markets and were facing a meltdown, I thought chairman Bernanke, what he did was creative, what he did was courageous. one of the boldest, more effective moves in the history of the fed. and I can’t think given the intellectual capacity where he came from, I cant think of a better man, a better American to do a better job he did with qe-1. let me first of all say i think chairman Bernanke has been a great public servant and what he did with qe-1 was phenomenal.
- having said that, I believe QE is extraordinary measure for extraordinary times – dysfunctional markets, meltdown . And I didn’t even agree with QE-2, but … we are five years into a recovery. the stock market has gone up and up and up. we’re talking about $85 billion a month. and I don’t think the academics at the the fed understand the unintended consequences of the potential exit. Yesterday the chairman was asked about whether this would complicate the exit. and incredibly to me, he suggested it wouldn’t.
- Can you possibly say what went on in June? where they hinted that maybe if the economy’s strong for three months, maybe we might do a little taper. You saw what created, Can they possibly think by adding $85 billion a month to their balance sheet and frankly to investors’ balance sheet. and I want to make this point, the exit is not going to be harder. and on the two balance sheets, everyone focuses on the fed’s balance sheet, $3 trillion and the problems that creates. don’t forget, there’s another balance sheet. and that’s the balance sheet of us in the market that sold them the bonds and were forced into the risk assets they’re so desperate to have us in. we have been forced into prices of securities at subsidized prices. and when those subsidies are removed, whenever that is going to be sometime in the future, those prices will adjust as shown in June and they will adjust immediately and they will do it on no volume.
- This wealth effect they’ve been using to prop this stuff up, once that’s removed, you go down on no volume, you reprice and I will bet from beginning to the exit that the wealth effect of QE will have been negative not positive.
- no, it’s not a short-term pop. first of all, as a practitioner in markets, I love this stuff. This is fantastic for every rich person. This is the biggest redistribution of wealth from the middle class & the poor to the rich ever. … I had a very good day yesterday. So anybody who thinks that Friday we get Summers is out. 20 minutes before the Fed meeting a white house official leaks it’s going to be Yellen and then we learn 20 minutes later it’s going to be Yellen without tapering. Anybody who thinks financial markets could possibly have adjusted to that equation in 72 hours is crazy. this is very bullish for markets. but is bullish for markets intermediate term. all this stuff I’m talking about is long-term.
- I think when I was on your show in March, I said we were on the seventh inning in a four-year bull market. I thought we’d be about done right now, we’re going into extra inning; the punch bowl was running out, just about dry and two waiters came in and they’re carrying this new punch in. we’re going to really party now.
4. Michael Novogratz on CNBC Closing Bell – Friday, September 20
- to contradict Carl Icahn and Warren Buffett might make me the biggest fool out here. I think the Fed is dovish. They came out this week and shocked the market on their view of the economy as tepid, continuing to pump liquidity in the system. And as long as liquidity comes into the system, stocks are going higher.
- It was a big surprise. maybe Roubini was calling for it but I think he was the only economist on the street that was thinking no taper. Most people thought in a 10 to 15 billion they would start this process of getting out of the QE regime. They didn’t. It was kind of a wildly dovish signal.
- the economy has some pockets of strength and some pockets of weakness but there’s a wet blanket thrown over the economy. Its just over all confidence; the government can’t seem to get their act together.we are in an environment in which it’s not a high probability but a possibility of a government shutdown.
- we have a lame duck president in a lot of ways and he has 3 1/2 years left. we can’t find an example in the last 50 years when a president couldn’t get his fed chief approved. four democratic senators stabbing Obama right in the back. So, that doesn’t build a lot of confidence in the system. I don’t think that was priced into the market. I think the market was so focused on fed and taper. You had a bit of relief right afterwards. I think part of the selloff today, and I think the volatility we’ll see in the month end is just that. You know, fear of how this is going to play out. … Republicans feel more emboldened now that the president looks so weak. I think you could wake up after we had a very dovish fed.
- if you’re a fixed income dove, equity bull, most of the good news is in the market. Now I think this is going to be kind of choppy back and fill. I don’t think the market has a major correction here. I just think there was a buyer’s exhaustion and shorts got squeezed; Gold had a 60 dollar move yesterday and halved it today. I think the market will kinda go two ways until we get set up.
- I think the fed had tapering priced in and they didn’t have enough. They aren’t going to flip back. they aren’t day traders. They have a medium term view of where the economy was going and I think they must have thought long and hard with what they did. I think bullard’s comments were partly to say, don’t get overdone the other direction. don’t get so dovish. We think the economy is doing okay but not enough for lift-off speed.
- this was the year for the first half where there were great trends in the market. there were great stories. there were correlations that broke down. The first half of the year is what I call a hedge fund Nirvaan – trending markets with uncorrelated assets; Japan was a big theme for people. China slowing down, hence, capital coming out of the emerging markets was a big theme. a fixed income bubble in the U.S. being turnwound was a big theme. So, the second half, i think, will be tougher. I don’t think markets will trend nearly as much as they did in the first half of the year. correlations which had broken down jumped back up. and so we think it’s going to be more of a trader’s market.
- we think if there’s one trend, it’s probably stocks continuing to go higher. fixed income market probably trades both sides, as do currency markets. I think there had been such a massive selloff in emerging market fixed income, there’s still catch-up. people will reallocate capital there for a little while.
- I think ten years will probably trade in a range of 2.6 to 3%, or 2.50% to 3%. Still like Japan. Ithink the japan story is real. It’s the only story I think has legs. Abeonomics is a shocking change in Japan. We continue to meet politicians from the LDP. Shocking change is the first two things they care about is Nikkei and Dollar-yen. I can’t imagine sitting down with John Boehner and him talking about the currency. Those are their policy objectives higher nikkei, higher Dollar-yen. so ride that wave. don’t fight the Government.
5. Larry Fink on CNBC Closing Bell – Wednesday, September 18
- I’m surprised. I’m surprised because I think at the same time the Fed was going to be tapering, the Treasury was going to start reducing issuance, which is going to because deficits are shrinking. So what I’m worried about now is the Fed is going to be buying maybe more than than 100%, 110%, 120% of all debt issuance. I think that will create more of a bubble issue in the future and will make it more difficult to unravel this.
- But I think if I had to sit back and say why did the Fed not taper, we’re going to have a lot of drama in October. The debt ceiling, nobody is forecasting this, thinking about it. I don’t think we should be assuming Washington will finally get it. I am very worried about how binary both positions are, Republicans and Democrats.
- Iit will create a lot of drama, uncertainty. more importantly, if there’s that type of drama, consumers will pull back and it will cause weakening to the economy. With the Federal Reserve knowing how pivotal the events in washington are going to be in October, it may force them to delay any decision of tapering until late October or November. so, we’ll see how this all plays out. I thought the Fed had the option of doing a small amount of tapering and giving guidance that would be very good.
- I think if they did a small amount of tapering with guidance, I think the market would have rallied anyway today. I’m not surprised at the rally. I’m surprised at their action and their action created even a bigger rally. We saw gold up $45. home building stocks up 4%.
- I agree with Rick [Reider]. We move now the ten-year range from a 2.75- 3% type of range to 2.50 to 2.75 for the time being. We’re in a trading range. I’m not as concerned about the ten-year movement. I’m more concerned about gold, oil, all the other types of thingrs that create more volatility, a bigger bubble.
- We began seeing stability two weeks ago. We were worried about emerging markets. We saw huge revaluations in emerging markets. Starting two weeks ago we saw $5 billion inflows if emerging markets. We began to see stabilization. i’m sure tomorrow we’ll see even more flows into emerging markets. but, you know, i thought the market was now equalizing from what the information they had. that’s why i thought the fed had the ability to do a modest amount of tapering and giving modest guidance and the market would have been fine.
- I think the Fed is telling us inflation is below target so that gave them more room. That’s something we underestimated because the level of inflation we’re seeing, which is below the fed target, the Fed was certainly unwilling to change that much policy. I’m not sure if it tells us anemic growth rates in the economy. I believe most of the anemia in the economy has to be due to the sequester. if you’re in the army, you’re not adding jobs. you’re not adding more scientists and doctors — and funding going down. so, I actually believe much of weakness in the employment market was more related to the sequester. Once again, Washington is causing the problems. and the Fed has to now pay attention to the actions of Washington. We all try to say the Fed is agnostic to what goes on in Washington and they have to be nonpolitical, but I do believe Washington is a source of so many of these problem. if you saw hourlywork, if you saw wages, they went up a little bit in the last employment number. so, i think the numbers were not as bad as we said they were. and i think much has to do with the sequester, now having an impact on employment and now, as i said, if the debt ceiling becomes very dramatic now, it’s going to put another layer of pessimism in the economy.
- getting back to your ceo and cash. we’re seeing more cash for m&a. buybacks. we’re seeing a lot more buybacks, dividend increases. some of that is manifested in that way. that’s also a sign of pessimism. if ceos are doing buyback, it’s telling you they don’t have better use for that money. that’s all manifesting in this lack of long-term outlook. that’s a bad thing for retirees. but the lack of long-term by ceos is saying, i need to reward shareholders, i’ll do that with dividend increase and share repurchases. but that’s not creating jobs. because we’re seeing such poor response in washington to move the dial, whether it’s infrastructure, tax policy, immigration. I thought we were going to see a lot of action in Washington. here we are now in september and there’s been very little being done in washington.
- a year ago said be in US – the revalutaion of emerging markets have made them a fairer value.. I still like the US; European companies have great value; they are trading at lower PEs.. compared to US companies in like types of businesses… and so I think you have to be a better stock picker today vs, a year or two years ago
6. Jim Chanos on BTV Market Makers – Tuesday, September 17
The following is a subset of a detailed summary from Bloomberg TV PR.
Chanos on whether we’re at the inflection point in the cycle where credit starts to deteriorate again:
- “I don’t think so – not yet. Again, there’s a place where that is definitely happening so we don’t have to guess. That’s happening in China. You have a credit system gone crazy there. New debt has been running anywhere from 30 to 40% of GDP a year. Think about that for a second. Their economy is going 10% nominally, 7.5% real and 2.5% inflation. If you are growing your debt at 35% and your economy is growing 10% a year, that means that new debt is growing 25 percentage points greater than your economy. And using the old rule of 72, that means you double your debt to GDP every three years. So when we started looking at China, total debt in China to GDP is about 100% of GDP. It’s now about 200%.”
- “Our view on Caterpillar as well as a few other companies globally – not Chinese companies – has to do with what we also see as the end of the commodities super cycle – industrial commodities, which have just gone ballistic in the last 10 years on the China infrastructure and real estate buildup. If you look at things like iron ore, copper, cement, steel, it’s all the same story. To give your viewers an idea, in 1991 total capex in the mining area globally was $4 billion. 10 years later, it was $14 billion as we got to 2001 and 2002. in the next 10 years from ’02 to now at the peak, it went from $14 billion to $120 billion. an arithmetic function became a geometric function in the last 10 years. When people say it could drop off a little bit, they think it could drop off slightly. It could drop off a lot.”
On shorting the Australian dollar:
- “There are countries that will not do as well. But there are big commodity companies, companies that have gone on acquisitions sprees. We are actually long on a couple of companies in Australia that are more diversified and we are short the leverage guys who have gone off and leveraged up their balance sheet. One of the great thing about the short side is i don’t always have to disclose my positions…We have been public on a few companies. One is Fortescue, which is a poster child for a one-way bet. It’s an iron ore play. It’s a leveraged iron ore play. Iron ore is about $130, up from 40 or 50 for years and years and years. We have talked about Vale as well in the past and I think it’s safe to say we’re still pretty negative on Vale.”
On how recent findings in China have confirmed his positions:
- “I think that the continued push for investment spending, every time the economy seems to slow down. Infrastructure, real estate. Even in the August data, we saw in the July data people got excited again. China is pulling out of this June credit blip. It was all new products being approved. They don’t know how to change this model and we’ve been talking about it for three years. The problem is it simply the same story. Stick a shovel in the ground, put up another building, another stadium, another railroad…at this point, the returns are minimal. We saw on your newswire yesterday, about 50 new international airports being greenlighted in China. And really there’s only room for five or six.”
On how hard is it for his team to get real research on China:
- “It’s a lot easier than you might think. The thing about a real estate bubble and an investment bubble is that it’s visible. You can literally go to these cities, and we have, and just travel up and down the boulevards and take photos and compare the ones you did from one year ago to current ones. China does give you decent granularity at the company level. The banks give you a lot of data, they do trade publicly in Hong Kong. There is good disclosure in the Hong Kong market. It’s not as difficult to get information as you might think.”
On how China is going to have an impact on the global economy:
- “Anybody selling raw materials into china. Africa will have a problem. Australia will have a problem. Brazil will have a problem. The amount of Chinese capital going into these projects globally will dry up…it depends when they need to repatriate the capital back to china. all of these things will probably happen, when is a good question, but it’s already happening in terms of market prices. The Chinese market has continued to underperform. Every other global market is basically up.”
On whether it’s difficult to have short positions when in a waiting period:
- “The one place my investors are happy we have been short is china. Everything else has been more problematic on the short side than China. It has been a place that the credit cycle is continuing to unfold in slow motion and pressuring equity returns. One fun fact — the Chinese economy has basically quadrupled in nominal terms over the past 10 years. The Chinese equity market is basically flat over that time. That’s an amazing statistic.”
- “They have that quaint notion of developing their own products internally with their own design teams as opposed to some of these companies who basically — and you have heard me complain about this and Cory understands this concept better than most. Companies in tech that acquire lots of companies are basically capitalizing their R&D…think the free cash flow looks good and thus Hewlett-Packard or dell or IBM, as you mentioned. But if you look at acquisitions as R&D, suddenly a lot of these companies look a lot more expensive than they do on the surface.”
On Amazon, Netflix, Pandora, Salesforce.com:
- “The problem not with Amazon and to a lesser extent with Netflix, but some of the other ones you mentioned right now, is that retail investors are falling in love with concepts again. They’ve fallen in love with concepts with limited floats–not enough shares outstanding. The whole world can get very excited about Pandora or a company that makes electric cars or whatever you might want to say, but if there are only a million shares outstanding in public hands as opposed to hundreds of millions outstanding which inexorably will get onto the market through venture capital distribution, insider sales, and this is what happened in 1999 and 2000. As these stocks were higher and higher, there was suddenly a flood of issuance….I’m not commenting on whether we are short Pandora. The point is that a lot of these stocks are trading on very, very limited floats. Even though they have big market caps, the amount of tradable shares is limited and that’s going to change radically in the fourth quarter of 2013 and into 2014 if prices stay where they are. It makes a lot of sense for the original investors to diversify.”
On how he figures out timing:
- “That’s the $64 million zillion dollar question on the short side. If we could time these things perfectly, there’d be no fun in the process. In any c
ase, it’s a mixture of things. Is the business deteriorating? We have pointed out over and over again that our best shorts historically are stocks that have appeared cheap. The businesses were deteriorating faster than the value investors were lowering their numbers. Many of those companies get into financial trouble. Everybody says be careful shorting on valuation and i think that’s a good bromide. On the other hand, not factoring in valuation when you buy a stock can kill you too, and nobody ever says that. I would caution a lot of investors out there–whether or not you want to short stocks or not–you ought to take valuation into account when you buy something because it will matter at some point.”
On whether he’s long Microsoft:
- “We have actually since the filing gotten out of it…for a variety of business reasons that I think Bloomberg has covered well…I am very leery of tech companies that become value stocks. It just never seems to work Apple trades like a value stock but I don’t think it’s a value stock. I think Apple is still innovating and is a good consumer product. I’m not so sure Apple is a technology company as much as a consumer products company. Microsoft is a technology company.”
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