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. Bernanke at bat
Wednesday September 18th was the day Bernanke stunned the world. How have the various asset classes performed since the close on September 17? Treasury Bonds have rallied more than S&P 500 with TLT & EDV up by 4.3% & 5.7% while Dow and S&P are up by 26bps and 3.3% resp. But Nasdaq 100 is up 6% and Russell 2000 is up 4.9%. All US indices except the Dow have also beaten EEM which only rose by 2.7%. Gold is up 3.1% and Silver is up 3.7%. Oil is down with USO having fallen by 6.5% since September 17. So every asset except Oil has risen smartly.
Will this continue after this coming Wednesday’s Fed statement? Will Bernanke again shock the world by sounding more hawkish now that the Debt debacle is over? Or will he raise concerns about the December budget deadline? Frankly, we find it difficult to believe that Bernanke will sound hawkish especially given the weakening trend in the data. Goldman’s Jan Hatzius, the NY Fed’s best friend, sounded concerned after the 148,000 print in September’s pre-govt-shutdown payroll number:
- “… the disappointments of recent months now look more significant. The 3-month average gain in nonfarm payrolls is now down to 143,000, the weakest pace since August 2012. … Job creation has been pitifully slow throughout the post-crisis period, but now we’re seeing a weak spot within a much bigger weak spot. … Now we can clearly see that even prior to the October shutdown mess we were in a mediocre spot.”
Tobias Levkovich of Citi was more bearish in his appearance on CNBC Fast Money on Thursday:
- Citi Economic Surprise Index, I don’t care if you look at the G-10, the U.S., Japan, they are all rolling over.
The real question is one that Marc Faber asked on Monday on CNBC Squawk Box and he answered his own question with typical Faberian hyperbole:
- “The question is
not tapering. The question is at what point will they increase the asset
purchases to say $150 [billion] , $200 [billion], a trillion dollars a
month, …The Fed has boxed itself into a position
where there is no exit strategy”
So will Bernanke actually increase the QE level on Wednesday? We doubt it. That, we suspect, will have to wait until Janet Yellen is confirmed by the Congress, a prospect that became a little less smooth due to comments from Senator Rand Paul.
By the way, why is Oil down? Marc Faber argues:
- “I say oil is down
maybe because in my view there is at the present time in emerging
economies practically no growth. The growth has slowed down to trickle
not that you feel there is a recession; in some sectors like tourism in
Asia is still growing rapidly, but other sectors are not growing. So if
you go to Hong Kong, he sees essentially a boom town but
it’s not growing. Same in
Singapore, you look at global exports they’re flat. So I think the
demand for oil is weakening”
2. U.S. Treasuries
On May 1, the day before the stronger than expected April payroll number, the 5-year yield closed at 65 bps. On May 22, the day Bernanke hinted at an early taper, the 5-year yield closed at 89 bps. On June 19, the day of Bernanke’s press conference, the 5-year yield closed at 1.25%. And on Friday, July 5, the day all yields rocketed higher due to a strong payroll number, the 5-year yield closed at 1.60%. On September 17, the day before Bernanke’s non-taper announcement, the 5-year yield closed at 1.61%.
This Friday’s close at 1.29% reverses the entire rise in 5-year yield from June 19. Assuming that Bernanke confirms no-taper on Wednesday and the market prices in no taper till March 2014, will the 5-year yield break 100 bps on the downside if not the May 22 level of 89 bps?
Yields across the curve have fallen since September 17 – 30 yrs by 24 bps, 10 yrs by 34 bps and the 5-year by 32bps. Is this entirely due to non-taper or is the bond market beginning to share Bernanke’s concern about persistent low inflation? Before we listen to Bernanke on Wednesday, below are a couple of opinions.
2.1 Michael Gayed of Pensionpartners
He had said the following to Maria Bartiromo on Friday, October 11:
- “we’ve been playing the emerging market play which has been very strong, especially since fourth quarter started. and we’re rotating into longer duration bonds in our mutual funds“
We tend to value doers over talkers. So with kudos to Mr. Gayed, here is what he said this Friday to Maria Bartiromo- basically he prefers bonds to stocks:
- “very near term into these new all-time highs, financials are underperforming the S&P. Bonds relative to stocks are basing. They’ve performed roughly in line with each other since late July”
- “I hear people talk about further gains … almost like it’s to the point where there is career risk if you’re not in U.S. stocks. the last time we had that sentiment was in ’99 and ’87 before that. On top of that you see defensive sectors starting to lead. the biggest thing the stock market has to be concerned about is repricing of reflation.”
- “there is no inflation in the system. the inflation expectations have been factually dropping all year. bond yields are starting to realize that, apologizing to bond yields. and I think the bond market is starting to say the Fed is not effective as forcing reflation of the system. At some point the stock market has to come to terms with that.”
2.2 A man who is on a winning streak is Paul Richards of UBS. He told Scott Wapner of CNBC FM-1/2 that he likes bonds:
- “I’m bullish on bonds because I think the Fed is on hold, at least until March. They looked particularly good in the September quarter after seeing the employment data today, and I am particularly concerned about Washington in January and February. The more I think about Washington, Scott, the more I think October was potentially the dress rehearsal. and I think risk aversion could be the name of the game into the new year. I’m very concerned.”
2.3 But David Rosenberg is not bullish about the bond market (see clip 2 below)
- “we’re finding that there’s increasingly less value in the bond market, even the high-yield market, which was acting as a very nice surrogate for equities for so long. and so, your choices in fixed income are becoming more limited. cash is earning you a negative real return, year in, year out“
The fall in both long & short rates have benefited muni closed end funds. The three funds below, from BlackRock, Nuveen & Pimco, still have 6% plus triple tax exempt yields but their discounts to NAV have narrowed. The rally has been nice but see how far they have to go to get to May 1 levels.
.
3. U.S. Equities
3.1 Ralph Acampora on rest of year and 2014 (see clip 1 below):
- “all the technology stocks and all the secondaries, on a very short term basis, they are on a spike, very sharp spike and they need to correct… but longer term I think this market is going a lot higher… year end target – I think somewhere between 16500 & 17000 … I don’t see any evidence, any negative divergences that really warn me that there is a bigger problem near term”
- “2014, we are going to be facing very extended prices charts, market will be very overbought, and fundamentals will come into play. I think that’s the combination that will set us up for the decline.“
3.2 Craig Johnson of Piper Jaffray was bullish on Wednesday on CNBC FM with 1,850 as year-end S&P target & 2,000 for 2014:
- “four set backs in the market. we had concerns about a war in the middle east. we have had concerns about potential deficit and a budget deficit issue in the u.s. we have had a rapid rising interest rate, all of which the market has been able to overcome and set a new high. in any given year in the past that wouldn’t have been the case. when you think back to history an
d what history is telling us, when stocks rise in the face of bad news, that’s very bullish. and the market is sending a very clear message” - “looking at a ratio of gold versus the S&P 500. when we go back and look at that chart it’s done a really good job historically, signally major turning points in the market, which is very important for traders to recognize whether we’re trading at an uptrend or a longer trending market. that ratio has recently violated the support line that had been in tact since about the 2,000 time frame which means bottom line, equities are now outperforming gold. I think it is a pretty important message”
- “November, December, they are typically strong. but when you get a very strong September like we just saw this year, greater than a 3% return and we have only seen 20 of those post to 1926 that you set yourself up for a strong Q4, strong push into year end and I think our 1850 number is pretty achievable based on what history is telling us and the stocks are telling us”
- “when you go back and look at the longer term trends we have seen very strong pushes up in the marketplace. we can — as we get into 2014, I don’t think that this pace of acceleration is going to continue. I do think we can hit 2,000 on the S&P 500 next year. but with the rapid advance we have seen this year it may do some backing and filling in 2014 but still, 2000 is achievable”.
3.3 Lawrence McMillan in his Friday summary:
- “From mid-morning just two weeks ago (October 9th) through Tuesday’s close, the Standard & Poors 500 Index ($SPX) rose 115 points. That is impressive, but the advance has been so swift that it has created a number of overbought conditions that are on the brink of becoming sell signals. $SPX has support at 1730 and 1700.”
- “In summary, the indicators are bullish for the intermediate term, but the overbought condition of the market indicators means that another short-lived pullback is likely.”
3.4 Paul Richards of UBS is not bullish as he told his favorite anchor, Scott “Judge” Wapner on Tuesday:
- ” I think
the resolution that we all greeted so happily a week ago is really
insubstantial. We’ve got the same people debating the same issues and
going back to the same parties and talking about the same problems. What
is really going to change between now and the December 13 budget
deadline? If they can get us the budget by December 13th, I’m fine on
risk. I think this recurrent risk momentum, that is fueled by interest rates and secondly by, frankly, relief over Washington, maybe has three to four weeks to go in it.
But come Thanksgiving, we need to be extremely careful as illiquid
year-end markets coupled with that December 13th deadline could really
upset things“
3.5 Tobias Levkovich of Citi expects a 100-point drop in the S&P between now and year-end as he said on CNBC FM on Thursday:
- “I sound like a terrible bear and I have 1900 target for year end 2014. I do think markets are going up. This is more tactical than anything else. Sounds like a terribly short period of time, two months. but we just put on 100 points in 7 trading days; so we have 45 trading days till year end.”
- “Citi Economic Surprise Index, I don’t care if you look at the G-10, the U.S., Japan, they are all rolling over. They are sending the wrong signal for markets. Too many people watch these for trading purposes. I think 2014 earnings estimates are too high, bottoms up analysts suggesting 11-12% earnings growth; we think it is more in the 6% area.”
3.6 Michael Hartnett of BAC-Merrill Lynch on Thursday, October 24
- SPX 2014 by 2014? – “Fed goes AWOL…investors go All-In. Big, frothy inflows to stocks, European equities (record inflows), high-yield bonds and floating-rate notes.”
- “BofAML Bull & Bear Index rises to 7.0, i.e. closing in on 8.0, the “greed” threshold and “sell” signal for risk assets .”
- “Since June $83bn into equity funds versus $80bn out of bond funds; investors beginning to worry about a repeat of Q4’99 when the Fed left the liquidity gates wide open because of “Y2K” fears with tech bubble outcome”
4. Gold
Last week, Art Cashin said about Gold:
- “My colleague Paul Richards points out that the last time they raised the debt ceiling, Gold rallied 17% in following 15 days”
Kudos to both Art Cashin & Paul Richards. Gold rallied 2.7% this week while GDX, the mining ETF, rallied 7.8%. Silver rallied by 2.9%. This action had year-long bears on Gold (kudos to them for being so right for so long) began making nice to Gold, at least via tweets. Is that a contrary signal?
Not according to Brent Johnson of Santiago Capital who gushed on CNBC Futures Now:
- “I do think the correction in gold is largely over, … I expect gold to go much higher even toward the end of the year, and on into next year. It wouldn’t surprise me to be back at $1,500 or $1,550 by the end of the year“
- Johnson does note that sentiment around gold is “really low.” The latest example of that came on Oct. 8, when the head of commodities research at Goldman Sachs, Jeffrey Currie, said that gold would become a “slam dunk sell” after the government shutdown ended and the debt ceiling debate was settled
- A number of different firms around the world are saying ‘Sell gold,’ that it’s a ‘slam dunk sell,’ so there’s still a lot of negative sentiment out there,” Johnson said. “And there are a lot of shorts out there…..You can get a bit of a pop, and all of the sudden those shorts start to cover, people start to realize that QE is here to stay and not going anywhere, and things can change very quickly, … I mean, gold can go up just as quickly as it came down There’s a very high correlation between the monetary base, the national debt and gold,” Johnson said. “For the long-term picture, that’s the main driver” of gold“
Featured Videoclips:
- Ralph Acampora on CNBC Futures Now on Tuesday, October 22
- David Rosenberg on CNBC FM Half Time on Tuesday, October 22
- Mark Spitznagel on CNBC Closing Bell on Wednesday, October 23
1. Ralph Acampora on CNBC Futures Now – Tuesday, October 22
- If you look at the averages like the S&P and the Dow, the S&P was making higher highs & higher lows since May and the Dow has not been able to do that; it is in a trading range – 14600 at low and right now 15440 near the high.. what was concerning me was the poor performance of some of the major Dow components, but in the last month or so that has completely changed.. I am noticing all time new highs in American Express,Disney & you are starting to see even American Telephone turn and Intel is starting to improve. So better than half of the components in the Dow are going to help the Dow break out to a all-time new high and play a game of catch up..
- In the meantime, all the technology stocks and all the secondaries, on a very short term basis, they are on a spike, very sharp spike and they need to correct… but longer term I think this market is going a lot higher… year end target – I think somewhere between 16500 & 17000;
- I don’ say the market is top heavy but you are starting to profile … you look at some of these graphs, you get a nosebleed, so high so fast that doesn’t make them bad near term, it means, may be, they correct near term … but I don’t see any evidence, any negative divergences that really warn me that there is a bigger problem near term
- however next year is a 4-year cycle low – 2014 is a year that we should have some kind of a decline; I don’t think it will be as big as everybody is talking about but it is out there
- assuming that I am right and we get a little bit of a correction and we go higher, again it is across the board with all time new highs in Russell averages, S&P and Dow, everybody is euphoric..if that happens and if we go into the new year, 2014, we are going to be facing very extended prices charts, market will be very overbought, and fundamentals will come into play. I think that’s the combination that will set us up for the decline.
2. David Rosenberg on CNBC FM -1/2 – Tuesday, October 22
Near the end of the interview, David Rosenberg said, as we recall, that the equity market is fully priced here. He added that a large part of this year’s return has c
ome from PE expansion and future returns will have to come from earnings growth. But we cannot find these comments in the videoclip on CNBC.com.
- I would say at our firm, we’re not buying the overall market. we’re buying certain slices that we like. so I would say that right now our asset mix would have us just over 50% in terms of a weighting towards equities. you know, when you talk about more positive, you know, one point, say, 18 months ago, the asset mix balance in favor of equities was quite a bit lower.
- we’re finding that there’s increasingly less value in the bond market, even the high-yield market, which was acting as a very nice surrogate for equities for so long. and so, your choices in fixed income are becoming more limited. cash is earning you a negative real return, year in, year out.
- there are some opportunities in the stock market. I can understand there are lean picking, but within the industrials group, the technology group, large-cap exporter, considering you are getting better growth overseas, despite the problems at home, there are still opportunities.
- it’s really understanding we passed an important litmus test for the U.S. economy. We had arguably the third most stringent year in terms of fiscal restraint on record, and we survived. it’s not a strong year for the economy. I was much more bearish on the economy. I thought it would be a more struggle this year, despite the fact that growth is slow. I thought it would be slower than it was. I think actually, despite the negativity out there, we actually passed some very important hurdles. hopefully, we’ll get this political hurdle early next year. but the underlying momentum in the private sector, I would submit, is probably better than i thought it was 12 months ago.
- have we been raising our equities weightings given the sense that the risk for a recession is coming down? The answer is yes
3. Mark Spitznagel of Universa on CNBC Closing Bell – Wednesday, October 23
This is clearly a fat tail risk type of view. But that doesn’t mean it is improbable or it is wise to ignore it.
- this is a very distorted market today, visible in a number of indicators. but it’s a market that’s sort of set up, I think, for a major crash, a major selloff. And, you know, it’s a period we have been been in a number of other times. I would argue all the major tops we’ve seen in the market over the last 100 years look very much like it does today. My argument, this is very much a fed-induced distortion.
Bartiromo – so, what’s the catalyst, then, to trigger this 40% crash in stock prices? We all know that this market has been goosed by the Fed. But now a lot of people are saying, tapering is off the table in 2013, off the table possibly for much of 2014. What’s the catalyst to actually send stocks lower in the face of the fed with this stimulus?
- I don’t think it matters what the catalyst is. The whole notion of catalyst in many ways sort of hides what’s really going on. whatever would drive the market down would say it’s this debt ceiling issue or anything else. These are proximate causes of crashes as opposed to ultimate cause of crashes. The ultimate cause is distorted environment we’re in. The fact that assets have been bit up to this unsustainable level based entirely on an artificial economic sort of illusion that is zero interest rate environment. So, the ultimate cause again is just the distorted setup we have in our economy today.
Bartiromo – so, from a practical standpoint, how do you invest in this market? In 2008 your funds scored returns of better than 100% as the S&P 500 lost over a third of the value during the crisis. How do you invest today?
- simple answer, mom and pop answer, I think, is just to step aside. This is sorted of a mundane response to that. But it’s impossible to do. Certainly impossible to do from a professional standpoint. the professional investors certainly more than nonprofessionals are forced to sort of make this return every quarter, every year. so they don’t have this luxury of being round-about, thinking of the positional advantage we try to gain for later. so, that’s a huge advantage that sort of mom and pop has over the professional. we can step aside. they can step aside and wait for the opportunities that are going to come. As long as you just understand the market process that’s happening here, understand the distortion. And it will allow you to step aside. Very simple advice. don’t just focus on this next slice of time. Understand all the other slices of time to come and prepare for other slices of time to come.
Bartiromo – when you say step aside, raise cash, do nothing, keep your money invested in the market?
- the hardest thing to do right now, what makes you look like a fool is sit and earn zero. I would argue it’s the best investment to sit earning zero. Again, this is the idea of not focusing on making immediate returns, these decisive returns every period but thinking about so that dry powder to have when great investment opportunities come. This is round-about investing, as I call it.
Bartiromo – do have you a time frame on this selloff? you’re expecting the market to fall 40% near-term, long-term, what’s your time frame?
- I think it’s probably naive to think we can pinpoint such a thing. If history is any guide, we should expect it sooner than later. You know, I think a year or so is a good guide. But, history need not be a good guide because we’re in this monetary experiment, the likes of which we really haven’t seen
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