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. Forget U, Chairman Bernanke?
This could be the real message of this week in a number of ways.
- First the Treasury market went “hot” with 10-year yields breaking out of the old range to a new ytd high on Thursday and again on Friday. This wiped out Bernanke’s dovish FOMC statement on July 30 and all the dovish cooing from his colleagues this week. So strong data means the Bond market will taper for Bernanke even if he doesn’t. So Forget U, Mr. Chairman.
- His needless taper talk in May-June has already led to massive selling by two of the largest buyers of Treasuries, China & Japan. Thursday’s TIC data showed $40 billion were sold by China & Japan in June. And these buyers are not coming back, not until they know all about about Bernanke’s taper and more importantly, his successor’s taper. So they are also saying, Forget U, Chairman Bernanke.
- That leads to the point that drove the ugly sell-off on Friday afternoon. As Steve Grasso of CNBC Fast Money said on Friday “today was about Summers versus Yellen. … If you look at Summers what people are worried about. is there going to be a guy who didn’t have anything to do with this jumping in”. In other words, Forget U, really Forget U, Dr. Bernanke.
In our humble opinion, Bernanke and the rest of FOMC are appalled, simply aghast, at what they are seeing in the Treasury market. Their dovish cooings are meant to tell the interest rate markets to cool down and ideally go down in yield. They simply do not understand, we think, why the market totally ignores what they are trying to say. They see that treausry yields don’t go down much or at all when Philly Fed, Macy’s & WalMart etc. disappoint but yields spike hard with strong data like jobless claims and retail sales. The bond market is convinced that the economy is strong & getting stronger and so a dovish Bernanke is interpreted as simply postponing the inevitable. And that is an awful prospect because, according to the Bond Market, Summers is likely to be far more aggressive than Bernanke has been or Yellen will be.
This is how simple minds like ours work. And that is why we had appealed to Chairman Bernanke on July 13 to begin his taper in the July 30 FOMC meeting. Had he done that, he would have provided some direction & certainty to bond markets. And he would have avoided losing control of the yield curve as he obviously has.
Just think of the mess Chairman Bernanke has created – the 10-year yield has risen from 1.64% on May 1 to 2.83% on Friday, August 16 – an increase of 73%. In contrast, the trough to peak rise in 10-year yield in 1994 was 40%. And that was after a series of rate increases by Greenspan. Here Bernanke hasn’t done a single thing and still created the largest % rise in 10-year yields in recent history. And aggressive Larry Summers is next at bat. No wonder the bond market is spooked.
What the bond market needs now is a clear announcement of a definitive tapering program and clarity on who the next Fed Chairman will be. Until then, we think, the bond market will continue to act ugly and mean. In technicalese, the bond market broke out of a triangle formation this week according to MacNeil Curry of BAC-Merrill Lynch. As he put it on CNBC Futures Now on Thursday:
- “triangle formation like a coiled spring … when you break out of it, you tend to sell-off strongly, trend strongly and with that you should see volatility in Fixed income markets start to pop higher… next couple of weeks yields are going higher to 2.95% -3.05% area“.
Remember what Louise Yamada said last week:
- If you go to 2.71%, all bets are off — we see 3%, ultimately 3.50%.
What Bernanke needs now is a really weak payroll number in the first week of September and some really smart talk next week from Jackson Hole. That is assuming he wants interest rates to remain low, as so many experts told us over the past two weeks.
2. Consequences of Further Easing?
CNBC’s Steve Liesman told us this week that the Fed has given up on their quixotic attempt to convince the markets that tapering is not tightening. That leads us to the next question – If Bernanke doesn’t taper to match the reduction in treasury issuance, then should that be regarded as further easing? David Rosenberg answered that question definitely on Friday on CNBC Closing Bell:
- “when you take a look at the new supply of treasuries coming on stream, because the fiscal deficit in the near term is coming down much more dramatically than expected, so when you look at the flow of bonds coming on the market, 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”
In other words, Rosenberg says Not Tapering is Easing. We concur. And that, via simple arithmetic, settles a basic argument of old, old meaning pre-deficit reduction period in May-July:
- Per Rosenberg, (-Tapering) = Easing. So by elementary Artithmetic, you get (-(-tapering)) = (- easing) Or tapering = tightening. QED, we think.
But what happens if Chairman Bernanke eases further (or doesn’t taper) in September? Paul Richards of UBS answered on Friday on CNBC FM-1/2:
- Imagine what the stock market will do 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.
As we recall, Nasdaq 100 rallied 10% in the 4th quarter of 1999. That brings us to what David Tepper said on May 14:
- “so if we don’t taper back we will get into this hyper dri
ve market … you are back, I think, in the last half of 1999“
Had Chairman Bernanke listened to David Tepper and began a taper in June 2013, the Fed would not be in the mess it is in today.
3. American Consumer in a Witness Protection Program?
The bond market may not care about the weak data of this week. But the data did bother a long term equity bull. Read what Jim Cramer said to his Mad Money viewers on Wednesday:
- “we cannot afford to lose the consumer; we just can’t; or we will have more days like today.. when Macy’s disappoints we have to be concerned because Macy’s is a national barometer of the consumer. You simply cant be as bullish as you were before you heard this news..the news should make you more cautious..until we get some better macro & corporate numbers or we get lower stock prices… lets face we are going to get one or the other; perhaps you should prepare for both..“
The title of this section comes from Art Cashin’s comments on Thursday on CNBC SOTS:
- “hopefully we’re not going to repeat what we did the last time we broke the 50-day moving average in the Dow. that was, I think, a 350-point down day.”
- “it looks like the American consumer is in the witness protection program. Nobody can find them“
- “well, I would recommend a little caution here, and that is because some of the various valuations that I have seen over the decades are all at cautionary signs. The yield of the stock market versus the bond market has a pretty big disparity.”
Macy’s & WalMart are national indicators of employment and income as Jim Cramer and Art Cashin said. The Philly & Empire manufacturing numbers were bad as well. Homebuilding stocks are a telltale sign of a weakening housing market. But the bond market doesn’t believe or care as we saw this week. Because the employment related numbers keep coming in strong.
This is the crucial Economy vs. Economy question that brighter people than us have wondered about all year. Well, they can get their answer here from ex-BAC guru David Goldman via CNBC’s Kudlow Report of Thursday (see clip 1 below):
- “I don’t
think rates are the problem at all. The problem is that we’re getting
the wrong signal from the unemployment claims. We have a part-time
employment recovery with about a million part-time jobs created this
year, according to the household survey, and barely 170,000 full-time
jobs. So what Obama care and the weak economy have done is shift
employment into bottom of the barrel low wage part-time employment so
the claims are low because there are tons of part-time jobs out there
… - “that’s why Walmart and Macy’s are showing such rotten results. The
consumer’s very weak even though we are seeing a lot of employment
because it’s extremely low grade employment. You can’t have a consumer
boom without Macy’s and Walmart participating. You can’t have a capital
spending improvement without Cisco improving. We still have an extremely
weak economy, very poor revenues in the S & P, very weak profit
growth …
With this explanation, David Goldman must think bonds are a buy here. Yes, as he added on Thursday:
- “I think that bonds
are a good buy at these yields. I think we’ve got a 1% to 1.5% real
economic growth environment, 1% inflation, so 2.5% is a pretty good
yield for the ten year.”
If this is so simple, then why is the Bond market so petrified? Frankly because the communication mess Bernanke has created since May 22, 2013 and since his comment in his June FOMC press conference. And because of non-negative comments from non-bears like rosier David Rosenberg who said on Friday on CNBC Closing Bell:
- “So let’s take a broader-turn perspective, and even though bond yields have ratcheted up, I think 2.85% on a 10-year note, I don’t think will bring the economy to its knees.”
And until the economy is visibly brought to its knees, the bond market will keep asking for clarity on taper and the end of QE.
4. U.S. Bond market
This was a hot and ugly week for Treasuries. Rates went up a bit on Monday, exploded up on Tuesday, backed up a bit on Wednesday, went hot on Thursday and rose in an ugly sell off on Friday afternoon. The 30-year Treasury yield rose by 22bps from 3.63% to 3.85%; the 10-year yield rose by 25 bps from 2.58% to 2.83% decisively breaking out of the old range bounded 2.74%. The 5-year yield, the yield most sensitive to Fed tightening rose by 21bps from 1.36% to 1.57%, a huge move and a direct rejection of dovish commentary from Fed heads.
Rick Santelli explained the importance of going “hot” on Thursday on CNBC Closing Bell:
- We call it the
Treasury market went hot – means it’s in new territory. It’s carving out
new range. … when
markets go hot, it’s so hugely significant. They’re proactive, interest
rates are moving the momentum gauge again into positive territory. - Maybe
the most important, yet under-reported bit of data today was Treasury
International Capital flows. The biggest monthly drop since 2007, we’ll
call it six years, close to 67 billion and China and Japan both
liquidated securities to the tune of 43 billion. I think that’s
important.
Larry McDonald of NewEdge added more color to these two points on the Kudlow Report later on Thursday (see clip 1 below):
- “… after a month and a half of dovish comment after dovish comment
from the Fed – and Mr. Bullard came out today and he was dovish. So
after all that dovishness, they’re losing control of the yield curve.
The ten year treasury broke out of a critical range today. We were going
between 2.45% up to 2.73% for the last month and a half, two months. We
broke out of that range today and I think it’s because foreign buyers
for the first time, really there’s a buyer’s strike. There was a $40
billion reduction in demand of treasuries in the most recent data that
came out this morning from Chinese and Japanese buyers. So the
foreigners around the world are not buying as many Treasuries. That
scared the market today as well“
So, China and Japan, two of the three largest buyers of Treasuries, are on buyer’s strike. When the last remaining large buyer, the Fed, stops buying, who would be left to buy Treasuries? Where should Treasuries trade then and at what yield would non-Fed buyers come in? Since the Fed doesn’t tell us about the end of QE and because President Obama doesn’t tell us who will succeed Bernanke, the bond market is trying to price in, by itself, both the end of QE and the next Fed chairman. That’s why it is acting so ornery.
5. U.S. Stock Market
This was a week when every body we heard was cautious at least in the near term. Action in the market, the seasonality, the weakness from Macy’s, Walmart & Cisco, and the Fed uncertainty all seemed to weigh on people simultaneously.
Ralph Acampora, the most fervent of bulls, went really cautious this week, first with his tweets and then in his summary on Friday on CNBC Closing Bell:
- “there’s an old adage on wall street, when good news can’t take the stock market up, that’s bad news. and the last couple of weeks, we’ve been hit with good news coming out of China, coming out Euro zone, and we faltered. That bothers me”
- “so what I did is I took a good look inside the Dow Jones Industrials Average. I studied the 30 components and there are some stocks in that look awfully heavy. When I say heavy, it’s not two weeks of churning. It’s three or four months of churning. And that concerns me – Home Depot, Coca-Cola, IBM, Travelers, Walmart, Disney. You have to be careful.
- ” … by the way, in that same study, I took the downside risks for all 30 Dow stocks. I didn’t make this number up, but it came out this way. It came out to 13,333. That’s about 15% from the top to the bottom. I tell my friends who have participated in those stocks and have done very well, I think a prudent bull should take a little profit. we can reinvest that later. that’s my stance”
- “… I couldn’t be very precise, but I think the next two months we’ll have choppiness to a downward market. When I really feel comfortable, and I think that’ll probably be in October sometime, I think we can have a very strong year end rally and maybe new highs“
Jack Bouroudjian, Acampora’s interview-mate on Friday, was a little more bullish, seeking only a 10% correction:
- “we hit an inflection note a couple of weeks ago. … we’ve seen the top-line revenue growth start to contract and worse yet, something that is a warning signal for me, the notional value of the entire stock market has surpassed that of GDP. … it’s a bit of a warning signal, and you throw in the calendar and the fact we have a lot of capitulation that took place, all lead to what I think will be the beginning of the 10% correction. We’re starting to see it.”
- if there’s ever a time to have 100% protection on your portfolio, these next couple of months are it. You know, one other thing I want to throw in as a black swan event is changing of the guard at the big chair and the federal reserve. Two times in my investing life we saw that happen, and it was followed by a big break in the market.
Jeffrey Saut of Raymond James was a little more bullish looking for a smaller correction on CNBC Closing Bell on Thursday:
- “I think the odds we’re in a new secular bull market remains high. … I have been targeting mid-july, mid-august as the first window of a decent or meaningful decline of the year. I don’t think it’s over with yet. i think we’re going lower. … I think you’re going to go down and break with the 1,600 and probably test the June 24 lows and somewhere down there it should be bought
On Friday on CNBC Fast Money, Marc Faber added a few more details to his 20% decline call from last week:
- “… although the indices are only down 3%, home builders are down something like 25%. retail has sold off, airlines have collapsed and just today and yesterday, food companies were rather week. So, it’s interesting, the S & P is down 3% from 1,709. and yesterday, we had over 400 new 12-month lows on the NYSE. That is remarkable. That shows that the internal picture of the market is very different than what the indices showed. The indices, Nasdaq, S & P, Dow, are driven by just a few stocks that are very strong… they are in bubble territory”
On Thursday, Dennis Gartman in an act of honesty and courage, admitted his trading error to CNBC’s Maria Bartiromo:
- “If a market moves and gets me by 2.5 or 3 percent, that to me is an egregious move. It tells me that I’m wrong; The market is telling me that I’m wrong. I’m going to the sidelines…”
Lawrence McMillan also went negative this week in his Friday commentary:
- “The Standard & Poors 500 Index ($SPX) broke down below the important support level of 1670-1680 today and, in doing so, unleashed a torrent of sell signals. The picture has changed to intermediate-term negative.
- “In summary, the situation is now intermediate-term bearish with most indicators having moved to sell signals.”
Readers who like to look at valuation should read Mark Hulbert’s MarketWatch article titled Stocks as Overvalued now as at 2007 High.
6. Gold
There was a spectacular spike in Gold on Thursday around mid day. Gold essentially went vertical stampeding over stops at $1,350. Rick Santelli saw it as the typical action of someone large getting out in a hurry. How much of a hurry? Gold spiked up $30 in 25 minutes according to CNBC.
MacNeil Curry of BAC-Merrill Lynch
said on Thursday on CNBC FuturesNow that he was looking for a move in Gold to $1,410, possibly to $1,450 area. He gave three reasons for his call:
- Downtrend in Gold was overstretched
- Precious metals are confirming gold bounce
- Unwinding of gold positions has subsided
For a more detailed discussion, read the CNBC.com article BofA’s three reasons why the gold spike will continue.
Larry McDonald of NewEdge disagrees in the short term but provided a very interesting case for Gold going up (see clip 1 below):
- “I have been very vocal late June, I was a screaming bull on gold. … I called buying gold very publicly. I sold two-thirds of my position. I think over the long haul it’s moving higher. The very short haul, I think gold is done.”
- “we have a moment in financial history they will talk about in 25 years and it’s all happening in Japan. The government is backing away from a tax increase that’s been talked about for the last couple months. It goes into effect very soon. It’s a massive consumption tax. Essentially what it means to the viewers watching us is it’s a classic all-in Krugman like Keynesian move where the Government of Japan will take the Debt to GDP, up to 260%, not raise the taxes, extremely inflationary, and they’re trying to grow their way out of this. Let’s make clear to everybody, they want inflation desperately. They have suffered with deflation or disinflation for 20 years and it’s been terrible for their economy.
- you have this printing press that’s been going on over in Japan and it’s colossal. They are doing $70 billion a month in an economy that’s smaller than ours. They are doing all this printing but on the fiscal side, everyone is worried about this tax increase because the tax increases over the year in japan have been horrifically deflationary. If they don’t do that, that moves in the opposite direction. It’s a major, major move for gold“
His interview-mate, David Goldman, gave a different reason and also discussed China & copper.
- “… the giant sucking sound you hear is the disappearance of American political influence in the middle east. anything that’s bad for American political influence is bad for the dollar’s reserve status”
- “other metals besides gold, there is a huge turnaround in Chinese demand for iron ore, copper and other metals. China has surprised massively on the upside. Last week when we got the import numbers, their iron ore imports were up nearly 20% year on year and there’s a big surge in copper demand as well. So the fact that China, which is the world’s biggest metals consumer, has surprised on the upside is pushing the base metals.
- “… the dollars reserve status has always been linked to America’s global prowess and strategic influence. if we lose that influence the likelihood that eventually the dollar will lose reserve status increases and gold is an insurance policy against that eventuality. ”
Featured Videoclips:
- David Goldman, Larry McDonald & Alec Young on CNBC Kudlow Report on Thursday, August 15
1. Bonds are a buy here – David Goldman, Larry McDonald & Alec Young on CNBC Kudlow Report Thursday, August 15
CNBC’s Michelle Caruso Cabrera (MCC) was the guest host on Thursday. Kudos to her for asking the right questions and conducting a fast, informative interview with three guests. Larry McDonald is a senior VP at NewEdge, David Goldman, former head of fixed income strategy at BAC, is now president of Macro Strategy and Alec Young is VP at S&P Capital IQ.
- MCC – here’s what I don’t understand. We got the weekly unemployment claims, people filing for jobless claims for the first time, lowest level we’ve seen in years. At the same time, we have heard from all these retailers that things aren’t very good. What is the story?
- Young – I think we’re back into a situation where good news is bad news from a taper perspective. The other thing that I think has investors worried is as the data’s come in, it hasn’t been great but it hasn’t been weak enough to get bond traders to back off the idea of the September taper. So they’re taking the ten-year yield through the roof and the stock market’s worried that the higher rates are going to kind of break the back of this recovery and hurt the earnings recovery,
- MCC – sounds like a very bad combination. so corporate profits not getting any better, yet the economic data is not bad enough so that way interest rates are going to keep rising because the Fed is going to pull back. That’s a bad combination.
- Young – I’m thinking it comes down to the fact the market’s worried that higher interest rates are going to kill what’s still a fairly fragile recovery. and the reason that would be bad is because it would hurt corporate profits, then you have walmart and cisco, two bellwethers, you throw it all together and it’s not a good day.
- MCC – David, are interest rates going to break the back of the recovery? considering today they hit the highest level in two years.
- Goldman – I don’t think rates are the problem at all. The problem is that we’re getting the wrong signal from the unemployment claims. We have a part-time employment recovery with about a million part-time jobs created this year, according to the household survey, and barely 170,000 full-time jobs. So what Obama care and the weak economy have done is shift employment into bottom of the barrel low wage part-time employment so the claims are low because there are tons of part-time jobs out there … because the world has changed around us, thanks to the Obama administration and other structural weaknesses.
- Goldman – that’s why Walmart and Macy’s are sh
owing such rotten results. The consumer’s very weak even though we are seeing a lot of employment because it’s extremely low grade employment. You can’t have a consumer boom without Macy’s and Walmart participating. You can’t have a capital spending improvement without cisco improving. We still have an extremely weak economy, very poor revenues in the s & p, very weak profit growth - MCC – why is the Fed talking about taking their foot off the pedal?
- Goldman – as Greenspan said, you have to taper at some point, whether or not the economy is strong or not. You can’t keep up this bond buying program forever so you might as well start tapering now. Like somebody said during the Vietnam war, they’re going to declare victory and go home.
- MCC – Larry, your assessment of the market today?
- McDonald – biggest concern today is after a month and a half of dovish comment after dovish comment after Fed and Mr. bullard came out today and he was dovish. So after all that dovishness, they’re losing control of the yield curve. The ten year treasury broke out of a critical range today. We were going between 2.45% up to 2.73% for the last month and a half, two months. we broke out of that range today and I think it’s because foreign buyers for the first time, really there’s a buyer’s strike. There was a $40 billion reduction in demand of treasuries in the most recent data that came out this morning from Chinese and Japanese buyers. So the foreigners around the world are not buying as many treasuries. that scared the market today as well.
- McDonald – that’s why if you look at the home builders, the home builders that focus on first time home buyers have massively outperformed kind of the longer term kind of sector home builders. in other words, different sectors are massively starting to under-perform the market relative to this rise in rates.
- Goldman – I think that bonds are a good buy at these yields. I think we’ve got a 1% to 1.5% real economic growth environment, 1% inflation, so 2.5% is a pretty good yield for the ten year.
- MCC – so if you think that these are a good buy at these levels, that means you don’t think yields go higher. you don’t wait to get even more interest.
- Goldman – I’m not worried about bond yield at this point. The economy is much weaker than people thought.
- Young – I don’t disagree with you that we’re getting near a good buying opportunity on long term bonds. but I don’t think it’s quite yet. I think we could be at 3% or 3.25% within 30 days.
- Goldman – we have a five dip, six dip move- basis points for the novice. which is a relatively small move. we had a big rise, it came down a bit. the decisive news today was lousy reports from Walmart on top of Macy’s yesterday and Cisco. I think that the expectations built into soft prices that a second half recovery and profits have been deflated and people are looking at flat profits and maybe sagging revenues as far as the eye can see which makes the stock market expensive. I think it keeps going down from here.
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