Interesting Videoclips of the Week (August 20 – August 24, 2012)

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 & Draghi

This week proved again that right now the investing game is of the central bankers and by the central bankers. Not all central bankers, just the only two that matter, Bernanke & Draghi. This week, Bernanke took the front while Draghi laid low. And Bernanke again showed he understands stock trading.

On Friday around 11 am, Bernanke’s letter to Congressman Issa became public. The letter simply said that there is scope for the Fed to do more. Just before that, a story crossed the tape about ECB contemplating yield levels for bonds of peripheral Europe. These two came across when the stock market was weakening Friday morning after a 4-day losing streak. The magic worked and the Dow closed up 100 points on Friday.

The real story of the week was the release of the Fed minutes on Wednesday. Who needs BTV or CNBC these days when we have Twitter? Bill Gross told the world what he thought with his tweet:

• Gross: #Fed minutes make #QE3 and extended period language an 80% probability. Front-end curve friendly.

2. QE3 – Guru views

Bill Gross may be the Bond King but he is not the acting Fed Chairman, not by a long shot. So what did the acting Fed chairman say about what Bernanke will do? Of course, we mean Jon Hilsenrath of  WSJ. He appeared on CNBC Money in Motion on Friday to say:

• Hilsenrath – He has said it before, but the fact that he is saying it again is a reaffirmation that this is on the table…. In my mind, the most important information we got this week was the minutes which suggested they have set a very high bar to not acting, for inaction. In other words, they have got to see some really strong burst of growth to be dissuaded from doing anything.

Hilsenrath said that Bernanke will make his closing arguments for the decision next week at Jackson Hole. Then in response to a question from Andy Busch about what Bernanke will do, Hilsenrath answered:

• There is a debate going on there right now about whether they should do some kind of open-ended program where they leave open the possibility of doing more. more and more down the road or whether they do something closed. That’s the important debate right now.
  
• If they are going to do QE and they have sent a lot of signals suggesting they are, do they announce some program like they did in November 2010, where they say 600 billion and then we are done in 9 months or whether they announce some number and say we might keep going if the economy doesn’t pick up. That’s really what the debate is about.
  
• Certainly, the doves, the activists at the Fed want to do something very big. These are people who include Janet Yellen, Bill Dudley, Eric Rosengren. These are people who have a lot of intellectual capital at the Fed.

Remember what Bill Gross said on April 4, 2012 (see clip 1 of Videoclips of April 2 – April 4, 2012) ? He called Bernanke the “King“, Janet Yellen the “Queen” and Bill Dudley the “Castle“. The rest, just “ordinary knights”  don’t matter is what Bill Gross told us then. Here Jon Hilsenrath told us just that. This is why we chose to not feature the comments from James Bullard of the St..Louis Fed who told CNBC Squawk Box that the US economy did not justify “gigantic action” from the Federal Reserve. 

Then, in response to another question, Hilsenrath said:

• Hilsenrath – “The two top items on their agenda are forward guidance, saying they won’t raise rates till 2014 – that probably goes out to 2015 and then going on another bond buying program.”

What should investors do? Bill Gross said the following to viewers of CNBC Closing Bell on Thursday afternoon:

• Gross – “Never to fight the Fed but to be very afraid in terms of the negative consequences of those policies. and I think ultimately, 6-12-18 months down the road we may begin to see those negatives. I think if the Fed follows through here in the next few weeks, you want to buy what the Fed is going to buy. You want to buy what the Fed is going to affect and so in the Treasury market, you want to buy TIPS as opposed to nominal Treasuries, basically you want inflation protection. You also want mortgages because presumably and I think, almost definitely, the Fed is going to be using mortgages in terms of the QE3 program. So TIPS and mortgages are the beneficiaries of these policies.”

Bill Gross may be the Bond King but, as a prince showed this week in Las Vegas, royals can be guilty of wrong judgement. Mr. Gross has been wrong in 2011 and in 2012 about long-term Treasuries. In contrast, Gary Shilling has been superbly accurate. And what does Dr. Shilling like this week (see clip 1 below)?

• Shilling – “I still like 30-Year Treasuries. I think
  they are going to 2% yield. They are now 2.7%. If they go there from
  here, you will probably make on a coupon bond about 15% with 2 coupons
  and 20% on the zero-coupon.”

Dr. Shilling is concerned about deflation setting in the US economy. Peter Fisher, Head of Fixed Income at BlackRock, concurs as he told CNBC’s Larry Kudlow on Monday (see clip 2 below)  :

• Fisher – “I think it runs the risk of driving us into liquidity trap….I‘m not nervous about inflation in the short run. I am much more nervous about the deflation when I see the Chinese currency start to turn the other way. That’s a big sign for me.”

The weakness in the Chinese Yuan is also a key sign for Jim Rickards who spoke with BTV’s Deidre Bolton on Monday (see clip 3 below):

• Rickards – “I think the weakness in Yuan is another
  factor that could likely lead to some sort of QE in the September 13
  open market committee meeting. The US Dollar is getting stronger vs. the
  Yuan, That is the last thing the Fed & the Treasury want.”

3. Gold, Oil, Israel-Iran Conflict

Gold and Silver reacted rapturously to the Fed minutes released on Wednesday.  Todd Wilson of Aspen Trading said this breakout in Gold was an entry point while Abigail Doolittle of Peaktheories argued just the opposite.

There is even more disagreement about whether Israel will attack Iranian nuclear facilities before the November elections. George Friedman of Stratfor came on CNBC Fast Money to argue that financial speculators don’t understand how the middle east works. He put the probability of an Israeli attack at only 15%.

We assume that Israeli reporters understand Benjamin Netanyahu and Ehud Barak. We remind readers about the statement made by reporter Ronen Bergman in March 2012.

• After speaking with many senior Israeli leaders and chiefs of the military and the intelligence, I have come to believe that Israel will indeed strike Iran in 2012.

This week, Alon Ben David, defense reporter at Israel’s Channel 10, said the following on CNBC Closing Bell:

• “the prime minister appears extremely determined to launch a strike on Iran between now and October. According to Benjamin Netanyahu, the time to act is now. Netanyahu believes if he waits and passes the November elections, no one, including the US will do anything to stop Iran and the next time it will have the operational conditions to launch a strike again in the coming spring will be too late. Iran will have too much fissile material… Netanyahu believes that any promised made by the US President Barack Obama before the elections will not be fulfilled after. Clearly there is a very deep mistrust between those two gentlemen and Netanyahu believes that the US will be forced to stand by Israel only before the elections and that is why he and Defense Minister Barak are both advocating attack now and I have to say the whole of the Israeli military echelon as well as the intelligence community believes otherwise, believes that there is still time, time to exhaust the sanctions and not rush into a strike.”

We remind readers about the comments made by Ehud Barak to Ronen Bergman back in March 2012:

• “at the end of the day, when the military command looks up, it sees us — the minister of defense and the prime minister. When we look up, we see nothing but the sky above us.”

We recommend the article by Oren Kessler in the Foreign Policy magazine titled The Decider. The Decider is Ehud Barak. The key quote in that article comes from Efraim Halevy, the former head of Mossad and an outspoken opponent of a strike,:

• “If I were an Iranian, I would be very fearful of the next 12 weeks,”

So why does an expert like George Friedman remain skeptical?

• “Over the past few years Israel tends to ramp up rhetoric, talking about air strikes and carrying out war games at a time when there’s already pressure on Iran. The rhetoric adds to the pressure. But it doesn’t necessarily mean we’re going to see an attack.”

Dr. Friedman has forgotten more about geostrategy that we will ever know. But we still tend to lean in the direction of Ronen Bergman and Alon Ben David. Why? Two reasons:

• We remember how Mr. Netanyahu launched an attack in Gaza last November before Mr. Obama took power. Mr. Netanyahu knew his chances of getting away with that globally condemned attack were zero after Mr. Obama took office. This fall is similar and we think Mr. Netanyahu is likely to make the same bet despite the much larger military challenge and the far greater global impact.
• Secondly, we remember what Indira Gandhi did in 1971 during the Pakistani atrocities in today’s Bangladesh. She spoke up and tried to persuade world leaders for six months. Every one listened and understood the situation. But no one believed that Mrs. Gandhi would take the military steps she did. But she did when no one expected her to and when the deck was stacked against her.

We see Netanyahu-Barak in the same position today. So if we have to bet, we would bet on them launching a strike.

But is this possibility priced in the markets? Jim Rickards doesn’t think so (see clip 3 below):

• “in the event war breaks out and the
  straits of Hormuz were closed, or attacks break out in the south parts
  of Saudi Arabia, most analysts put oil at $200 a barrel, may be
  higher…its nowhere near that right now, its only less than half that;
  so clearly we are not pricing in acts of war.But the odds of that might
  be a lot higher than the market is pricing in right now. President
  Obama and the State Department are trying to talk it down. Diplomacy has
  failed up to this point. The talks are going nowhere. Israel is bearing
  with the President but they may have to strike in October, can’t rule
  that out.”

T. Boone Pickens also forecast a spike in the price of oil if Israel bombs Iran, just because they bombed Iran not because there would be a shortage of oil. But the only place he sees the spike is Brent North Sea oil, not WTI.    

We are simple folk and we first said in March 2012 that the best portfolio insurance for any conflict is to own call options on Oil and 30-Year Treasuries. We repeated that in May 2012 and we repeat that today. The only modification we make today is to overweight Oil calls towards Brent and not WTI.

4. U.S. Treasuries & U.S. Stock Market

Last week’s sell-off in U.S. Treasuries continued on Monday and on Tuesday morning. On Tuesday, the 10-year traded intra-day at 1.86% just on top of its 200-day moving average and the 30-Year yield reached 2.96%. And then it reversed on a dime. The Fed minutes added fuel to the rally on Wednesday afternoon and the 10-year closed on Wednesday at a yield of 1.70%. Interestingly, Friday’s 100 point rally in the Dow didn’t result in a sell off in either the 10-year or the 30-year. On the other hand, the 10-year yield closed the week above the technical threshold of 1.67%. 

Despite 4 negative days, the S&P held 1400. And the rally on Friday demonstrated the Bernanke Put under this market. We will refrain from adding any opinions or commentary this week because it is all up to Bernanke & Draghi who speak at Jackson Hole next week. A couple of forecasts & predictions are listed below:

• David Kostin of Goldman Sachs – S&P will end the year at 1,200.
• Jeff Saut of Raymond James (clip 5 below) – S&P will get to 1,500.
• Mary Ann Bartels of BAC-Merrill Lynch  (see clip 4 below) – 8%-10% correction in September followed by a year-end rally. 
• Brian Belski of BMO Capital Markets (see clip 5 below) – this is really the best opportunity to be in equities I have seen in my 23-year career.

5. China, Japan, Vietnam

Those who remain complacent about global growth got two shocks this week. Japan, that perennial exporting machine, showed a trade deficit and Chinese PMI again fell harder than expected.

Last week, we wrote about the Zero% China growth forecast of author Gordon Chang. The CNBC Street Signs gang scoffed at Mr. Chang and his forecast. This week, he got some support. Keith Bradsher of the New York Times wrote about the mounting piles of unsold goods in China. You read that article and you get a better feel of why China’s growth may indeed be close to zero%. You read that article and you would understand why the 30-year Treasury can get to 2% as Gary Shilling predicts. You would also understand why Chinese Millionaires are fleeing China. As CNBC’s Robert Frank said on Wednesday:

• “If you are on the Chinese rich list, you are 3 times more likely to either be investigated or wind up in jail than any other wealthy people. It’s not just economic uncertainty, it is personal security.”

Peter Navarro from UC Irvine added his view:

• “I’m from Orange country, California. we’re seeing millionaires and boat loads of cash coming in, they’re buying 40 or 50 houses at a time.”

The scale might be different but we hear of such migration stories in New York, Princeton NJ and Connecticut as well.

This week we saw the arrest of Nguyen Duc Kien, one of Vietnam’s wealthiest businessmen, an event that sunk the Vietnamese stock market. And Vietnam was a darling frontier market for EM bulls. Thomas Fuller of the New York Times wrote a detailed article this week titled In Vietnam, Growing Fears of an Economic Meltdown. In short:

• “The problem in Vietnam is a very, very toxic cocktail from the European debt crisis, the stagnation in the U.S. economy plus a very critical situation in the domestic economy,” Mr. Doanh said. “It’s a very dangerous mixture.”

To our simple minds, all this stuff simply says buy the 30-year Treasury. Because, in this world and at least for the next couple of years, we are more likely to meet Godot than see inflation. .
 

1. Gary Shilling on BTV Street Smarts on Wednesday, August 22
2. Peter Fisher on The Kudlow Report on Monday, August 20
3. Jim Rickards on BTV Money in Motion on Monday, August 20
4. Mary Ann Bartels on CNBC Fast Money on Wednesday, August 22
5. Jeff Saut and Brian Belsky on CNBC Closing Bell on Monday, August 22

1. 30-year Bond yield going to 2% – Gary Shilling on BTV Street Smarts – Wednesday, August 22

Dr. A. Gary Shilling was the guest closer on BTV Street Smarts on Wednesday. As usual, he was clear in his views and explicit in his forecast. 

Shilling on Fed, QE & Europe:

• They [the Fed] can’t [fix the economy], but they have to show they are doing something; after all, we have the election coming up, they have limited time, they probably have a one more meeting where they can do a QE3 or whatever and looks like they are leading up to it. But you are getting less and less response each time…But it is doing something,… we feel your pain.
• I think it [European GDP] could go a lot lower, I don’t have a precise targe
  t. Because Europe probably has the same depth of recession, their GDP declined about 4.5% in 2008-2009, because they have the same combination – they have a financial crisis spilled over the goods & services economy. This time, we don’t have the financial crisis, we have the weak goods & services economy, but they have got both.
• The fundamentals to me have been deteriorating on a global basis and yet the market has been, at least until yesterday,  on a risk-on trade. Yesterday’s close is very interesting. I am not really a technician but you had outside reversals in both the S&P and the 30-Year Bond – the 30-year bond to the upside, the S&P to the downside. The Fed’s announcement has reversed that partially bit I am wondering if we are not at the point now where investors are going to look more at the fundamentals – they really are pretty poor.
• We could be in a recession right now, you don’t know but retail sales have been down 3 consecutive months. This has happened 29 times since data has been kept since 1947. In 27 of 29 times, the economy was in or within 3 months of a recession.  

Shilling on Housing:

Gary Shilling made the same points he made two weeks ago about the excess shadow inventory in housing that has increased by 1.3 million homes in the past 3 years.

• Housing as a percentage of GDP in 2006 was 6.3%, now it is 2.2%…. The biggest effect of housing is really in terms of prices of houses and what that does to real wealth effect for people. Housing doesn’t really count as a serious percentage of GDP.
  

In response to Trish Regan’s question about housing a good or bad investment, Gary Shilling answered ” they are bad investments, still. I think we still have a potential 20% decline in house prices“.

Shilling on what he likes right now:

• I still like 30-Year Treasuries. I think they are going to 2% yield. They are now 2.7%. If they go there from here, you will probably make on a coupon bond about 15% with 2 coupons and 20% on the zero-coupon.

At this point, the discussion shifted to College Tuition and the enormous difference between the earnings power of new college graduates and the tuition debt burden they graduate with. 

In another segment, Gary Shilling expressed concern about high yield bonds and about emerging market bonds.  His basic point is that Asian economies are essentially export economies and their products end up in either US or Europe. And so a recession is likely to impact the Asian economies negatively. About currencies:

• Look at Brazil, that currency gets pushed around like a pawn on a chessboard; the currency is strong because they have interest rates high, they control inflation but that attracts foreign money. That pushes the currency to the point that they worry about their exports, they reduce rates…..

And we have seen what happened when Brazil reduced rates.

Shilling on the Fiscal Cliff:

This is probably a contrarian view as any in the market. We can’t find a videoclip on Bloomberg.com that contains these comments. So we rely on our scribbled notes. Dr. Shilling doesn’t think that the fiscal cliff is going to happen. He says that the Congress will not want to go into the election with the fiscal cliff hanging over their heads. They will extend it for six months or so before the election and leave it to the next congress to address it in 2013.

2. Nervous about deflation & weakness in Chinese Yuan – Peter Fisher on The Kudlow Report – Monday, August 22

Peter Fisher is the Head of Fixed Income at BlackRock. He was previously an Under-Secretary of the Treasury  and ran open market operations at the New York Federal Reserve. He is, in our experience, a very smart, balanced observer of the Fixed Income markets. This interview is very good because this expert is being interviewed by another expert, Larry Kudlow.

• Kudlow – I want to talk policy. The Federal Reserve in the last 3years + has created $2 trillion some odd in money. The Federal Government has spent at least a trillion on one thing or another. According to the joint economic committee, this is the worst recovery in modern times going back to 1947. Unprecedented stimulus, lousy growth. what ?
• Fisher – It was the end of a bull run in credit creation. We got a little over exuberant with credit creation. When you squeeze back on the financial system it’s a slow recovery. That’s part of it. I agree with you, the stimulus was misspent. I didn’t think about it at the time. I tell you what a shovel ready project is. It’s a project a governor never bothered to fund. They had it on the books but it didn’t have the pay-off for anyone to bother funding. It’s sort of a good idea in principle but didn’t work in practice. There are a lot of things that have to go wrong to get a recovery this feeble.
• Kudlow – most of the recoveries, and there is a
  lot of research done on the united states, we have had terrible financial downturns followed by big snap-backs. This is not one of them. I want to ask another related question. for all of your monetary experience. Do you think the Federal Reserve should come back in now and start more manipulation, buying bonds or creating money from quantitative easing? Hasn’t the Fed run its course at this point?
• Fisher – I think they have. I don’t want to say they are out of powder. They could keep trying. They have reached diminishing and maybe negative returns, particularly on Operation Twist.…I think Operation Twist, it’s time to put it on the shelf. I don’t see why driving down the term premium is going to help us create more credit in our economy. I know the Fed thinks it will through a portfolio rebalancing. They take risk out of the system. Private investors have to go out and find the risk. But I think it runs the risk of driving us into liquidity trap. You keep pushing down on the term premium, you’re reducing the opportunity cost of putting your money in cash…
• Kudlow – you ran open market operations for the New York Fed and you were the Undersecretary of the Treasury. I guess what I am trying to figure out – you have 1.6 trillion dollars in excess bank reserve sitting on the Fed’s balance sheet. They can create another 500 billion or a trillion. All its gonna do is sit on the Fed’s balance sheet. meanwhile they are enabling and financing unprecedented budget deficits. How does it sit with you? this is a different federal reserve role. they are enabling and financing unprecedented budget deficits in the trillions every year.
• Fisher – It makes me very nervous. I‘m not nervous about inflation in the short run. I am much more nervous about the deflation when I see the Chinese currency start to turn the other way. That’s a big sign for me. But I do worry about the Fed crushing the incentive to lend.That’s what happens when you squeeze the term premium down.  they say we’ll make borrowing costs cheaper so that more people borrow. But who will lend if you don’t get a reward? The differential is too narrow. I think Twist is a mistake. I really do. If they think they need to balloon the balance sheets more, they are welcome to do it. I don’t know why they need to given the idle reserves.
• Kudlow – Do you think the Fed – I know they control short rates….Do you believe the Fed controls medium and long term rates? 
• Fisher – probably. I think the Fed has a big influence on the expected paths of long term rates through the fact that they control rates. They have a big influence but not the only influence. But I wish they would free the long end. We could all see where it trades. I think both investors and corporate executives. I think the US economy is showing remarkable resilience here; given the recession in Europe, given the slowdown in China, given the restraint already coming through, the headwinds we have, the US economy is being pretty resilient. I hope we keep it up.
• Kudlow – what is your favorite bond investment?
• Fisher – You pressed me on what the Fed is going to do. As long as the Fed is keeping the term premium down, its spreads. They are forcing us into credit spreads. There just isn’t any other choice. They are hoarding duration. So investment spreads, high yields.  

• Israel-Iran war – It is not fully priced in the markets; most understand how close we may be to some geopolitical developments; in the event war breaks out and the straits of Hormuz were closed, or attacks break out in the south parts of Saudi Arabia, most analysts put oil at $200 a barrel, may be higher…its no where near that right now, its only less than half that; so clearly we are not pricing in acts of war.But the odds of that might be a lot higher than the market is pricing in right now. President Obama and the State Department are trying to talk it down. Diplomacy has failed up to this point. The talks are going nowhere. Israel is bearing with the President but they may have to strike in October, can’t rule that out. You look for more volatility, higher Treasury prices, lower yields on a flight to quality, stronger Dollar. US Equities won’t necessarily get hurt, people getting out of other markets – that could be a flight to quality [into US equity market], and Gold probably higher and energy higher. 

• Australia – The Aussie Dollar has surprised a lot of people with its strength. The conventional story is it is an export-driven economy which it is; China is the biggest buyer of their exports, China is slowing down, that means Aussie Dollar should be weaker. But it hasn’t been weaker; it has been a lot stronger. And the reason is, trade is important but capital flows dominate trade flows. Like it or not, the Australian Dollar has become a safe haven currency. You are an international investor, you want to get out of Euro; I am bullish in Euro, but that’s beside the point. Most want to get out of Euro, you can’t really get into the Yuan; people are full up on Dollars and Yen, so Australia seems very attractive, rule of law with commodity based economy; problem is Australian capital markets are really small. So they can’t absorb the global capital flows. The Reserve Bank of Australia is between a rock and a hard place. The exporters want them to cut rates, weaken the Australian Dollar which is what Brazil did a year ago. Brazil had the strongest currency in 2010 and they cut rates under exporter’s pressure. Big mistake because now they have inflation in Brazil. The Reserve Bank of Australia has resisted this pressure; they have kept their rates up.  I suggested they should buy some Gold. Australia has only 50 tons vs. 10,000 tons for Europe and 8,000 tons for US. So its a great time for Australia’s Reserve Bank to buy Gold. They could issue more Government Bonds, create more investor demand to absorb capital inflows, use the Bonds for infrastructure, long term infrastructure; get current GDP on infrastructure, future GDP on productivity – that’s how we built our interstate highways. 

• Chinese Yuan – Just in the last couple of months, the Chinese Yuan has actually come down against the Dollar; Chinese have their own problems; they are no so worried about inflation today; they need to get the export machine going. So I think the weakness in Yuan is another factor that could likely lead to some sort of QE in the September 13 open market committee meeting. The US Dollar is getting stronger vs. the Yuan, That is the last thing the Fed & the Treasury want.
  

• Form of QE in September – I think it will be a lot more open-ended. The Fed realized they made a mistake in QE2 because they put a specific quantity and a specific time, The trouble was the market by March was what else have you got for us? So they might kinda say what Draghi said – we are going to do what it takes; we are going to buy securities, might be mortgages, might be Treasuries..we are gonna buy what we think is right, we are gonna do it as long as it takes, do as much as it takes..we got to get nominal GDP up in this country. So you might see a nominal GDP target.

• Europe & Draghi – They are going to be all together in Jackson Hole – Draghi, Bernanke. I think you might see some hints coming out of Jackson Hole. The message from all the central banks is we are not going to let the deal go down; we are all gonna do what it takes. We are hearing that from China, the US and Europe. I am bullish on the Euro and I think there is going to be systematic support, but I am bullish for a lot of other reasons. Angela Merkel is doing everything right, I think the idea that they need a convergence of unit labor costs between Germany and others, cutting government spending, call it austerity, they call it prudence. I think a few years from now, Europe is going to be an export investment powerhouse; the US will be beginning to fact its problems. So I am much more bullish on Europe. 

4. 10% Correction Coming in September – Mary Ann Bartels on CNBC Fast Money – Wednesday, August 22

Mary Ann Bartels is the Chief Technical Analyst at BAC-Merrill Lynch. She speaks with the Fast Money Team led by anchor Melissa Lee.

• Lee – we are heading into labor day, heading into September. a lot of people get worried about the month of September. what should we expect?
• Bartels – I’m agreeing with many of the members on the desk. I think this market is actually set up to correct going to into September. It is traditionally the worst performing month [shows S&P vs. VIX chart]. There is a number of times going back to 2008 when we have gotten below 20%. Recently we were 13 on the VIX and that was the lowest since 2007 and we have these arrows showing low points. We were there earlier this year when the market went down, we are right back there again. We also have negative divergences, the market is not confirming the leadership of the transports, small caps are not confirming. We think we are set up nor an 8%-10% correction in the month of September.
• Lee – if you are calling for an eight to 10% correction, why would you want to be in the bigger stocks which have led us higher.
• Bartels – Well, there is a stealth market going on in these stocks. We brought you today the S&P 100, the OEX index, relative to the S&P 500. This has built a two-year base and we have broken out. This is showing leadership. This is one of our year-ahead pieces. And they have done it. You can even look at the top 50 stocks within the S&P.  Small cap has been your leadership for 13 years. We think over time the relative performance of the Russell 2000, even the 450 of the S&P are going roll over. So here what we have is the Russell 2,000 relative to the S&P. It looks like a distributive, a head & shoulders top. We think this [Russell 2000/S&P 500] is going down in under-performance. We think the stock market stays in a range but these megacaps have much more upside. They represent growth, quality, yield, I didn’t mention technicals – They have big bases and they are breaking out.
• Bartels – The charts say many of these stocks are breaking out from 5, to 10 to 12 year basis and that we are in the early stages of a bull market. So we don’t think this is crowded. We all think a number of these stocks are institutionally under-owned. Many fund managers have even woken up to look at many of these stocks. Pharmaceuticals would be a great area to look, Beverages would be a great area to look, all institutionally under-owned making big bases breakouts..
• Bartels – The VIX is showing complacency. If you do a five day moving average on the put-call ratio, it is showing  complacency. We do an index at our firm called the Global Financial Stress index. That is now down at  levels we haven’t seen since 2007. I am starting to see everybody get bullish now. And I am really not bullish. We have been on this train for summer rally and I think you are close to the end. I think you get a pullback. I do think you will get a year end rally. So I think the year winds up fine and the leadership is going to be in the mega caps.
• Bartels – [in response to a question about a breakout despite the low VIX]  Great question. The S&P is struggling with earlier resistance where we trade on the S&P around 1400-1422. It hasn’t been able to breakout of that range. But if you break out of 1422, you are headed up towards 1440. That’s the highest I can get the S&P up this year.