Interesting Videoclips of the Week (October 3 – October 7, 2011)

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. The Main Man

Last week, the stock market closed out the third quarter with an ugly close on Friday. Monday was worse. The stock market fell through 1120, the level we have discussed so often, and closed at 1099, just below the absolute support of 1100. Tuesday morning was far worse. The stock market fell like a waterfall through 1100 and went below 1080. VIX exploded higher, Bonds ratcheted higher and financials looked as if they were being slaughtered.

Then the market stabilized as Ben Bernanke started speaking. Bernanke was calm and composed. He has credibility. He is the one man the Bears fear. He is the one man who can drive a stake through the hearts and guts of Shorts. They know that Ben will be as aggressive and as innovative as he wants to be.

The calmness of the markets post-Bernanke was a sign of a massive storm to come, a storm that would wipe out the shorts. Since the afternoon on Tuesday, September 27, the stock market had closed down every day with an afternoon ugly sell-off. When the dreaded afternoon sell-off did not materialize on Tuesday October 4, when the fears of an overnight European headline lessened with a FT rumorarticle, the stock market exploded vertically. The Dow rallied 350 points in less than an hour, the S&P 500 rallied 40 handles in 45 minutes.

It was the reaction to Ben Bernanke, we are convinced. The FT rumorarticle was just an excuse. The next morning the rumorarticle was downgraded to a rumor and the rally continued. The assurance of Tim Geithner was the key to the rally in the Financials. In two and half days, the S&P rallied from about 1079 to 1165.

It would not have happened without our Main Man Ben.

2. US Stock Market Levels

The most bearish of the technicians we follow has been Mary Ann Bartels, Chief Technician at BAC-Merrill Lynch. We have quoted from her discussion of a Bear Flag formation leading to S&P 1020 or then perhaps 910. The morning after Tuesday’s explosive rally, Ms. Bartels issued another report that we consider timely, important and illuminating.

She called the upside reversal on the S&P 500 on Tuesday, a potential bullish piercing pattern – a two day Japanese candlestick bottoming pattern. She said a higher close on Wednesday would confirm the pattern and suggest that the rally continues. She pointed to signs of diminished selling pressure and early signs of accumulation. In short, this report was the first bullish report from her since the stock market began falling in August. She does not rule out a probe into the 985-910 level but finds early signs of the equity market trying to hammer a bottom. In particular, she reminds investors once a bottom is formed, it can take months to complete the bottoming process – for example, October 2008 to early March 2009.

Kudos to Ms. Bartels for a timely and well documented call. Lawrence McMillan of Option Strategist weighed in with his weekly commentary on Friday:

This rally has not yet turned the picture bullish, but it’s getting close. A close above the 50-day moving average at 1180 would be bullish…. A VIX close below 35 would be even more bullish…. In summary, we continue to look for an October low and a strong rally thereafter. It did not seem to me that Tuesday’s low was that low, but if this rally persists, I would have to change my opinion.

The one risk cited by Mary Ann Bartels, acceleration of the European financial crisis.

3. Europe & Greece and Next Friday

Greece has a payment coming due next Friday. So the question of a Greek default will take center stage soon. Kyle Bass of Hayman Capital said that the Troika is playing a game of chicken with Greece…forcing Greece to default internally. He added that the Greek default would be any time now (see clip 2 below).

Rebecca Patterson of JP Morgan said on CNBC Money in Motion on Friday afternoon:

I look at the Greek payment and think, even if Greece didn’t have the money, would the rest of Europe actually let them default on a payment? In my mind, No Way. This a zero probability because if Greece defaults now, the other banks in Europe are not ready to handle that and the contagion hit could be huge. So I think they make sure that Greece gets through the next Friday and they keep working on recapitalizing the banks to refinance Greece.

Sean Egan of the independent ratings agency Egan-Jones sort of concurred and provided a vivid analogy:

…my belief is they have to default and every weekend we go into is a potential default scenario just because there’s no way they can support the debt that they have….a restructuring is inevitable….the whole focus has now shifted from preventing Greece’s ultimate default to making sure that the banks have the capital to absorb the hit……and when I look at Greece defaulting or restructuring its debt, I don’t think it’s that coming week, but I do think it probably is going to happen at some point in the next six months
a metaphor you may want to consider is that of a meteor. if it is relatively small and hits in the right spot, it is fairly manageable. however, if it’s large and it moves quickly, it causes a lot of damage. If Greece were to default within the next week, I think there would be quite a bit of damage. If it’s delayed for another six months, which might be a stretch, then the damage would be relatively low.

This is a big weekend, Ms. Patterson added:

We have a Dexia Board meeting, we have a Merkel-Sarkozy meeting. What we get out of Sunday will affect how we start the week ahead.

Come on Ms. Patterson, make a call about Monday morning would you? Terrence Keeley of BlackRock made a big call on a Friday two weeks ago. Is BlackRock more knowledgeable than JP Morgan?

4. One Firm, Two Spokespeople, One Anchor – A Journalistic Misconduct!

Last week, we referred to an interview on CNBC Closing Bell in which Tim Hayes, Chief Investment Strategist of Ned Davis Research said the following to Anchor Bill Griffeth:

…..this third quarter was one of the seven worst, the worst since 2002, but following a bad third quarter, and there have been 15 third quarters where the market has been down 8%, and actually after that the median gain has been 4.9%….the 5 exceptions have been all during recessions, 2008 was a major exception, 1957 and three times in the 1930s.

This Friday, Ed Clissold of the same firm Ned David Research, said the following to the same CNBC Anchor, Bill Griffeth, on the same CNBC show, Closing Bell:

the S&P 500 declined about 14% last quarter. that’s only happened about 24 times since the 1920s. looking out over the next year, the average rebound has been about 12%. Post-war it’s been a stronger rebound, about 23%. with the market only declining once over the next year.

Notice the resoundingly bullish prediction of Mr. Clissold, his lack of any mention of 2008 and his lack of of any recession caveat or warning.

Tim Hayes and Ed Clissold are from the same firm Ned Davis Research. So do these two have a difference in opinion? Did Ned Davis Research change its mind in the last week? What about the difference in the numbers – Tim Hayes listed 5 exceptions, Ed Clissold only 1 exception?

Ned Davis Research is regarded as a quality firm. Mr. Clissold should have referred to the previous week’s interview by Tim Hayes and explained the reasons for his own different set of facts and reasons for his opinion. We call on Mr. Ned Davis to examine this contradiction and take corrective steps. After all, the firm bears his name.

But why didn’t Bill Griffeth, the CNBC Journalist Anchor, ask Mr. Clissold about these obvious and important discrepancies? Does Bill Griffeth even prepare for any interviews? Did he even remember that he had interviewed Tim Hayes only a week ago? Or was he just happy that he had found a guest to deliver the Buy, Buy, Buy exhortation which CNBC loves.

We consider this a Journalistic Misconduct and throw a flag.

5. Steve Jobs

Rarely has the passing of a businessman, a CEO been so mourned. But then Mr. Jobs was no ordinary CEO, no extraordinary CEO even. He was the symbol of America’s ingenuity, its talent for inventions that create new demand. He was an artist who created beauty. We cannot think of any other CEO who made his company the largest in the world just by designing products of rare beauty. His iPod, iPhone, iPad did not create new technologies like the Telegraph, the Telephone, the Car or the Plane. He made products so beautiful in their concept and design that the world simply had to buy them.

We may not see another Steve Jobs for a long long time.

6. Apple, Today’s America, Yesterday’s Europe

We now explore a different view of the success of Apple. We are fans of Steve Jobs as a brilliant CEO. We adore the success of Apple as a company and a stock. But we now examine a Global Macro Viewpoint of the meaning of Apple’s success to America.

Go back say 100 years ago. The world’s dominant companies were European. Their products were of superb quality but only available to people with higher incomes by design. They were not mass market products. American companies were more focused on serving the needs of the emerging American mass market. They were focused on making products that cost less but provided value to the rising American worker class. They left the high end products to European companies. In the process, American companies dominated the emerging mass market. Slowly the American products rose in quality and design. And the dominance of the mass market allowed American companies to slowly push European companies into smaller niches.

In this context, the Apple products are more European-like. They are not intended for the American mass market, not in an America where families are critically short of income, not in an America where one on six are below the poverty line. And if Apple’s products are not for America’s mass market, they certainly are not for the World’s mass market.

In other words, Apple is a great success story for its fans, customers, employees and stock holders. But it may not be a story that provides solutions for American economy’s structural problems.

7. A Contra-Apple model

In sheer contrast, India announced a $35 tablet computer this week. This tablet is meant for the 200 million children in Indian villages, small towns and urban neighborhoods. The tablet, named Aakash or “Sky” has a color screen and provides Word Processing, Web Browsing and Video Conferencing, according to an article by Associated Press. It is called Aakash because the message to India’s children is “Aim for the sky and beyond” regardless of your financial condition today.

(AP Photo/Gurinder Osan)

AP called this as the latest in a series of “world’s cheapest” innovations in India that include a $2,040 Nano car, a $15 water purifier and $2,000 open heart surgery. Frugal but adequate products like these are ideal for capturing the several hundred million mass market in India. Also these products can fit the needs of the mass markets in Asia, Latin America and Africa, the world of high demographic growth. It seems to us that the Indian market is following the path that the American market blazed 100 years ago.

This is the polar opposite of the Apple story. Incidentally, Apple products are almost nonexistent in the Indian mainstream market.

Which of the above two approaches end up doing more for American & Indian economies? Time will tell. For a more detailed discussion, see our February 9, 2009 article titled Will The Indian Market Be To America What The American Market Was To Europe 100 Years Ago.

By the way, the same frugal and adequate product model has done wonders for India’s software industry. The top sliver of India’s intellectual talent comes to American Universities for education. But the vast majority of Indian students stay in India to study in adequate but inexpensive Universities. These students then join companies like InfoSys, Tata Consultancy Services. It has been a successful model for India’s software, technology and outsourcing businesses.

8. From the Sea Level to the Mountain Top

Last week, we discussed at some length the tensions building up in the South China Sea. Stratfor continued its coverage of this broad topic with its article –Vietnam, China: Economic Prosperity Leads to Heightened Tensions.

This week, we jump from the South China sea level to the Roof of the World. We jump to an unfolding crisis that could engulf Asia into the first major war over water. Doug Kass of Seebreeze Partners included this possibility as his Surprise Number 3 for 2011 in his CNBC Fast Money Appearance on November 29, 2010 (see clip 2 in Videoclips of November 27 – December 3, 2010).

This topic is becoming exceedingly important to the entire arc of countries from Tajikistan, Afghanistan in Central Asia to Cambodia, Laos & Vietnam in Far East Asia. Recently Georgetown University Press published a scholarly and authoritative book on this topic. Read our adjacent article – The Greatest Acquisition of the 20th Century & Its Impact on the 21st Century.

Featured Videoclips

Jeffrey Gundlach on CNBC Strategy Session on Tuesday, October 4
Kyle Bass on CNBC Strategy Session on Wednesday, October 5
Bill Gross on CNBC StreetSigns on Tuesday, October 4
Bob Doll & Peter Fisher on CNBC Squawk Box on Wednesday, October 5
Jim Cramer on John Roque’s Views on CNBC Mad Money on Tuesday, October 4

1. Don’t Ever Equate Dividend Stocks & Bonds (04:26 minute clip) – Jeffrey Gundlach on CNBC Strategy Session – Tuesday, October 4

This we think is a critically important topic. Expert Guests and CNBC Anchors constantly preach the doctrine of buying dividend stocks as an alternative to bonds that offer low yields. The pitch is simplistically logical and emotional –

“Why would would buy10-year Treasury yielding 2% when you can buy a stock yielding say 4% and get dividend growth as well as capital gains?”

Most people who fall in this trap lose money as well as sleep. The past two months tell the story. Stocks fell off a cliff and yields did not protect investors at all. A 4% (or 5% or 3%) yield is not worth much when your stock drops 10% or 20% in a couple of months. After all, if the stock price goes down by 10% , you have essentially lost the benefit of 2.5 years of a 4% dividend yield. That is assuming the dividend yield does not get reduced.

The only time this strategy works is when stocks are in a bull market for the entire period you hold stocks.
In this clip, Jeffrey Gundlach makes the same case fervently and intellectually.

But first, he also gives his views on High Yield Bonds and Emerging Market Local Currency Bonds:

Faber – CMBS, ABX down sharply, Junk, are you seeing any opportunity there with this very large sell off in credit?
Gundlach – We are getting to where it is not easy anymore. we talked about 6 months ago- it was so easy to avoid all of this junky credit, I remember in March & April we were talking about high yield bonds as being the most overvalued in history. Now it has dropped so much… you are at a valuation perspective where junk bonds are actually cheap now; they have gone from the richest valuation in history to a massive under-performance vs Government Bonds. Now they are cheap.
Faber – what gets you to that valuation of so called cheap
Gundlach – you compare the returns of one index to the other vs. sort of a historical trend and we were two standard deviations rich on that basis in March-April which is the worst ever and now you are actually one & half standard deviations cheap. Now is the tough part. The valuation is there but the technicals and the momentum are terrible. Because of that, it is too early to buy…. I think this thing is going to get a little bit cheaper particularly as we consider the earnings and the default situation, which won’t be an imminent turnaround but in late 2012-2013 you are going to be facing higher default rates and it is just not that likely that you are going to get that sustained rally in credit when default rates are about to move to the upside. It is too early to buy but the valuation is OK. It is a lot trickier now.
Kaminsky – You know Jeff, a lot of investors have put a lot of money this year in high dividend paying stocks. Investment Advisors have told clients to do that. I know you have some thoughts about using high dividend paying stocks as fixed income substitutes. Share with us.
Gundlach – Well, there are two things one year ago, if you talked to a roomful of advisers, you get a lot of heads moving in the north-south direction.
- One was you should buy Emerging Markets Debt in local currencies. We hated that idea. There has just been a bloodbath in that area in the past month.
- And the other idea that got people nodding was sell your bonds and buy dividend paying stocks. What I don’t like about that idea is disrespects the obvious mismatch in volatility. Bonds have much much lower volatility than stocks. If a 10-Year Treasury yield would have doubled from 3% to 6%, obviously it went the other way, but if it had doubled you would have lost 20% if it happened overnight. If the dividend over a basket of stocks were to double overnight, you would lose 50%. So you need to volatility adjust. What’s ended up happening for the poor folks who followed that advise, that you are toting up the losses for about 8%-10% year-to-date on the basket of dividend paying stocks, and bonds of course, if you are doing it right, are up 9%-10%. So it is a massive under-performance. It is one of those things where people like to find ideas that are superficially compelling but when you think about it on a more logical basis, the volatilities just don’t line up. You have to realize that equities are much much more volatile and you should not sell bonds to buy equities ever unless you are thinking about buying something in a bull market.
Faber – Give me your latest take on where we stand vis-a-vis the European financial system, our own banks. Has your opinion changed at all?
Gundlach – No. People keep asking me what is going to happen in Europe and I say, I don’t really know. As Ben Bernanke himself said today, we are innocent bystanders held hostage to the ministers in Europe. But there is one thing, I think I know. That there is a huge loss that is emanating out of Europe and all we can do as investors is make sure that we are NOT the ones taking the loss. Means avoid Europe, avoid Banks. No investments there at all. 100% dollar denominated AA.

First we concur with everything Mr. Gundlach says here. Secondly, we request Gary Kaminsky to look inward into his own network in addition to blaming investment advisors. Maria Bartiromo, Jim Cramer and Bob Pisani have been vociferous in exhorting viewers to buy dividend paying stocks instead of Treasuries & Bonds.

2. 350% Debt-GDP Ratio Globally & Tax the Belly of US Population – Kyle Bass on CNBC Strategy Session – Wednesday, October 5

Kyle Bass is the Managing Member and Founder of Hayman Capital. We have featured his comments often in these articles. This comments are serious and realistic in our own humble opinion. His comments about the Global Total Debt to GDP ratio, if correct, point in only one direction – multiple sovereign defaults. The first clip discusses Greece & the World’s Debt.

Bass – I believe the Troika [IMF, EU, ECB] is in a chicken game with Greece right now…..back in May of 2010, they made an agreement with Greece….whereby when 5 state workers leave or retire, they were to hire only 1 new one. Then they moved that to 10 to 1. And when the Troika got to Greece a few weeks ago,….they realized that roughly 18,000-20,000 Greeks had retired and they had hired 24,000 new ones, So they realized Greece was taking in money and not adhering to the austerity measures.
Bass – Greece runs a Current Account Deficit, they run a Fiscal Deficit, they have no Cash Reserves. The point being is they are completely broke….The Troika is saying may be [Greece] will get the debt payment in October and now November. They are forcing Greece to prioritize payments, they are forcing Greece to almost internally default, they are forcing Greece to figure out who they are going to pay and who they are not going to pay. The problem, Greece is spending 15% of central government revenue on interest. Any time now. Any time now.
Bass – …how many real creditor nations are there in Europe?.. Everyone is a debtor….Germany is not a creditor nation. They are 80% Debt to GDP and they haven’t recapped their Banks. We hold them out to be this island of fiscal solitude and they’re not. Germany has defaulted twice in the last hundred years….
Bass – ….this is really important. From 2002 to 2011, Global Credit Market Debt, that is Sovereign Debt, Consumer Debt, Corporate Debt., all the debt has gone from 80 trillion to 200 trillion. It’s grown at 12% a year. Real GDP globally has grown at 4% a year. Debt growing at 12% and GDP growing at 4% doesn’t work for long.
Bass – Today the globe is 350% Total Credit Market Debt to GDP …..you make an analogy back to the great depression ..in the early 30s, mid 30s, we were 225% of Total Credit Market Debt to GDP and now we are at 350% globally.
Bass – When you see debts restructure, it’s very difficult to have them not all restructure simultaneously. What Rogoff tells you is that Sovereign defaults happen in clusters and that’s what is likely to happen. Whether people engaged in this process or not want it to happen, it’s going to happen.
Bass – I think there’s one question that either delays the inevitable for a while or the inevitable happens much sooner. Does Germany go all in? Does Germany decide we have a moral obligation post-world war II to save the periphery? I personally believe that Germany won’t go.
Faber – Why don’t you believe that?
Bass – We polled the German population and talked to a number of people in upper ranks of that country. I believe…they realize that if they lend into the profligacy, the money they lend, they will lose 70% or 80% of that.
- Would you rather be the country that has a strong currency and ability to recap your banks while the rest of the people in a much worse scenario? OR
- Would you rather be in the much worse scenario with everyone else?
How many of your fiscally irresponsible relatives would you go joint and several with on your personal balance sheet? I don’t know too many people that would sign on.

The conversation continues in a second clip that we title Tax the Belly of US Population.

Kaminsky – ..every third or fourth guest on this network says it could be an orderly default in Greece. We’ll kick the can down the road and have an orderly default. Is that possible?
Bass – … I don’t understand what an orderly default means. Does that mean that everyone that owns this debt is going to haircut the private sector number which at the beginning was 21%. You saw people in Germany and Merkel today open up the idea to maybe another 30% taking it to 50%…. We think the write-down is 75 cents or 80 cents and can European Banking system take that? I don’t know. I don’t think a default can be orderly. I think it will be disorderly.
Faber – I want to bring it back here to the country we love…we’re not in exactly good fiscal straits ourselves…. Where do you come down on more revenues and where they will come from?
Bass – I think if you look at the budget from a bipartisan perspective or more importantly a nonpartisan perspective, revenues need to come up. Expenses are 25% to 26% of GDP. We’re having a spending problem…..Mr. Buffett and Mr. Gates are two of the wealthiest people in the world, their collective networth is about $100 billion. To put things into context. if Buffett and Gates wrote a check to U.S. Federal Government for their entire net worth, we’ll have October covered. Who do we go to for November? Let’s think about Forbes 400. Let’s confiscate the wealth of the entire Forbes 400, we might balance the Budget for 2012. Then what are we going to do in 2013?
Faber – What’s the right mix?
Bass – The right mix is simply you have to raise revenue but it can’t just be from the rich. It just doesn’t matter. If you took all their money, you couldn’t even balance it for a year. Then what? If you took Buffett’s and Gates’ money you couldn’t balance for a month. The belly of the population has to be taxed.

3. No Double Digit Returns Anywhere – Bill Gross on CNBC Street Signs (08:50 minute clip) – Tuesday, October 4.

This clip discusses the points made by Bill Gross in his October investment outlook article on Pimco.com. We urge all to read it, at least the investment related material if not the imagery. We include the key points from this article. The conclusion first:

There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0% than the 3%-4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years.

Mr. Gross writes about three structural hurricanes that have impacted the American economy:

Globalization has hollowed Developed Economy labor markets,
Technology has outdated entire industries that produce physical as
opposed to “cloud”– oriented goods and services – books, records, postal
letters and DVDs among the most recent dinosaurs,
An aging
demographic is now favoring savings as opposed to consumption in almost
all developed nations

With this introduction, we provide below the following excerpts from the videoclip:

Sullivan – In your mind, is the first the biggest problem? Because you warn about how labor is not participating in wealth creation and that’s a Macro Global threat?
Gross – That’s certainly the most immediate problem. Globalization. policies may be killing their golden goose. The household worker at 49,000 bucks is the lowest in more than a decade. To the extent jobs go to China and overseas as opposed to stay in the United States, that affects obviously employment. It affects levels for unemployment and economic growth going forward. Without the Consumer, Without the Wage Earner, you have very little in terms of the potential for consumer growth and for economic growth going forward.
Sullivan – You noted in History, Financial crises become Banking crises become Political crises. We’re seeing the riots of the protests in Greece. We’re seeing Occupy Wall Street here. Is this going to turn into more of a political crises whereby the people sort of march up, rise up if you will, and these austerity programs are forced to go on the back burner, thus disenabling a country like Greece to pay its bills?
Gross – I don’t think we’re going that far in the United States. We’re always fascinated by the debates and by the policy differences, so to speak. but to a considerable extent, the policies are much the same in terms of favoring capital as opposed to labor. Until we begin to have that sense in terms of the Main Street Public that it’s Labor that needs to be favored in terms of policies, then I don’t think we’re going to see much of a protest per se.
Sullivan – Bill, is there anything that you’re seeing that is massively undervalued right now?
Gross – Well, yes, I think certain stocks, you know. I spoke to consistent earnings and consistent dividends. To the extent that an electric utility has a 4% to 4.5% yielding instrument with a 10% relatively consistent return on equity, yeah, there’s some value there. I think the market has reflected that this year. for instance, electric utility stocks or utility stocks in general are up 10% to 15% versus the Dow at 5% to 10%. I think that trend will continue.
Sullivan – Anything in fixed income undervalued? Anything on the mortgage side?
Gross – Mortgages are down there along with Treasuries. I would say in the fixed income markets that we would look to other countries. For instance, we’ve been buying UK Gilts because their yields are 75 to 100 basis points higher than the United States. Their growth rate is certainly at 0% and maybe heading into a recession or near environment. There are high quality countries, AAA Countries, what we call hard duration countries such as the United Kingdom where Bonds are a little more attractive than U.S. Treasuries.

4. BlackRock Q4 Asset Allocation – Bob Doll & Peter Fisher on CNBC Squawk Box (06:19 minute clip) – Wednesday, October 5

BlackRock is one of the most important asset management firms in the world with over 3 trillion dollars under management. Bob Doll is BlackRock’s Chief Equity Strategist and Peter Fisher is BlackRock’s Global Head of Fixed Income.

At the beginning of each quarter, BlackRock releases an asset allocation report. You can find the Q4 2011 report on BlackRock.com at Asset Allocation Review. The three themes are:

Equity valuations are attractive but risks have grown.
Anticipate additional Fed policy action.
Munis continue to show resilience and value.

More specifically:

Stock-Bond Allocation – Neutral
Stocks – Favor US over non-US; too early to shift to Emerging; Favor Growth over Value; Neutral between Large-Cap and Small-Cap
Bonds – Favor Developed Market Bonds over Emerging Market Bonds; Favor High quality across Sectors; Favor shorter duration somewhat over longer duration.
Commodities – Neutral
Currencies – Lean towards US Dollar; anticipated ECB easing.

Below are some comments from Peter Fisher and Bob Doll.

Fisher – We face some real challenges here for investors. Two of them we can handle. One is hard. Three big transitions in the world.
- We’re going from the engines of growth to shifting, U.S. from a consumption led economy, China from an investment led economy. We got to shift gears. Investors can handle that.
- Step two, the monetary authorities are shifting from rate targeting regimes to quantity targeting regimes. We are learning to handle it. Bernanke had to translate for everyone. Operation Twist means like a 50 basis reduction in the Fed Funds rate. We can handle those.
- The third one is the Financial Sector shrinking. The Sell Side is shrinking. The making of markets is coming down. Capital requirements for banks are going up. So the Market Making function of the traditional sell side is shrinking and that makes it so illiquid. That makes it really hard for investors to handle when the pipes in the financial markets get thinner.
Kernen – … You’re not telling people to buy Treasuries any more are you?
Fisher – No. You want to be cautious. I think Operation Twist may have more punch in it than people think, for the long end and so that may keep rates stable here…There’s not a lot of value in treasuries. We want to look through the fact that the sell side is shrinking, volatility is There…..people will be dying for these higher yielding assets of quality companies come the first quarter of next year.
Kernen – then equities, too.
Doll – I think so. Look at what happened to high yield spreads. How narrow they got compared to where they were at the worst of the great recession. Now they’ve widened out again. You’ve got to play that trade if you believe the world is going to hold together.
Fisher – Investors shouldn’t put all their money in high yield. I think the Munis are attractive at this point….anybody looking at Muni wraps is making a mistake. It is a credit market. You got to look through and decide whether you like the underlying credit. Forget the wrap.
Doll – Look. the uncertainty is higher than usual. We know that. Yet I would argue it’s in the price. When I buy a stock and pay 20 or 25 earnings, I expect everything to be nearly perfect. When I pay 8, 10, 12 times earnings, I expect a lot of hair on the story. We’ve got a lot of hair on the story. Yes. When you get S&P yielding more than a ten-year Treasury, i think you got to look at the asset class.

Mohamed El Erian of Pimco was a guest host that morning. He added a 4th transition to what Peter Fisher’s comments about 3 transitions. He said investors must differentiate balance sheets and move towards stronger balance sheets. He added this is a very tricky environment including erratic policy making. At this point Bob Doll added the necessity of looking at income statement and free cash flow, free cash flow being a statement of flexibility.

5. Pretty Girl Index to Under-Perform – Jim Cramer on John Roque’s view – Tuesday, October 4

John Roque is a well known technician. Jim Cramer points out that Mr. Roque has had a hot hand lately. A well known market tenet states that corrections are the market’s way of changing leadership. The leadership of the stock market in the first half of the year was stocks with glowing fundamentals like Apple, Chipotle, Netflix etc. John Roque has built an index of such stocks that he calls the Pretty Girls Index. Mr. Roque believes that such pretty stocks will under-perform the broad market from here.

Below we include excerpts of comments of Jim Cramer about Mr. Roque’s viewpoint. The charts in the clip are really interesting and important. So we urge all to view the clip.

…Momentum has become dangerous…. before we can bottom, all the fast-growing highfliers have to get crushed. that’s kind of the opinion of John Roque, Managing Director at JB Capital. He is a brilliant chartist. He has helped us nail commodity after commodity on the way up. He told us to pull in our bullish horns on the S&P 500 time and again on the way down. In other words, Roque’s got the proverbial hot hand in this market. When someone has been right that often, we have to take what they say very seriously, even if it’s contrary to our view.
… look at some of the highest quality stocks out there, the kind that have reported and rallied hard today. But he thinks they could be the next cohort to keel over, or in some cases they have already been obliterated.
….What is happening to these great growth stocks and I’m talking about Chipotle, Estee Lauder, Green Mountain, Hanson Natural, Lululemon, Netflix, Price Line, Whole Foods, Wynn Resorts, Yum Brands, you name it…these stocks which Roque refers to as the Pretty Girls since they’re loved and have tons of sex appeal that could be headed for a big fall.
…(these) stocks may be pretty, but to a technician like Roque, this is about as far from a pretty picture as it gets. …You can see the Pretty Girls Index has made, yes, the ugliest formation in the history of the western world, the dreaded Head and Shoulders Top Formation…It’s one of the most consistently correct technical patterns, the kind that accurately depicts a huge decline about 90% of the time…..and it says the Pretty Girls Index is in serious trouble. Even worse, recently the index broke through the neckline…that’s the line connecting the two shoulders…. it means a major pullback is practically unavoidable.
….once that breaks down. notice he says once it breaks down, Roque believes….the pretty stocks are going to go much, much lower. How much lower? If you take the height of the right shoulder over the neckline and extend it downward, Roque believes we could be looking at a 15% across the board decline from Friday, a bit less from the current level from right here.

This is a timely warning. A warning is NOT a certainty. But a warning gets you on your guard to sell the moment you see the evidence. Kudos to Jim Cramer for alerting his viewers. They might not like his warning but they are better off for it.

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