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.
Greece, Europe & US Equity Market
What’s there to say? We wait for Monday morning. Thursday morning looked so bad that Ms. Angela Merkel and IMF saw the light. So IMF dropped its rule and Ms. Merkel dropped her demand for haircuts by private investors. And things were fine on Friday morning with a 100-point rally in the Dow.
So if Greece pretends to agree to the rigorous austerity, then calm will return to markets. And possibly, we will see a decent rally in equity markets. At least, that is what Gurus & Technicians told us this week. And they feel that the rally will last longer than what people think (see clips 2 & 3 below).
US Economy & Treasuries
Two weeks, John Taylor of FX Concepts predicted a recession in 2012 (see clip 1 in our May 31 – June 3 Videoclips article). This week, David Rosenberg said he sees a 99% chance that US Economy will go into a recession in 2012 (see clip 1 below).
Meanwhile forecasts of Q2 GDP keep getting revised down with Goldman dropping its forecast to 2% from 3%. Citi’s Tobias Levkovich pointed out that estimate revisions are beginning to slide down alongside sentiment.
Is this why Treasury yields stayed low despite a rally in stock markets? And what does this mean for High Yield Debt in the US?
Featured Videoclips
- David Rosenberg on Bloomberg’s In the Loop on Monday, June 13
- Steven Leuthold on Bloomberg’s In the Loop on Thursday, June 16
- Louise Yamada on CNBC’s Closing Bell on Friday, June 17
- Patrick Wolff on CNBC’s The Call on Friday, June 17
- Ralph Peters on Fox’s The O’Reilly Factor on Wednesday, June 15
1. David Rosenberg on Bloomberg’s In the Loop – Monday, June 13
David Rosenberg has simply been the most accurate and predictive analyst of the US Economy and US Treasury Rates to our knowledge. He is also unafraid to say what he feels. The prediction in this clip might upset or scare some. But the truth usually sets us free, or so we believe.
This was a three against one battle with Bloomberg’s Betty Liu, Jon Erlichman and Michael McKee.
- Liu – How certain are you that we may be headed for another recession?
- Rosenberg – I think by 2012, I would give a 99% chance of that occurring, I will give myself a 1% wiggle room. I say that because as an Economist you have to be part historian and when you have a manufacturing inventory cycle, recessions are usually separated 5 years apart. But when you have a Balance Sheet recession, we are talking about credit contraction, asset deflation, for example residential real estate, these sorts of Balance Sheet recessions, the downturn happens every two, two & half years. So I think that by 2012, that is going to be roughly the timing when we will see the next downturn
- Liu – I don’t want that point lost on our viewers. You are 99% sure that we are headed towards a double dip?
- Rosenberg – I didn’t mean to waffle on that..I think what we are seeing now Betty is what economists call a soft patch; …when all the stimulus is gone, you get to see what the Emperor looks like, it is not a pretty picture…it is not a double dip..it is going to be another recession
- Rosenberg – once the Fed sees the whites of the eyes of the economy, they will start to move…difference is that last year, the Fed had a lot more political capital, …this time it is going to be a lot more difficult… but the Fed going to be forced to do QE3 whatever you call it ..
- Rosenberg – there is no more room for a fiscal stimulus…unless they do a tax cut..in Washington there is no appetite ..in the country there is no appetite for more fiscal stimulus and deficits at that level ..So I think the onus is going to be on the Fed…theoretically the Fed’s balance sheet is infinite…they took rates to zero in December 2008- how normal is that? three months later, they embarked on QE1, how normal is that? a year after that, they embarked on QE2…Ben Bernanke has shown he is willing to be extremely aggressive but he has also shown that he is not going to be early either..the question for investors is what is the strike price for the time he goes for another Quantitative Easing…I will tell you it is not going ti be 1280 or 1300 on the S&P, last year, the strike price was 1040..
2. Steven Leuthold with Betty Liu on Bloomberg’s In the Loop – Thursday, June 16
Steven Leuthold, the founder of Leuthold Group LLC, is a well respected investor.
- Leuthold – ….The old advice “Sell in May and Go Away” looks good these days…I think we did see the highs for the year, back at the end of April..and I don’t expect any disaster here because I am still hopeful that the US is going to come to its senses about fiscal responsibility and take some steps. In addition to that, compared to say the rest of the World, if you look at the action of the 10-Year Bond, things look pretty good in the United States compared to other places..we are sitting close right now to median valuations for the S&P and actually our number is 1245..and I will probably lift some of the hedges that I have had on for the last 6-7 weeks so I expect we are pretty close to some type of a significant rally point...I think we are getting close to an area where we could get a significant bounce, this isn’t any time to sell
- Liu – a rally of what do you think? a rally of how much?
- Leuthold – oh, it will probably go farther than people expect, may be it is going to be stirred by some settlement in Greece……I think there is going to be some kind of shift in confidence here, we have gone too far, too fast and we are really oversold….may be back to 1300 or something like that…
- Liu – are you still fully invested? are you still fully invested in stocks in your portfolio?
- Leuthold – In our mutual funds and asset allocation funds, we are only 60% in stocks but in the partnership that I run, we are only about 35% in stocks and that is where I am going to be probably lifting the hedges.
- Liu – what are you going to be buying then?
- Leuthold – I am tending to focus on foreign investing in strong currency countries and I think the US has major, major problems in addressing its deficit and so I feel more comfortable in places like China, in Singapore, in Canada ….in markets denominated not in Dollars but in strong currencies..
- Liu – But Steve, you just said though we are poised for a rally in the US, So in the US, within your US portfolio, what looks attractive to you now?
- Leuthold – the biggest part in our US portfolio and it has been there for a year, year and half, is really in the Health Care management companies, the ones that have been so out of favor and have been cheap..they have performed extremely well for us this year….
- Liu – last time I talked to you Steve, you also were starting to buy into Citigroup and looking at some of the regionals..have you bought more?
- Leuthold – In our portfolios, we are about 6-7% in diversified financials…which includes Citicorp…. I am a little concerned about them in terms of their holdings on a global basis, especially in Euroland..So I am not selling anything but I am not, at this point, adding any more there……in our disciplines, that whole group (GS, MS, brokers) doesn’t grade out very well…we actually do have life insurance companies where we have a 7-8% weighting and I think they look sane and fairly safe…the regional banks might look interesting too…diversified financials like Citigroup look really cheap but I don’t know how much of their earnings can disappear quickly….
Whenever we feature an interview by Betty Liu of Bloomberg, we are impressed by the direct and useful questions she asks. She does not waste viewers’ time with useless banter and gets straight to the point. It is also clear that she reviews her notes from her prior conversations with the guest before the interview. As we said, we are impressed.
3. More Correction Ahead? – Louise Yamada on CNBC Closing Bell – Friday, June 17
Louise Yamada is a well respected technical analyst. Her appearances on CNBC are relatively rare and often timely (see our comments below). She is known for making good long term calls.
- Yamada – the technical indicators are in the weakest condition we have seen…new highs vs. new lows have broken an 11 month support level, the up-down volume relationship deep oversold, very deep oversold, the empirical evidence of selling which suggests that the rallies we have had prior to this declining phase has been met with selling into strength, right now you are at the March level, right at the upturn lines for the U.S. markets, right at the 200 day moving average and its a critical point; if you rally here and fail at the 50 day moving average and roll over again then we will be extending what already looks like a six month potential distribution into something larger.
- Francis – ...we are seeing US markets outperform other markets. What would explain that disparity?
- Yamada – That’s very interesting, its been in place for about a year and because the other markets have been in two years sideways trading markets, France, Australia, Switzerland, Japan, China all going sideways breaking their up trends and in some ways rolling over within those trading ranges..
- Francis – you are a long term bear on the Dollar, take us through that chart
- Yamada – we got a sell signal on the Dollar in 2002. I think you can see the two year downtrend is still in place. Interestingly the rally we have just had stopped exactly at the downtrend line at 76. Also each rally you see there for each crisis we have had financially, has had less of a rally to the perceived safe haven of the Dollar, 2008 was a 25% rally, 2010 was a 19% rally, late 2010 was only 7%, so far we have seen next to nothing.What’s really been safe haven is the Swiss Franc and Gold…even as the Dollar rallied, Gold held firm.
- Francis – forgive my ignorance here..it looks like an inflection point in the end of the chart you were just showing us, where does it go from there?
- Yamada – It is very possible, you could have a further rally into the declining moving average of 78. Recognize 80 on the US Dollar is a major 34 year resistance level, a level that was broken..
- Francis – what’s the bottom line? what should the viewers take away from all of this?
- Yamada – …you keep an eye on the rally, any rally that continues from this point for quality, for Sustainability, and for any failure to exceed the resistance level above first, the first 50 day moving average and above that if there is a failure to get to new highs…
There was a time we included Melissa Francis in CNBC’s version of The Young & The Reckless. No more, we think. She is still provocative, often biting. But now her comments and questions are relevant and often smart. This interview is an example, especially the question about an inflection point in the Dollar. If you see the clip, you will notice that Louise Yamada was surprised by the question. And she is fun to watch, a quality we admire in an anchor ( Bloomberg anchors, take note). The Francis-Kudlow anchor duo has become the most entertaining act on CNBC. And who would thunk that Larry Kudlow could one day be called entertaining?
Melissa Francis was a guest anchor on Maria Bartiromo’s show when she interviewed Louise Yamada. That is a relevant because it throws up an empirical pattern. Go back and check out the timing of Louise Yamada interviews on Maria’s shows. She tends to invite Ms. Yamada just as a correction is about to end. So if this empirical indicator remains valid, we should see a rally in the stock market pretty soon. Yes, we do realize that this is highly tenuous, but as Coach Chuck Daly taught us, when a play works, keep calling it until they learn how to stop it.
On this subject, short the S&P when Maria gets very happy on air and says “the market is climbing a wall of worry”. The duration of this indicator is a function of Maria’s level of giddy bullishness in making this comment. For example, on February 18, 2011 at 3:36 pm, Maria was absolutely beaming when she gave this signal. The mark on that signal was $134.24 on the S&P. What a signal that was? This Tuesday, she was less giddy when she gave us this signal. But it still worked. Remember Wednesday’s decline.
Below is a partial list of experts who are calling for a rally from these levels:
- Rick Bensignor said on Friday – “if something good comes out over the weekend, you could see the S&P up 20-25 points on Monday and the Dow can be up 200-300 points..the market is very ripe for a bounce.”
- Carter Worth on Wednesday – “We are buying…the rally could get to 1300….trim at 1310-1320 …Sell All Longs at 1340-1350”
- Thomas Lee on Thursday – hedge funds and mutual funds have position-squared meaning couple of months ago, they were really cyclically tilted, they have now gone towards neutral..markets have really sold off with oversold readings like RSI, Investor sentiment. we are very close to where we were in August of last year..which means I think we are going to rally over the summer…
4. Hedge Fund Star Strategy – Patrick Wolff of Grandmaster Capital on CNBC’s The Call – Friday, June 17
Mr. Wolff has been named as one of Institutional Investor’s Rising Hedge Fund Stars. His fund was launched in January 2011. Presumably, Mr. Wolff was a Hedge Fund Star at Clarium Capital where he worked before starting his own fund.
- Kudlow – You don’t like Europe. What is your take on the USA which is where I want to focus?
- Wolff – Two words, Fortress America. We have our share of problems to be sure but some are priced in, some aren’t. it’s a good place to be investing. Europe is doomed. There will be a time there and some opportunities. But the European situation is not yet resolved, I think China will hit the wall harder than almost anybody thinks sometime during this decade.
- Wolff – It is very simple. China’s share of investment in its economy is at an all time high and going higher. That investment, I believe, is more and more mal-investment, bad investment, build up of debt…this is a debt-fueled investment bubble and when it breaks, it’s going to be the major event of the decade.
- Wolff – I think the risk trade ….is pretty much over now. I think Staples, Defensive, Consumer, high quality businesses, you basically want stable businesses, good cash flow, good valuation…one sector that’s interesting in property and casualty insurance which is at an all time low in terms of its valuations….you may get a harder pricing market, the balance sheets are generally quite good.
5. Ralph Peters on Bill O’Reilly’s Factor – Wednesday, June 15
Emerging Markets, Asia in particular, may have the highest growth in the world.But Asia also has the greatest geostrategic risk of any continent. There was a time when Bill O’Reilly was a fan of Pakistan, at least as a convenient ally. Lt. Colonel Ralph Peters has usually been a smart, if emotional, observer of Asia. This clip discusses an obese but real tail risk.
- O’Reilly – Specifically Colonel, what would you do if you were the President?
- Peters – Stop, Stop pretending that Pakistan is an ally and treat it as the rogue state it is. Bill, Pakistan’s Military and Intelligence Services, those who really run the country are addicted to terror as a tool of statecraft. They are terror junkies. And giving junkies more money doesn’t help the addiction. So again, treat them as a rogue state. Here is how you do it. Three steps.
- 1) You got to get the number of troops in Afghanistan down to a level of about 15,000-18,000, hunters and killers. Stop trying to reform Afghanistan by giving it platinum toothbrushes to toothless villagers. So we don’t have to rely on that supply line through Pakistan,
- 2) At that point, you cut all support for Pakistan, no more money, no more intelligence support, no more spare parts for the F-16s.
- 3) You throw all of our weight behind India – worried about Pakistani nukes, we can take care of them but I guarantee you, Indians could take care of them.
- 1) You got to get the number of troops in Afghanistan down to a level of about 15,000-18,000, hunters and killers. Stop trying to reform Afghanistan by giving it platinum toothbrushes to toothless villagers. So we don’t have to rely on that supply line through Pakistan,
- O’Reilly – I raised that the last time around…but I got all kinds of flak from the Washington Establishment …we really are caught there logistically…
- Peters – we got to stop backing ourselves in a corner, don’t believe the propaganda about how wonderful things are.the Taliban are not short of recruits…Pakistan, we have given them as you pointed out $20 billion plus over ten years, what did we get for it? They actively hid Bin Laden, they knew where he was..they are helping the Taliban kill and maim American soldiers, marines and Navy corpsmen every single day, they support a wider range of terrorist groups than Iran does, they give safe havens as you pointed out to terrorists, they launched terrorist attacks against India, how is this a good deal? I am fired up about this.
- O’Reilly – it is a terrible deal….There is no debate on this. Nobody feels Pakistan is cooperating, everybody knows they are not…. I predict the President is not going to do anything…not a thing not publicly, privately behind the scenes they might do something, do you have any idea what it would be?
- Peters – They are not going to do anything to make the Pakistanis angry. It is a joke. We are afraid of the Pakistanis. It is crazy. Bill, the President’s goal in Afghanistan and dealing with Pakistan is very straightforward. It is to keep the lid on things until November 2012 no matter what happens, no matter how many soldiers are killed or maimed, no matter what Pakistan does. And I will tell you this and I am more fired up about this than I have been about anything in a long time. Any member of Congress who votes to give more billions to Pakistan, any body who does it, they have blood on their hands, the blood of our servicemen.
- O’Reilly – you would say at this point, OK Pakistan, we are cutting off all the money until you… launch a military operation with US support in South and North Waziristan which is where the Taliban stronghold is right now and in Quetta where the leadership is. I think that would be a fair deal….If you take reprisals against us, this is what I would do, if you take reprisals against us and stop our pipeline, we will actively bomb Pakistan, we will bomb your country in pursuit of the Taleban, no more drones, you will have bombers coming in from Bagram…you want that, you got it..I think you got to take a hard line..
- Peters – Bill, its great but its not going to happen. The Administration is not interested in strategic planning, they are interested in November 2012. They will anything they can to keep a lid on things until then.
But this clip overreaches, we think. No US President is going to bomb Pakistan. Not unless a bomb goes off in America and it is traced back to Pakistan. The only reason a US President would bomb Pakistan would be to de-nuclearize Pakistan. And that would be a massive, massive effort. It could also result in the Pakistani Military handing off small nuke weapons to their captive terrorist groups.
Today, we have numerous financial types who argue that Greece should restructure now because the longer they wait, the problem gets worse. Greece or even PIIGS are essentially trivial compared to the problem of Pakistan.
Pakistan is potentially a disaster of unimaginable magnitude. And no one has the slightest appetite to deal with the consequences of any military action against it. Any real solution would need a united active effort by America, Russia, Iran, India and passive support from China. So the can gets kicked down the road and everyone waits until that ultimate inflection point when all hell breaks loose. That inflection point has been given an official name in Washington’s Foreign Policy and Military Establishment. That name is “The Morning After”.
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