Editor’s Note: In this series of articles, we include important or interesting videoclips with brief comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
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.
Despite the bad rap it gets, recently September has been a good month for Commodities, US Equities, Resource Stocks, Emerging Market Stocks and a bad month for the US Dollar. This has been the pattern for 2003-2007. (September 2008 was dominated by the Lehman Bankruptcy – clearly a special case).
US Dollar
True to its September form, the US Dollar broke down decisively this week and traded to new 2009 lows. In the process, it broke what we have termed the Rogers-Kudlow double bottom on June 4 and August 3. Every single day this week, the US Dollar was sold and fell without any meaningful bounce. This has been a very crowded trade and got far more crowded this week. Perhaps, as a result, Gold broke above the $1,000 level.
Does the Dollar turn soon as experts such as Robert Prechter & Rick Bensignor predicted three weeks ago? Or does it get sold relentlessly until year-end as in 2004? This is a very big question and the answer could decide the fate of other asset classes. See clip 2 below for a thoughtful debate on this topic.
Equities
Global Equities continued to rally in a low volume, grinding manner to new 2009 highs. As we wrote on August 1, this action in the equity markets reminds us of the second half of 2006. The equity market began rallying in July 2006 and kept going up straight for the rest of the year in the same low volume, grinding but persistent manner. That rally kept driving VIX to lower lows during those 6 months. Every decline was be stopped in a day or so by persistent buying that was present underneath the market. We recall that veteran market observers like Art Cashin of UBS-CNBC kept finding fault with that rally arguing that low volume made that rally suspect.
The equity market behaved similarly this week. All week, selloffs were muted and met by a persistent bid under the market. The volume on up days was low and the VIX kept going down. Interestingly, Art Cashin has been making the same arguments he made in 2006 with the same results (see clip 7 below).
September is not over and next week is Options Expiration, which usually has a bullish bias. But as Greg Troccoli of CNBC Fast Money wondered on Friday, is the Thursday new high a bull trap? Or is it another way station to 1100 on the S&P. We shall find out next week.
US Treasuries
There is another similarity between 2006 and 2009. US Treasuries began a strong rally in June 2006 that continued until November 2006. In this 6 month period, we recall that the 25 year Treasury Zero Coupon Strip rallied 22% in price. This rally provided the foundation for the strong equity rally that began in July 2006.
As we wrote in our June 20 article, the excessively negative CNBC coverage of the 10-year Treasury Auction on June 10, 2009 ended up marking a bottom for Treasury prices and a top for Treasury yields. What a top-bottom combo it turned out to be? The figures below tell the story of the 3-month rally from June 10 to September 11:
- EDV, the Treasury Zero Coupon Strip ETF, has rallied from $89.42 to $103 – a rally of 15.18%
- SPY, the S&P 500 ETF, has rallied from $94.82 to $104.77 – a rally of 10.49%
- EEM, the Emerging Markets ETF, has rallied from $34.29 to $37.86 – a rally of 10.41%
- FXI, the China ETF, has rallied from $40.12 to $$42.39 – a rally of 5.6%
- GLD, the Gold ETF, has rallied from $93.70 to $98.78 – a rally of 5.4%
A few anchors did deign to take notice of this Treasury rally but their tone was one of disbelief. Despite the best efforts of Rick Santelli and Steve Liesman, not a single CNBC Anchor could bring herself or himself to talk about BUYING long Treasuries. Only Jim Cramer & Erin Burnett had the guts to speak positively about the Treasury Rally (see clip 5 below).
Apart from strong technicals, this Treasury rally may simply be due to the fact that 30-year Treasuries became extremely cheap in June 2009.
- The attractiveness of Treasuries is usually determined by the level of Real Yields (after inflation) they offer. Real Yields are calculated as Real Yields = Market (or Nominal) Yields – Core Inflation.
- Today, core inflation is negative and is expected to remain negative until the end of 2010. Assuming the core inflation rate of (-1%), today the Real Yield of the 30-Year Treasury Bond is 4.2% – (-1%) = 5.2%. This is a very very high real yield.
- If you don’t believe us, compare today’s real yield to that in June 2007, another peak in Treasury Yields. At that time, the market yield of the 30-Year Treasury Bond was 5.5% and core inflation was about 2.5%. So, the Real Yield in June 2007 was only 5.5% – 2.5% = 3%.
And move they have. Big Money seems to be liquidating its massive short position in the 30-Year Treasury Bond. According to the recent CFTC report, the short position of Large Speculators on September 8 has been cut in half from what it was on August 25. Just imagine how low Treasury Yields could go if Big Money decided to actually get long the 30-Year Treasury Bond?
What could tempt them to do so? Sheer price momentum is always a great lure for these players. Then, they could remember the great carry trade of the second half of 1993. That year, George Soros and Julian Robertson made a billion dollars (personally as we recall) by borrowing short and buying the 30-year Treasury Bond on a leveraged basis.
The conditions are even better in 2009. You can borrow at virtually zero cost and buy the 30-year Bond at 4.2% thus earning a humongous carry of over 400 basis points. Will Big Money begin to consider this trade? We shall find out together.
At least, the Bond King, Bill Gross has discovered the hot spice of the 30-Year Treasury Bond (See clip 4 below for his comments).
This week, we feature the following clips:
- Meredith Whitney on Squawk Box on Thursday, September 10
- Mark Chandler, Brown Brothers, & Rebecca Patterson, JP Morgan, on Closing Bell on Wednesday, September 9
- Jim Chanos on Squawk Box on Wednesday, September 9
- Bill Gross on StreetSigns on Wednesday, September 2
- Jim Cramer on StreetSigns on Friday, September 11
- Doug Kreps, Fort Pitt Capital, & Dan Solin, Author on Power Lunch on Tuesday, September 8
- Art Cashin on Squawk Box on Tuesday, September 8
1. Meredith Whitney on Squawk Box – Thursday, September 10
Readers might recall that it was Meredith Whitney who caused an explosive rally on Monday, July 13 with her Squawk Box interview. During this interview, she upgraded Goldman Sachs and spoke positively about other Bank Stocks.
This week, Whitney had a different and more disturbing message. She predicted that house prices could go down more than 20% from today’s levels and she spoke negatively about most Bank stocks.
However, she said Goldman had more horsepower left and that it would benefit greatly from its dominant franchise. That was enough to make GS stock go up by 5 points that day.
Her interview is in two segments:
- Home Prices Going Down – 7:31 am
- Whitney On Rebuilding Credit Markets – 7:03 am
2. Dollar’s Direction – Mark Chandler of Brown Brothers & Rebecca Patterson of JP Morgan with Matt Nesto – Wednesday, September 9 – 3:28 pm
This is a must watch discussion about the direction of the US Dollar. Rebecca Patterson is bearish on the Dollar while Mark Chandler is bullish.
3. Chanos on China on Squawk Box – Wednesday, September 9 – 8:55 am
James Chanos, President Kynikos Associates, is an extremely smart investor. He is known for detailed analysis of the companies he shorts and he is very right far more often than he is wrong. So we were very interested in his views on China.
Essentially, Chanos describes China as a centrally controlled economy like the Soviet Union. He wonders how long such a complex economy can be managed by directives from the top leadership. Watch this clip.
We have made a similar argument by describing Chinese leadership as momentum players or trend followers. It is one thing to be a momentum player when one manages a portfolio and is only responsible to one’s investors. It is a completely different thing to be a momentum player when managing a huge country of 1.3 billion people and the world’s 3rd largest economy.
We have argued that the Chinese Leadership is likely to make a big mistake just like it did when it forced a one-child policy on China in 1980s. That has proved to be a disastrous mistake and one that China will pay for the next 30-40 years.
The consensus in the markets is that Chinese leadership is smart, decisive and capable of taking the right decisions every single time. In contrast, the markets have complete contempt for America’s economic and political leaders as well as for the state of the American economy.
We think the markets are wrong. Apparently Jim Chanos concurs.
4. Bill Gross’s September Outlook with Erin Burnett – Wednesday, September 2 – 2:06 pm
This is a very good clip in which Bill Gross explains Pimco’s views about the economy and the markets. Kudos to Erin Burnett for letting Bill Gross explain his views in detail and gently asking focused questions.
In response to such a question, Bill Gross said (at minute 6:02 of the clip) that the 30-Year Treasury Bond at 4.12-4.15% is an attractive asset to own.
This is the same Bill Gross who said he was “bland” about Treasuries on Fed day, a couple of weeks ago. Mr. Gross explained that Pimco is beginning to explore the possibility of a double dip in the economy.
Watching Bill Gross’s conversations with Erin Burnett since late May 2009 has been both instructive and interesting.
- In late May, he was negative on Treasuries.
- In early June, he admitted that the 10-Year Treasury could be an attractive entry point at 4%.
- Since then, he and his colleague Paul McCulley have stated that they preferred the short end of the Treasury market. Now, perhaps because of their concerns about a double dip, Pimco and Gross have become bullish on the 30-Year Treasury Bond.
5. Stop Trading, Listen to Cramer! with Erin Burnett – Friday, September 11 – 2:32 pm
This is fun segment but with good advice for individual investors. Unlike his other CNBC colleagues, Cramer acknowledges and welcomes the huge rally in long maturity Treasuries. He states that this rally will be positive for both the mortgage market and for the stock market.
Erin Burnett asked him how low the 30 year Treasury yield could go and whether Cramer would buy the 30-year Bond now? Jim Cramer dodged the first one and said that he was a Municipal Bond Investor rather than a Treasury investor. Then Jim Cramer told viewers that the Municipal market has rallied a great deal and that he would wait for a pull back before buying Municipal Bonds. We think he is correct.
We have to point out to readers that Municipal Bonds and 30 year Treasury Bonds are two very different creatures. Municipal Bonds are mainly used for long term investing and that too for income investing. The Muni market is too illiquid to be used for short-term or medium-term trading for capital gains.
In contrast, the 30-Year Treasury Bond is an aggressive security used mainly for capital gains or equity-type returns. It is also ideal for both short-term and medium-term trading. The Treasury market is the most liquid market in the bond world and trades in huge volumes.
6. Does Diversification Still Work? Doug Kreps of Fort Pitt Capital Group and Dan Solin, author with Michelle Caruso Cabrera – Tuesday, September 8 – 1:50 pm
Diversification is a very important topic for us. In our opinion, lack of true diversification in a portfolio is probably the worst sin in investing.
We wrote an article on this topic on August 22 titled Fall of the Super-Rich – A Lesson in True Diversification? This was a commentary on a New York Times article that chronicled the case of Mr. John McAfee whose net worth fell from over $100 million to about $4 million because a “tandem collapse” in both stocks and real estate.
So we watched this interview with interest. Unfortunately, we were disappointed. Frankly, the question mark in the title should have been a dead giveaway. The anchor, Michelle Caruso Cabrera, made the opening point that diversification did not work for many investors in 2008 because “everything” went down. Apparently,Michelle Caruso Cabrera, like so many of her colleagues, only seems to think of foreign stocks or commodities are diversification for US stocks.
The author Dan Solin tried to point out to Michelle that bonds did do well in 2008 and a portfolio diversified between stocks and bonds would have performed much better than a non-diversified portfolio. But Michelle did not seem to listen or care.
The other guest, Doug Kreps, was unfortunately a stock manager and he could only speak of stocks. This is not just Michelle’s fault. It seems to be the DNA of Power Lunch. This show only invites stock managers or stock mutual fund managers. Then they ask these stock managers questions about investing in Bonds as well as timing the markets.
This is highly inappropriate. A stock mutual fund manager makes his living by being fully invested in stocks. There is no way such a manager will ever recommend getting out of stocks because that will invalidate his or her entire business. This is why all these managers only recommend long term buy and hold strategies. They did so in 2008 despite causing huge losses in investor portfolios.
Inviting these stock managers and asking them to opine on Diversification is ridden with conflicts. It is OK to ask these managers about the stocks they like but NOT about the market direction or diversification. We call on CNBC to stop this unethical and conflict-ridden practice.
Diversification is a crucial topic and True Diversification always works. Unfortunately, this interview did not work.
We encourage PowerLunch to revisit this topic again with real asset allocators as guests and provide a real discussion about coherent diversification strategies.
7. Trader Talk With Art Cashin and Joe Kernan – Tuesday, September 8 – 8:50 am
Art Cashin, head of floor operations for UBS, is a respected market watcher. He is also an engaging personality and exhibits wit & humor.
Unfortunately, Mr. Cashin has been dead wrong on the stock rally this summer. He has vainly tried to come up with zany reasons to predict a correction including a Solar Eclipse, Ramadan, 9/9/2009 etc. Frankly, Cashin’s comments & contrived reasons have become a semi-farce this summer.
So we liked Joe Kernan’s friendly but pointed comment to Art Cashin:
- “You have thrown Solar Eclipses, Ramadan, 9/9/2009; you have thrown everything at this market that you can possibly come up with and it has never corrected”
We recall that, only a few years ago, we considered Mr. Cashin a must watch. We would stop our work to listen to him when he came on. Then we got a rude jolt when he spoke about something that we knew a lot more of than he did. That is when we realized that Mr. Cashin does not really study the facts or the factors behind the obvious. We concluded that he does not have the necessary rigor that we see in so many other market commentators on CNBC such as Rick Santelli, Jim Cramer or the Fast Money trading team. Then we watched Mr. Cashin completely miss the entire rally in the second half of 2006. He kept complaining then about the lack of volume and the lack of factors that, in his opinion, make a real bull market rally.
This is not to make light of Mr. Cashin’s extensive experience or his empirical observations about the stock market. It could simply be that Mr. Cashin, as a floor trader, has not updated his indicators or his analysis to reflect the fact that 75% of today’s trading volume is executed away from the NYSE trading floor. He does not seem to talk with clients as Steve Grasso does. So he is unable to comment on actions or opinions of large institutions as Mr. Grasso does.
We bear neither ill will nor disrespect towards Mr. Cashin. But, frankly, a market commentator is only as good as his or her recent calls. We would respectfully request Mr. Cashin to add more rigor to his analysis and more factual indicators to his comments. That will help his empirical observations to become more useful and perhaps more accurate.
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