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. Economy vs. Economy
We used this expression back on July 20 to wonder whether the real economy was reflected in the then weakness in ISM & other data or in the then strength in the employment numbers. And we wondered which will trend to the other. But we had no idea that both would trend towards each other so hard that they would go past each other rather than converging. The ISM numbers have shot up dramatically to multi-year highs as demonstrated by this Thursday’s ISM non-mfg number of 58.6. And the payroll numbers have been weak two months in a row with labor force participation dropping to 1978 levels.
So we are again left wondering which of the two series better reflects the U.S. economy. The Treasury market is still skewed towards a stronger economy thesis based on the asymmetric (Rick Santelli’s favorite expression) action in yields on strong data and weak data. For example, 30/10/5 yr yields jumped 8.3 bps, 9.7 bps and 10.4 bps on Thursday’s great ISM non-mfg data while the fall in yields was much smaller on Friday’s weak payrolls number, only 1.4 bps, 5.5 bps and 8.7 bps resp.
This week’s movement in yields was decisively higher despite Friday’s drop. The 30-yr yield rose by 16 bps this week, the 10-year yield by 16 bps and the 5-year yield by 14 bps. The 10-year yield touched 3% on Thursday and the 2-year closed at 52 bps, a level that brings into question the Fed’s commitment to not raise short term rates until 2015.
We noted two weeks ago that the 30-10 year yield spread fell below 100 bps on Thursday August 22 after remaining above this old resistance & new support level since launch of QE. This flattening continued for the past two weeks till the 30-10 year yield spread went down to 88bps on this Thursday. But the spread steepened sharply to 92.5 bps in response to the weak data on Friday.
What does all this suggest about a taper, taper-light or non-taper at the next FOMC meeting in a week and half? We don’t know and neither do the TV gurus whose opinions range from one extreme to the other. At this point, we will simply watch interest rates and wait for Chairman Bernanke to tell us on September 18.
The taper-light case was made stronger when Esther George, the most vocal hawk at the Fed, said the Fed could slow, for example, its $85 billion program to $70 billion per month and bring it the purchase program to a close by middle of next year.
2. U.S. Treasuries
Frankly, Rick Santelli’s “asymmetric” term does not do justice to the ugly action in Treasuries on Friday afternoon. The action immediately after the release of the weak payroll number was intense as Bespoke tweeted at around 8:40 am on Friday:
- Bespoke @bespokeinvest6m – 10-Year Treasury Yield is down over 12.5 bps, which would be the largest one day decline in yield since April 2012.
Wasn’t April 2012 a great buying opportunity to buy long duration Treasuries or TLT? But then the 10-year yield began rising slowly but surely to close down by only 5.5 bps. And the 30-year yield only closed down 1.4 bps. That is not bullish action. It reeks of immediate short covering after the 8:30 am number and then reestablishment of shorts on Friday afternoon. This is what Dennis Gartman had threatened to do on Friday early morning on CNBC Squawk.
Despite the rise in yields during the first four days of the week or the ugly action on Friday afternoon, a number of smart guys were bullish on bonds this week.
2.1 Marc Faber on CNBC Futures Now on Tuesday, September 3
- I think the sentiment is incredibly bearish about Treasury bonds and
Treasury notes… the Treasury market looks attractive here … if the stock market goes down as much as I think it will, people will again fear
deflation, and they will move into 10-year Treasury notes”.
2.2 Tony Dwyer on CNBC FM -1/2 on Tuesday, September 3
- “there’s
been four times when ten-week rate of change on the ten-year
note yield has gotten over 35%. Each of those periods were not the peak
in yields but they surrounded it and then you saw a drop. So I think
yields are coming back into the low to mid 2s and that should boost
stock prices with a valuation expansion under way” - “I don’t think rates are actually going to rise. The Fed said until 2015. Let’s just assume the end of
2014,
early 2015 which means the two-year note is really pinned at about 40
basis points. it’s kind of become the 90-day t-bill. - “I think this is probably going to be the most important comment. The Philadelphia Fed in 2005 did a paper on the savings rate.
they found that disposable personal income is under estimated by 8.4%
per year since 1965. that tells you how much this data gets revised. so
we have the ten-year note yield is up 10 or 11 basis points when i came
to the camera. the durable goods number was better than expected. it was
0.2 better than expected. the last month was revised by that entire
amount. How could the Fed possibly look at a single data point, even
the ISM, and say this is it, we got to get tight already that would be
crazy given the amount of revisions. the trend of the data remains
better but still from historically tame levels.”
2.3 Jon Najarian on CNBC FM on Thursday, September 5
- “I think we’re topping out as far as rates. … think we hit an absolute wall at 3 percent and pull back down to 2.8 and consolidate and move back up through three.”
- “I say we’re going to get through three but just slightly, possibly not close above it more than a couple days and then, boom, pull back down because a lot of things will get triggered, a lot of knockouts will get triggered, a lot of exotics as we hit three.”
2.4 JC Parets on CNBC FM on Thursday, September 5
- “when you look at bond sentiment, it’s some of the worst we’ve seen in years. The last time there were this little amount of bulls in Treasury bonds was in the beginning of 2011 and the TLTs rallied 45% from there .. ”
2.5. Carter Worth on CNBC Options Action on Friday, September 6.
- “tapering – buy the rumor, sell the news. … We think the move in the bond is pricing that in. … we have just now reached the top of the chart [of the 30-year]. We are almost 4%. 3.9% & change on the 30-year. That is pricing in what is coming from the Federal Reserve. … We think this is at an end.”
- “Let look at the TLT, itself. … we started to break up above this channel [on 1-year chart]. We think that’s the tale that something is occurring here. Look at the long-term chart of TLT. We reached something of a trend line. We would play for a bounce in TLT or a pullback in rates”
2.6 Larry McDonald tweet on Thursday, September 5
- Lawrence McDonald @Convertbond – At 2.99%, the US 10 Year Treasury is at the very top of 5 year channel – pic.twitter.com/3fItEP8aqk
A smaller copy of Larry McDonald’s chart is below:
3. U.S. Equities
3.1 Ralph Acampora was absent from his usual Friday after-market slot on CNBC Closing Bell. So we substitute his Friday morning tweet below.
- Ralph Acampora CMT @Ralph_Acampora4m – Home Depot (HD) broke major support, completing a major double-top pattern. This exemplifies the split between large-cap and small/mid cap
3.2 JC Parets on CNBC Fast Money on Thursday, September 5
- “there is less good. that’s the problem. I was on the show in May and one of the reasons I loved the market when we were breaking above 1600 was the fact that more stocks were participating. the market was getting broader, was getting stronger.. It had legs to take it to another level. Now we look at it and there are less stocks participating. You look at stocks above the 200 day average. It’s generally in an uptrend. When we see the S&P 500 making new highs you want to see more stocks in uptrends. We’re actually see the opposite. At new highs in August there were less stocks in uptrends. That to us is worrisome. Underneath the surface, market is weakening”
3.3 Tony Dwyer on CNBC FM -1/2 on Tuesday, September 5
His 2013 target is 1,760 and 2014 target is 1,955.
- “I think the more important point isn’t whether the Fed is going to taper, it’s when they’re going to unpin the short rates. What precedes a recession, really the only reason to get really bearish or defensive for more than a couple weeks is … if the yield curve is going to invert. You can’t find a time where the yield curve has steepened. … Unless you really flatten the yield curve and the Fed raises short-term interest rates, to us it’s not whether you’re a buyer, it’s whether you’re more aggressive.”
3.4 Marc Faber gave three reasons for an upcoming plunge on CNBC Futures Now on Tuesday, September 3:
- U.S. will follow emerging markets down,
- Middle East will become a disaster,
- Interest Rates have become a headwind.
3.5 Lawrence McMillan wrote on Friday, September 6
-
At this point, the $SPX chart is still bearish, because it has a sequence of lower highs and lower lows. In summary, the market appears to be in the midst of an oversold
bounce. … That rally is likely to run out of steam soon. We remain
intermediate-term bearish, in line with our indicators.
Bespoke seems to concur with its tweet on Friday after the close:
- Bespoke @bespokeinvest4m – “Nice effort, but bulls couldn’t keep the Russell 2,000 and Transports above their 50-days. Bears still in control here.”
5. EM
While Submerging EM has been the visible story for the past few months, the reality has been different as Mark Newton tweeted on Friday morning:
- Mark Newton @MarkNewtonCMT1m – Bounce in Emrg mkts continuing, EEM up 7 straight days, longest winning streak since Dec ’12-nearing import Resist-July/Aug highs,Apr lows
Readers might recall that a EM trading signal was provided a few weeks ago by Michael Hartnett of BAC-Merrill Lynch. This week, he writes in his The EM Pain Trade is Up report.
-
Big $6.1bn redemptions from EM stock & bond funds.
Massive $60bn outflows from EM equity & bond funds over past 3
months = capitulation. Note EM equities outperformed after similar
redemptions Jul’04, Aug’06 and Sep’08 (Chart 2). Tactical bounce in EM
equities continues unless a big payroll print (>250K) causes gap
higher in treasury yields (>3%).
That was on Thursday before Friday’s payroll number which negated his “unless” caveat. The various EM ETFs outperformed SPX by 1.5%-2% on Friday. That seems to be the message of Hartnett’s chart below:
Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
But Michael Hartnett remains underweight EM with his colleague Ajay Kapur as he explains in his Canaries in the GEM Mine report:
- “We’re underweight EM, but both Ajay Kapur and ourselves believe a trading bounce is likely given positioning and performance. Note China is outperforming and EM cyclicals have stopped underperforming. Let’s hope EM equities bounce. If they do not and the EM decline continues, the financial and macro impact on Developed Markets would start to be discounted.”
6. Gold
Gold and Silver have had a pretty volatile week after a huge rally from the last week in June. This week, the precious metals seemed to be buffeted by both the Syria intervention and Taper prospects.
George Davis of RBC is bearish on Gold as he told CNBC Futures Now on Thursday, September 5:
- “Valuations are starting to become more overbought at this juncture,” he
said. “I think there’s a window of opportunity where you could leg into
some short positions.” - “We are looking for a return back down to the $1,275 level as a
medium-term target,” he said. Eventually, Davis thinks gold will
“retest” to the $1,200 level. After all, that’s roughly the level that
gold bounced off of in July 2010, and then again in June 2013″ - “Davis advises using short-term rallies to the $1,427 to $1,487 level as a selling
opportunity.” And on the upside, he recommends using the well-tested
$1,530 level as a stop loss“
Kathleen Kelley, founder of Queen Anne’s Gate hedge fund, is worried that outflows from Gold ETFs will be a catalyst for a downward move in Gold. She thinks that Copper is the clear outlier among metals:
- “Copper has the most bearish story right now and I think part of that
is just because of supply,” she said, pointing to 2013 production
increases in Chile as well as lagging demand and increased supply in
China. “Copper is definitely far off from its fair value, from
its average price of production. It’s probably the furthest off of most
commodities,” she added.”
In contrast, Brian Stutland of Stutland Volatility Group was bullish on Gold on CNBC Closing Bell on Friday, September 6
- “we have had a two-year bear market since that all-time high. What we see right now is every little sell-off, April sell-off, June sell-off, even yesterday, each sell-off is met with less volatility. That’s a good thing. [Gold] Volatility is declining, buyers are stepping in the sell-offs and buying the dip. … one thing I would say that could turn it downward, watch the Ten-year Treasury; a rise in the ten-year yield could cause a sell-off. That’s something to watch. Otherwise, I’m very bullish on GLD right here.”
Featured Videoclips:
- Bill Gross on Bloomberg Surveillance on Friday, September 6
1. Taper-Lite – Bill Gross on Bloomberg Surveillance – Friday, September 6
This is a detailed interview with BTV’s Tom Keene. The excellent summary below is courtesy of Bloomberg PR.
Gross on today’s jobs report being the new normal:
- “Yes, it sure was. And I guess the revision of last month was the biggest shocker. And the fall, of course, as you mentioned in terms of the participation rate from 63.4 to 63.2. You know, the unemployment rate is down, for those that focus on the unemployment rate, it is 7.3 percent. They would simply suggest we are closer to tapering and closer to a fed funds increase at some point. But I would suggest otherwise, that it is really a weaker economy as evidenced by today’s report.”
On whether the Fed will taper September 18:
- “Yes, perhaps. I think they will. You know, much like the red line in Syria, I think Bernanke and company are committed to a taper and the sooner the better. The taper is really a factor not necessarily of the growth or the strength of the economy, but the fact that at some point, three to six months ago, Governor Stein, for instance, wrote about the impact that tapering and QE is having on risk assets and the potential for a bubble. So I think the Fed is really focused on de-bubbling risk markets in terms of a frenzied narrowness of spreads, or even a frenzied peak in terms of equity prices. And they will taper in September, but it will taper lite as opposed to a strong taper. And what does that mean? That means to us perhaps $10 billion. And mainly, by the way, on the treasury side as opposed to the mortgage side.”
On whether this is two Americas:
- “I think so. It has been for a long, long time…And as the rich get richer, the middle class, as Obama is want to characterize the poor, basically stands still or even moves in reverse as their wages don’t keep up with inflation. So it is certainly two Americas. At this point, and for the past three to four years, the fed and the government has focused primarily on reinvigorating the financial markets, which are the bastion basically of the first America, the one percent or the five percent. But 95 percent are not participating and that ultimately affects economic growth no doubt.”
On whether nobody wants to work in America:
- “Well, I think people want to work. We’ve seen they want to work, but they want to work for a decent wage and the wanting isn’t necessarily fulfilled by global forces and by structural forces such as technology and corporate downsizing to improve bottom line targeting. So wanting a job or not wanting a job, to my way of thinking, is not really the factor – the headwinds of globalization which sees China and others replace U.S. jobs with technology, which sees robots replace jobs, and corporations which basically want to improve their productivity by eliminating jobs.”
On how he frames the ten year yield future:
- “Well, our view is dominated not by QE and tapering, which influences the ten year yield, but by the front end and how long the Fed stays there. To the extent that they stay there until 2015 or 2016, that acts as a magnate so to speak, as a force that keeps the ten year from increasing, if only because the three percent yield and the roll down associated with it produce returns of four percent to five percent – very attractive. So if the Fed stays where they are and this morning, for instance, Evans suggested that it might take six percent unemployment to produce a fed funds increase, then basically there is value in the bond market, value in the ten year to your question. There is more value, in our opinion, in the front end because, believe it or not, the forward – see it gets a little complicated here – but forward interest rates, the fed funds future so to speak, in 2008 are anticipating nearly a four percent fed funds rate and we are at 25 basis points. That becomes rather ludicrous in the face of this particular report and the expectation that the economy remains in a new normal, as opposed to an old normal type of world.”
On whether he would predict now or in the near future that there will be serious illiquidity as there are bond portfolio redemptions:
- “Perhaps in the market per se, not with PIMCO. I mean the total return fund has ten percent cash. We’ve got $25 billion in cash. So liquidity problems? No. I think what we’ve seen in core bond funds industry wide is an outflow. Because PIMCO total return is the biggest and the best, by the way, we get focused on in terms of the headlines. But our friendly competitors, Vanguard and Double Line and so on, are all in the same boat. In PIMCO’s case, when money comes out of total return, that is basically a choice on the part of an investor to move to either a lower duration or a different asset class, such as unconstrained bond funds, which have a lower duration target. And so PIMCO loses a little bit of flow in terms of total return, but gains that flow back with unconstrained or with an alternative asset. So PIMCO is not suffering. The total return fund is losing some assets, but that is a choice on the part of the investment public and we are well prepared for it.”
On what PIMCO is pinning its forecasts on:
- “Right, a wonderful question. You guys all ask wonderful questions. In this particular case, we have talked about the fundamentals fo
r the past few minutes. The markets are being influenced by what we call technicals as well. And this doesn’t refer to a head and shoulders pattern or a shampoo, but it refers to technical flows that are coming, or outflows, to put it frankly, that are being instigated, yes, by the fed and potential tapering, but also by retail. We just talked about that and pulling money out of core bond funds. Banks are under pressure in terms of regulatory influences and cutting down and reducing their assets. And believe it or not, foreign central banks, in the attempt to support their own currency and financial markets, are selling treasuries. So it is not just a question of the unemployment rate or the jobs report. It’s a question of whether these technical structural influences stop at some point. And, for the moment, they are feeding on themselves.”
On whether Bernanke is working out of a textbook:
- “We talked about yesterday in an investment committee. It was sort of a joke, but not so much of a joke actually. There is the London school and the Chicago school. And I suggested perhaps the Phoenix school of economics in terms of modeling will now dominate going forward. There are legitimate questions as to whether increasing interest rates will be a negative for economic growth as opposed to a positive. And there are legitimate questions – this is Bernanke’s model – that lowering interest rates and quantitative easing has produced stronger economic growth. Yet one could say, if you are in Phoenix I suppose, that the higher the interest rate and the higher the return on investment in real assets, that being plants and equipment, houses and so on, that the more opportunity and the higher willingness to invest. So, yes, London, Chicago, Keynes, neo-Keynes, perhaps we’re all in a world in which models are being readjusted as we speak.”
On where the economy is going:
- “We still see a two percent U.S. economy. We think in the last month that the economy has been proceeding at 2.5 percent. And yes, as fiscal austerity becomes a little bit less as we move into 2014, perhaps you see stronger growth. And we’re seeing importantly euro land flattening out at least and the U.K. exhibiting two percent to three percent growth. So the world itself is doing better, aside from emerging. But the developed countries are doing better. So it’s a more decent forecast going forward. But the old three percent to four percent Minsky types of numbers, which can be produced by big government and what they call a big bank or a thing of the past if only because the labor force is only growing at 0.5 percent. And labor force growth at 0.5 percent, plus productivity at the high side – maybe two percent, only leads to 2.5 percent growth on a long term basis.”
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