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. Tightening & the Fed
There was a good deal of Fed related talk this week from the annual Jackson Hole Conference on all Financial networks. But King Bernanke, Queen Yellen & Castle Dudley, in the Bill Gross terminology, did not speak. So we listened to those who did but frankly didn’t pay too much attention. Steve Grasso of CNBC Fast Money was clearer when he said on Friday “the more you listen to the Fed, the more confused you get.” Our own preference is to listen to the Treasury market and it certainly told a couple of interesting tales this week.
For the first tale, we need to take you back to the week of July 27 – August 2. The last FOMC meeting took place on July 30 and August 2 featured the weaker than expected payroll report. On August 3, in our section titled Disconnect between Fed Intentions & Bond Market’s Expectations, we pointed out that, while the 30-year yield reached 3.75% on August 1, 5 bps higher than the July 5 peak of 3.7%, the 5-year yield had dropped significantly from its July 5 high of 1.60% to 1.36% on August 2. That led us to ask on August 3:
- “the
maturity most sensitive to the Fed dropped significantly from its July 5
level while the maturities most sensitive to the bond market touched
their July 5 peak levels on Thursday, August 1. … Doesn’t this point to a disconnect between Fed’s intentions and the Bond Market’s expectations? How will this get resolved?”
The question was decisively answered by the bond market on Wednesday, August 21, after the minutes of the July 30 FOMC meeting were released. The answer was in the direction of the Bond market with the 5-year yield exploding by 9.5 bps to 1.64% and the 30-year yield rising 6 bps to 3.92%.
The rise in the 5-year yield in the past two weeks has been breathtaking – a rise of 33 bps from 1.36% close on Friday, August 9, to 1.69% on Thursday, August 22; a rise of 24% in 9 trading days. This is why Rick Santelli kept calling the 5-year “the canary in the coal mine“ all week.
Every Fed honcho keeps telling us that tapering isn’t tightening and that the Fed has no plans to raise the FF rate. Unfortunately, the 5-year canary is signalling something else with its explosive rise in 2 weeks. Even the dormant 2-year yield rose by 4bps on this Wednesday capping its 8 bps rise in the past 2 weeks from 31bps to 39bps.
The action on Thursday was even more interesting as Rick Santelli kept telling us. The 30-year yield fell by 5 bps on Thursday but the 5-year yield rose by 4 bps to 1.69%, a flattening of 9 bps. The 2-year yield also rose by 1 bps on Thursday. All yields fell on Friday but the 30-year yield fell by 8bps while the 5-year yield fell by 5bps, a further flattening.
Whatever the bond market is telling us in this first tale is interesting and will be important if this trend continues next week. To our simple minds, the message seems to be the Fed will tighten liquidity (based on the 5-year action) and that tightening will not be growth-positive (based on the 30-year action). This might be a signal that the Fed is about to make a policy mistake, assuming this flattening trend continues.
The second tale takes us back to pre-QE days. Remember that the 100 basis spread level between the 30-year yield and the 10-year yield was considered a very rare occurrence pre-QE. In fact, such a break of 100 bps used to signal a buying opportunity for the 30-year T-bond. How rare was that occurrence? We take you back to the detailed discussion of Rick Santelli’s great call in 2010 call via our Videoclips article of March 13, 2010:
- Rick Santelli said on Thursday, March 11, 2010 that “he had seen the 30-10 yr yield spread exceed 100 bps only 3 times in his 3 decades of watching the bond market”.
But then came QE and the 30-10 yield spread broke the 100 bps resistance and never looked back. Even at the lows in yields in July 2012, the 30-10 yield spread remained above 100bps.
Until this Thursday. On both Thursday & Friday of this week, the 30-10 year yield spread closed at 98bps, the first downside break of 100bps since the pre-QE days.
Clearly, this could be a simple case of position squaring with more short covering of 30-year positions than 10-year positions. But what if this break of 100bps of the 30-10 year yield spread holds and goes down further? Would that be another confirming signal of the potential reduction or withdrawal of QE? Or would that suggest that there is some problem out there as Ralph Acampora cautioned on Friday (see 3.1 below)?
We are rather simple in our thinking and we caution readers that the above may simply be wild conjecture stimulated by Friday’s regular liquid diet of single malts. Doesn’t it still beat listening to same old “will he, won’t he” discussions by Fed heads about a September taper?
2. U.S. Bond Market – Guru opinions
All week, CNBC kept showing a clip of Bob Pisani pleading “will somebody make a call to buy bonds” or words to that effect. This shows that Pisani doesn’t watch CNBC himself. Below are 3 separate “buy bonds” calls made on CNBC, the most emphatic of which was the one by Larry McDonald, Senior Director of NewEdge.
2.1 – Larry McDonald on CNBC Futures Now on August 20
- “reminds me Jackie of the June 27th low in Gold, where everybody was bearish on Gold and now Gold miners are up 38% since that day;”
- “I would tell you one very powerful statistic – since Lehman, there have been only 2 times where the 10-year UST has traded 85 bps above its 200-day moving average..& this is one of them.. in other words, the 200-day moving average is 2.01% and we traded at 2.90%; so we traded 89bps above 200-day; in the last 10 years it has happened like 5 times, it is an extremely rare time and it is a great opportunity to buy bonds, long term bonds …”
- [2.83% on Tuesday, where does it finish out the year?] Yesterday,
on Monday, we had very very high volume, about 182% of 10-day average
volume ..that’s definite sign of capitulation… I think we move
towards, year end, come down towards 2.35% to may be even 2.20%; - [Fed minutes what in & how it will impact this trade] – there is so much priced in to Fed Minutes and Jackson Hole in other words, people expect guaranteed taper in Sept-Oct; its like 90% of investors think we are going to get taper in Sept-Oct – I think there may be some pushback, if you look at the economic date that has come out in the last 2 weeks, esp; emerging market pains, the current account deficits that are being created by the Fed; the Fed is actually blowing up central banks all around the world.. & that’s a side effect of QE they were not forecasting…So I think you could get little more push back in terms of the timing of taper..
- [how history will judge Bernanke] – “many many tears from now it might be critical.. the side effects of these drugs QE drugs wont be known for many many years & we are seeing some of them now..there could be deep dark side effects that play out over the next 10-15 years…I think it could be similar to Greenspan when he left he had a lot of friends in the street and each year that has gone by , there are little less happy faces …”
- strongest part of the US economy, strongest part of the global economy..is now in a bear market on Friday… that tells me the Fed is very concerned about what just happened at the long end of the yield curve and mortgage rates……
- [next Fed chairman?] – I am still in the Yellen camp but one of the reasons the bonds sold off so much is clearly pricing in a Summers appointment..the difference is, Larry Summers, has been critical of QE.. which really doesn’t jive with what the Obama administration wants, you would think the Obama administration going into 2014 election want more QE, right? So its bizarre that, his record is very negative on QE, he has questioned validity of it and now market is pricing in a huge divergence between Summers and Yellen…
2.2 – John Brynjolfsson on CNBC FM & 1/2 on Tuesday August 20
For those who may not remember, John Brynjolfsson, a long term veteran of Pimco, is the founder of Armored Wolf, a hedge fund.
The slide on the screen made the following 3 points – Fed has lowered growth forecasts, Economy is softening, Interest rates much higher.
- “the key is the macroeconomy. If the macroeconomy picks up as the Fed forecast a few months ago, then the taper is on the table, but my concern is that those announcements were contingent. they were contingent upon those relatively optimistic forecasts of the Fed coming through, and frankly, I don’t see it happening.”
- “the last employment report had extensive revisions going back to april where the payrolls were not 200,000 jobs a month. they were well below that, and that’s being revised down. that’s going to be after … I think by the time September comes along, there’s at best a 50/50 chance they will taper.”
- “the other big wildcard and this will come up at the Jackson Hole is does unconventional monetary policy work? we’ve got kind of an experiment going on in Japan. Japan’s GDP recently disappointed. They were revised down from 3.5% to 2.5% growth. Maybe that the unconventional monetary policy is not going to deliver the goods either. So stocks are vulnerable either way. The opportunity I see is in the bond market with yields of 2.8% or 3% or 3.25% as Rick Reider suggests. Those are bargain levels for ten-year bonds in an economy that is really flat on its back“.
- [at peak in rates?] “I think so. You might want to wait until after the minutes come out tomorrow because they’re probably going to be relatively hawkish absent the July employment report, but we know that the current data coming in is what the they’re going to look at in September when they have to actually make the decision.”
- “all of the Fed candidates come from basically the same school, whether it’s Keynesian or even Milton Friedman school. The idea is if the economy is slowing, those Fed governors will step on the gas pedal.”
- “… we know that the economy was struggling with yields at 1.6%. I heard Larry Summers speak last April. When he was speaking, yields were about 1.6% and he gave a very hawkish, bullish outlook for the economy. I don’t know if his comments would be as viable with yields almost twice as high now at 2.8% or 3%”.
- “there’s a huge kind of intellectual question and the market participants are certainly 100% involved in that intellectual debate as to whether printing more money will help out the economy or merely create more and more bubbles. That’s kind of a side debate. The mainstream debate is, is the economy strong enough to sustain a taper and ultimate rate rise? I don’t think so. If it’s not, the conventional type of people who run the Fed are obviously going to print more money and 3% would look good”.
2.3 Shawn Mathews on CNBC Street Signs on Tuesday August 20
Shawn Mathews is the CEO of Cantor Fitzgerald.
- “I think it’s a bet on the broad based fixed income marketplace. if you look, we’ve had a significant backup in a relatively short period of time. you still have the Fed on hold. they’re going to ease their tapering process. They’re going to taper but not going to actually raise fed funds probably for another year and a half. When you look at the developments that are out there, I actually think fixed income is an interesting place to play. For the first time in a long time, people should be looking to sell into strength the equity market.“
- “I think you look at the mortgage space and it’s gone through a very difficult two or three month time horizon. at least half the mortgages now are below par so you have a lot less convexity selling going on in the marketplace right now. Certainly from a spread’s perspective, mortgages look the cheapest asset class right now in fixed income, in my opinion.”
- [10-year yields] – “I think we’re range bound and certainly3.25% is the high end for the 10-year, 2.25% is the low end. But that leads for a tremendous amount of carry, especially when the short end of the curb is actually at zero. I think people will be gravitatin
g back into the marketplace once they feel there’s some stability and the 10-year has found a floor.” - “I actually think the equity market is probably a better place to be in Europe right now, certainly some of the financials look interesting. they’ve been beaten down. from the relative perspective of the fixed income markets, you want to be in the U.S. right now.”
A humble suggestion to Mr. Pisani – please begin watching CNBC regularly. Who knows you might learn something!
3. U.S. Equities – Guru Opinions
3.1 Ralph Acampora on CNBC Closing Bell on Friday, August 23
- “we lost about 750 points in the first couple of weeks of august. We’re oversold. traders have a good time with this rally, investors Sell into it. … 60% of the components in the Dow are either broken or very vulnerable. And the last time I saw that, with the market being so-so, the last time I saw the Dow hemorrhaging was in August of 1998. And that was about two weeks before the Russian bond problem and long-term capital. Yeah. I think there’s a problem out there.”
- “I just have to say one thing. never fight Papa Dow. Those are the largest companies in the United States, and they have international exposure. You look at the EM markets, they look terrible. Something is wrong. … I gave you all a target of 13,333. I’m going to lower that to 12,000,”
3.2 Ryan Detrick of Schaeffers on CNBC Closing Bell on Friday, August 23
- ” when you talk about the Dow, the Dow is breaking down, Ralph is absolutely correct. But what encourages me is the small caps. The small caps are over a percent this week. The Russell 2000 had the breakout in July above the 1000 level, came back and tested it and is now kind of leading again. Nasdaq is a percent off its 52-week high. … we have the pullbacks, you know, 4%, 5%, and the fear is really spiking. We’re seeing record VIX call buying over the past 20 days. Investors’ intelligence poll, 35% looking for a correction, only happened 28 times since 1980. A month later, S&P up about 2% and up 75% of the time. So to me, sentiment is getting a little too skeptical on the minor pullback that could be positive in my view”
3.3 Abigail Doolittle on CNBC Power Lunch on Friday, August 23
- “we see the S&P trading in a near term corrective mode. … If the S&P goes below 1632, we are looking down at 1555 and this reminds me of 2011. I think all in from the record high it could be a 8% to 10% correction. We still have the debt ceiling debate coming up. We could be looking at something much more severe this time.”
3.4 Dan Fitzpatrick via Jim Cramer on Mad Money on Tuesday, August 20:
This is one clip which should be watched rather than read. Cramer takes viewers through Fitzpatrick’s case which with charts. The bottom line is that, according to Fitzpatrick, S&P has peaked and will remain range-bound for the rest of the year. His bear case is a fall to the 200-day moving average or 1550.
3.5 Lawrence McMillan on Friday, August 23
- “Nearly all of our indicators turned bearish in the last two weeks. The breakdown of the Standard & Poors 500 Index ($SPX) below support at 1680 was the trigger that turned the $SPX chart negative. … In summary, the indicators are now mixed. The sell signals were well-timed, but the market drop quickly created oversold conditions. Those have sparked a rally, which is likely to be short-lived, but we will watch the indicators closely for any further bullish confirmation.“
4. Gold
Gold and Silver rallied again this week. The lows of last week of June 2013 seem like old history. A number of gurus were brave enough to tell us viewers to buy gold that week in June. They include Tom McClellan, Jon Najarian, Carter Worth and Larry McDonald. Only Larry McDonald seems short term bearish in Gold as he said last week on the Kudlow Report.
What does Carter worth think of Gold after the recent rally? His final call on CNBC Options Action on Friday was short and sweet:
- “Retain all longs in Gold & Gold miners; if you are not long, get long.”
What about Tom McClellan, the master of interesting and profitable correlations? Frankly, he outdid himself this week with his article Gold’s 13-1/2 Month Cycle. Read the entire article and look at his charts. A couple of excerpts are below:
- There is a dominant cycle in gold prices lasting about 13-1/2 months, measured bottom to bottom. The latest instance of this cycle’s major bottoms was ideally due in May 2013. It arrived a month late in June, but that is not outside the normal tolerance for punctuality. With the major cycle bottom evidently in, gold is now in the advancing phase of this cycle, which is when the most robust advances usually take place.
- … now we are into a new cycle, and into the most aggressive advancing phase of this cycle. Now is the period when the biggest advances in gold prices are usually seen.
- Coming up sometime around November 2013, we can reasonably expect the next occurrence of a mid-cycle low, …
The above is enough to make money, assuming Mr. McClellan proves correct. For those with a celestially curious bent, he adds:
- “I mentioned that I don’t know why gold exhibits this very regular 13-1/2 month cycle. But I do know that there is a very real and important anchor which seems to control its regularity. You may have noticed that these charts show a rather funny looking representation of a sine wave cycle, with bars instead of a wiggly line. Those bars have an important meaning: They represent
the distance between the earth and moon on the day of the full moon. So the 13-1/2 month cycle which is evident in gold prices just happens to match up really well with the lunar apogee-perigee cycle. Or at least it has for a couple of decades, which ought to be long enough to establish it as a real phenomenon.”
Featured Videoclips:
- Christine Lagarde with BTV’s Sara Eisen on Friday, August 23
1. Christine Lagarde with BTV’s Sara Eisen – Friday, August 23
These detailed interviews is what Bloomberg TV does best. The excellent summary below is courtesy of Bloomberg Television.
Lagarde on what the biggest takeaway is from the Fed conference:
- “First of all, I think it’s a very good meeting. It’s a forum where central bankers in particular can talk to each other, and it goes straight to one of the points that I made during my speech earlier today which is that there has to be coordination. Unconventional monetary policy has played a major role in helping economies avoid the precipice, but clearly it’s not something that can last forever. And unconventional monetary policy has to be gradually withdrawn over time at the time, and that will be decided by central bankers according to, I hope, very specific measurements, but it has to be coordinated.”
On the lack of coordination with the Fed making a move to taper when Europe, Japan and others are going the other way:
- “Well I would disagree with you because we don’t think – that all central banks will phase out from unconventional monetary policy at the same time. We believe that, for instance, in Europe and Japan there is a lot more to be done, and central bankers will probably have to continue unconventional monetary policies. In the US it’s a different story because the recovery is clearly underway. Whether it’s enough, whether it’s solid enough, sustainable is another story. And it’s for central bankers to decide on the basis of measurements we hope whether it’s now time or not to withdraw from unconventional monetary policy.”
On the impact of a move by the U.S. on the rest of the world:
- “Yeah, we do monitor that very carefully. And it’s a fact that since May 22 when Chairman Bernanke announced that it might be considered eventually without much more by way of clarification or specifications, markets immediately jumped on that news and there was consequences on emerging markets, which is why we advocate clarity, proper and well-channeled communications, proper measurements of the reasons, the criteria, the indices that will be used for the eventual tapering.”
On whether tapering hasn’t been clear enough from the Fed:
- “No, I wouldn’t say that. I would say that going forward because the signaling effect matters almost more than the actual implementation, the signal has to be very clear. Markets are this unknown quantity which needs to receive very clear signals. They need the clarity of when things will happen, how they will happen, on what basis. And that needs to be properly articulated.”
On how messy it could get for emerging markets:
- “Well I would hope that we can learn from the ’90s and that the tapering that will ultimately take place will take into account what we learned from those days. Emerging markets are not one single region. They’re not one single group of countries. What we are seeing is a great differentiation between those countries that have strong fundamentals, that have had good economic policies, that have conducted reforms, and those that are much more hesitant, which have been more loose on reforms. And it’s a very strong signal that external factors matter but that fundamentals of each and every economy is key as well to its stability.”
On whether Europe has really turned the corner:
- “We are all globally on a path to recovery. Still fragile, not yet strong enough and with this very strong support from the unconventional monetary policy, including in the Eurozone. Let’s not forget that the European Central Bank has been a strong support for the European recovery. The latest numbers that we have received, in particular from Germany, are encouraging, whether it’s manufacturing, whether it’s service activity, whether it’s exports. That is heading in the right direction, but it needs to be sustained over time. And I’m crossing fingers for the Eurozone, but I wouldn’t necessarily draw the conclusion that it’s over, we are out of the woods and nothing needs to be done. There is still a lot of work to be done.”
On whether she would support the ECB lowering rates:
- “We have consistently said so, that the European Central Bank still have room to maneuver. But we’ve also consistently said that for it to be effective, the banking system needs to be unclogged and liquidity as well as instruments need to – to move fluidly within the system, which is not yet the case. So that’s what I mean by more work to be done, particularly on the banking system.”
On whether Egypt could use more money at this point given the recent events there:
- “We have been working with Egypt ever since I think last August, and actually before that. We are still in touch at the technical level and we are very keen to support the Egyptian people in this transition period. But clearly not all the ingredients are on the table. There needs to be global political endorsement. There needs to be enough stability for the policy commitments to be delivered. That is not yet the case, clearly. So we remain available, but it’s clearly now for the country to come to the table with those ingredients that I just mentioned.”
On how the IMF continues to play a prominent role in the global economy given that we are on a path towards recovery:
- “I think the IMF will continue to be prominent if it really focuses on its members needs. When I was in the private sector, I used to say client first. Here it’s members first. And while we have played a significant role with the euro area members lately because they were hit by the crisis, I believe that the emerging market economies may want to use some of our precautionary instruments, as they do actually. When I look at our balance sheet, some of our largest commitments are to countries such as Mexico, such as Poland under precautionary lines which they don’t draw on but which are av
ailable there for security purposes. I think that going forward, this is very likely what we will have to do.”
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