CNBC Writes: Pimco: 3 reasons bond investors should chill

Bond investors are sweating bullets. In 3½ months, the 10-year yield has risen from about 1.6 percent to over 2.9 percent, before cooling off in recent days. And on Thursday, bond expert Jeffrey Gundlach made the case that the 10-year yield could reach 3.1 percent by end of the year.

As yields rise, bond prices fall, so the move in yields has been very painful for those who have owned bonds, and investors are heading for the exits. Bond funds saw outflows of $36.5 billion in the first 22 days of August, according to TrimTabs. Bond giant Pimco saw $7.4 billion worth of outflows in July alone, and double that in June.

But Tony Crecenzi, Pimco executive vice president, market strategist and portfolio manager, believes that the bearishness has gotten overdone. On CNBC’s “Futures Now” on Thursday, he made the case that “yields will move lower from here,” and he provided three reasons why.

1: Economic fundamentals don’t support these yields

Crescenzi said that yields could rise a bit more due to technical reasons, but the fundamentals don’t support it.

After all, “what’s priced into the bond market is the idea that the economy, in 2014, will accelerate,” Crescenzi said.

But he throws cold water on the rosy economic picture that some are drawing. “Bond investors will begin to reassess whether or not the optimistic forecasts, including the Fed’s own forecast, will come true.”

Indeed, many have questioned the accuracy of the Federal Reserve’s forecast for 3 to 3.5 percent GDP growth in 2014. On Tuesday, Krishna Memani, OppenheimerFunds’ chief investment officer of fixed income, said on “Futures Now”: “The economic growth that we’re looking for in the Fed’s forecasts is probably a bit overstated,” and for that reason, he, too, sees rates dropping.

2: Inflation is not coming back

While Gundlach compared the recent rise in rates to the rate rally in 1994, Crescenzi said the present situation is markedly different.

“What 1994 was about was the last big battle against inflation expectations,” Crescenzi said. “When the economy began to accelerate from the 1991 recession, people started to say, ‘Well hey, more growth means more inflation. Why can’t the inflation rate get back to 4 and 6 percent again?’ Then Alan Greenspan came in and stomped on the bond market with big rate hikes to say there isn’t going to be an inflation acceleration like there used to be in the ’70s and ’80s.”

Because “that inflation battle has been fought,” the Fed doesn’t need to hike rates in order to tamp down the rate of economic growth and thus reduce inflation, according to Crescenzi. That means that a full repeat of the 1994 bond catastrophe-in which yields rose nearly 2 percentage points in three months-is unlikely.

3: Investors are misreading the Fed

Crecenzi believes there’s an “80 percent chance” that the Fed will begin to taper its qualitative easing program in September. But he thinks investors are misreading when the Fed will raise their Federal funds rate.

Again, because the Fed doesn’t need to worry about inflation expectations getting out of hand, Fed Chairman Ben Bernanke has no need to hike short-term rates as Greenspan did. “Unlike 1994, there won’t be rate hikes to reinforce the rise in interest rates,” Crescenzi said. So according to Crescenzi, “there won’t be a rate hike until 2015 and the earliest, and we think 2016.”

Any rise in rates would be investor-directed, then-and since the economy will not be as good as investors expect, he does not expect to see rates get pushed higher.

In fact, by the end of the year, this bond guru sees rates falling back to the low to mid 2s on the 10-year.

The points outlined in the article above are important and must be addressed. As I have mentioned in my previous article  “The Most Important Financial Story No One Is Talking About”  interest rates on a 10 Year T-Note have increased 100% over the last 12 months. That is a huge move. Should the investors be worried? I think so. Let’s take a look and take away their argument.

1. Economic fundamentals don’t support these yields: Oh yes they do. I don’t think the market is pricing in growth, I think the market is pricing in upcoming defaults and beginning of an inflationary environment.

2. Inflation is not coming back: That is kind of a definitive statement. My work is showing that inflation is just around the corner and will start to accelerate in 2016. I think the bond market is starting to price that in as well.

3. Investors are misreading the Fed: This is not about the Fed. This is simply following the market and trying to determine what the future holds. The Fed has an imaginary control, not a real one.

The bottom line is this. As I have indicated in my previous post I believe the interest rates have bottomed in July of 2012 and are now starting their multi decade climb higher. Yes, the rates are likely to decline here (pull back) only to resume their climb upwards within a short period of time. Of course, this will have huge negative consequences on the overall economy, the stock market and real estate.  

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Bloomberg writes: German Jobless Unexpectedly Rises Even as Economy Grows

The number of people out of work increased by a seasonally adjusted 7,000 to 2.95 million, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to the median of 25 estimates in a Bloomberg News survey. The adjusted jobless rate stayed at 6.8 percent, near a two-decade low.

The economy in Germany, which faces elections next month, is forecast to slow after growth was bolstered last quarter by a rebound from a colder-than-usual winter that curbed output. While the euro area, the nation’s largest export market, has emerged from its longest-ever recession, some companies are still cutting jobs as countries in the periphery of the region struggle to recover.

“If data that signal the economy will gather pace in the second half of the year are to be believed, there’s a good possibility that employment will increase and unemployment will drop next year,” said Jens Kramer, an economist at NordLB in Hanover. “In the euro area, there’s at least hope that the worst is behind us.”

I think the best way to look at Europe at this point in time in from Macro Economic perspective. 

Obviously Germany is by far the strongest economy in the region and the only reason European Union hasn’t collapsed yet. The rest of the countries there are in a big time mess. 

I do not believe the worst is yet over for Europe. Not by a long shot. The only reason you are seeing an improvement and better data coming out of Germany is the same reason you see it in the US. Massive amounts of liquidity in the system. 

What is quite shocking is how weak the recovery has been in the European Union region even though record amounts of capital were deployed to sustain it.

What will happen next is quite simple. 

As interest rates continue to increase on the global scale, as the US Stock market begins to go down, as emerging markets continue their decline….there won’t be any reason for European Union to recover. As a matter of fact, quite the opposite. As all stimulus disappears, expect most of the European Union to fall back into a depression environment.  

An eventual break up of the European Union is not out of the question. As a matter of fact, I would be surprised if it doesn’t happen over the next 5 years. 

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CNBC Writes: Prepare for the crash no one is predicting

Stock market declines, especially the violent kind we refer to as “crashes,” are pretty hard to predict.

True, for every crash one or two visionaries emerge who called the market decline with unusual accuracy. In time, we generally conclude that these visionaries were more lucky than prescient, because there are no records of prognosticators who predict market crashes more than once.

But this time may be different.

The Federal Reserve has been propping up the stock market through its quantitative easing program that forced interest rates to all-time lows and drove investors out of bonds and into stocks.

But those days may be coming to an end.

Read the rest of the article here.

WOW, really CNBC, I am not sure what to think here. I thought that CNBC were perpetual bulls. One thing is for certain. If CNBC is predicting a crash, there won’t be one.

Here is the bottom line and what my mathematical/timing work is showing. There shouldn’t be a crash here. As a matter of fact, the next few years a quite boring.  The market will decline to the tune of 20-40% over the next two years, but it shouldn’t be anything drastic like a crash. As a matter of fact, the market is a little bit oversold here and I do anticipate a rebound.

See, who said I was always a bear?  

Most market participants buy and sell at exactly the wrong time.  If you watch CNBC there was a parade of bulls in 2007 predicting DOW 20,000 within a year only to be replaced by a parade of bears predicting the end of the world at 2009 bottom. Simple human psychology.

Why is this important? Well, I am glad you have asked. 

As of early August 2013, various metrics measuring/showing investor sentiment indicate an optimistic extreme among market participants.  In fact, some optimistic views expressed wouldn’t be out of place on a space ship heading to Mars.

“This is a buying opportunity of a lifetime, this is the most powerful bull market since the World War II and there is a lot more upside to come” – some guy from a mental asylum on CNBC, August 6th. 

Since then the Dow dropped about 800 points, posting the worst weekly performance since the start of 2013. Yet, that’s just a speed bump for the eternal optimists.

On August 16, a Wharton professor of finance told CNBC, “I certainly wouldn’t throw in the towel. I’m still projecting Dow 16,000 to 17,000 by year end.”  

So, is this a great buying opportunity as most pundits on CNBC and in financial media claim? Are we on our way to DOW 20,000?

HELL NO SON. Get your head out of your ass and start thinking straight.  Here are just a few  facts you might want to consider……

• Investor sentiment is way too high. Some indicators claim it is at historic levels of extreme kind of high.
• The US Stock market is overpriced at these levels.
• The is a lot of emerging market money flooding into the US Stock market looking for safety. This usually happens at exactly the wrong time.  There is no such thing as safety.
• There is no fundamental case for the US stock market to go to Dow 17 or 20,000. Once again, it is extremely overpriced now.
• The fundamental business environment for most US Corporation is starting to deteriorate substantially.
• Interest rates are going higher and the FED has done everything they could up to now. No further stimulus will help and any additional stimulus will be marginal at best.  There is no stimulus velocity left in the system.
• Technical picture is flashing warning signs and showing  that there is a high probability that the stock market is about to break down.
• My timing work indicates that the bull run that started at 2009 bottom is coming to an end. The stock market must decline into its 2016 bottom. There is no way to stop the law of nature.

I can go on for another 20 or so points, but you get the idea.  You have been warned. Start positioning yourself for an upcoming decline now. 

You very well know my position that I believe that the market has topped or in the topping process and will decline into 2016 bottom from this point, to the tune of 20-40%. What is interesting at this juncture is that we are looking for a technical confirmation that it is indeed true.

At least in the short term the market is a little bit oversold. I would wait for a technical pullback to the upside and then wait for the resumption of the bear market. I think we are a few weeks away from any such technical confirmation, but it pays to know exactly where we are.  

My timing work shows that there is a slight possibility (about 20%) that this bull run will end in March of 2014. However, even if such is the case, the market won’t go that much higher here.  

India Bloomberg Writes: India Markets Plunge Pressures Singh as Economy Teeters

India’s biggest two-day stock market slide since 2009, surging bond yields and a plunge in the rupee to a record low are pressuring officials for fresh steps to stem capital outflows and support the economy.

The S&P BSE Sensex (SENSEX) Index sank 1.6 percent at the close in Mumbai, extending the 4 percent loss on Aug. 16. The rupee tumbled 2.3 percent against the dollar, touching an all-time low of 63.23. The yield on the government bond due May 2023 rose 34 basis points to 9.24 percent, the highest on a 10-year note since 2008.

Policy Concern

“Our primary concern is that the policy authorities still don’t ‘get it’ –- thinking this is a fairly minor squall which will simmer down relatively quickly with fairly minor actions,” Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore, wrote in a note. “If this remains the case, then a swift move to 65 against the U.S. dollar is probable, which in turn should help focus minds.”

“Slow growth, high inflation, a high fiscal deficit and high current-account deficit all point to the inescapable conclusion that India’s problems are deep and structural,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. 

Staunch Outflows

While other developing nations are also striving to staunch outflows, the rupee’s 13 percent fall in the past three months is the worst after the about 16 percent drop in Brazil’s real in a basket of 24 emerging markets tracked by Bloomberg.

The question is, does this market plunge in India as well as their currency slide represent a buying opportunity or beginning of a trend for all emerging markets such as SEA?

From an emerging market perspective India finds itself in a unique situation due to its structural problems.  As of right now, other emerging markets are fairing much better. Where it is not unique, is the capital outflows from all emerging markets and subsequent capital inflows into an overpriced US Stock Market.

In simple term, people are looking for safety. They are taking money from emerging markets and pilling it into the US Market under the pretense  that the US Market is somehow safer. However, quite the opposite is the case. The US Market is the most overpriced and by definition the most risky. This time around it is simply lagging behind the emerging markets on the downside.

Bottom line, I wouldn’t touch India or other emerging markets right now. Rarely do markets or stocks make a V shape recovery.  While an argument can be made that emerging markets are undervalued (and some of them are), I believe they are leading the decline and the US Markets is surely to follow them shortly. 

What is TIMED VALUE ?

Timed Value is an investment approach that I have developed over the last 15 years.  Please, allow me to first break it down for you into two investment approaches and then bring it back together for a more comprehensive understanding.

Value Investing.

If you have been in an investment field for any period of time you know what value investing is and I won’t spend too much time going over it here.

Basically, Value Investing is investing in undervalued companies that for whatever reason are selling at a significant discount to their intrinsic value or what  they should be worth. There could be a million and one reasons why that happens, but markets do swing up and down, improperly and significantly undervaluing great businesses at times. 

By investing in such businesses you automatically reduce your risk due to a margin of safety.  It’s not a sure fire way to prevent losses, but undervalued companies tend to depreciate less if you have made a wrong decision and appreciate more when your fundamental research is proven to be correct.

As you probably know Value Investing has been famously used by a super investor Warren Buffett to amass his $40-60 Billion wealth.  I too firmly believe that value investing is one of the best ways to minimize risk while setting yourself up for a larger gain should the stock recover.  At the same time, value investing has a number of shortcomings.

The biggest problem with value investing is TIMING.  Yes, you might have found a very cheap or very expensive (short side) stock, but you have no idea WHEN this stock will move in your direction. Yes the stock might be cheap, but it can remain cheap and not move anywhere for many years  -OR – worst, move in the opposite direction even though you are 100% confident that your fundamental analysis is correct.     

Let me give you an example. As early as 2006, I have predicted the economic collapse of 2007-2008 and the catalyst behind it. I have made a determination that the market will decline significantly and that it would be best to be on the short side. I have identified the worst of the Sub-prime lenders (companies like LEND) and shorted them.  Yet, these companies kept going up for the next 18 months.  When my fundamental thesis was finally proven, these companies collapsed and filed for bankruptcy within 2 weeks. 

The lesson of the story is…… while your fundamental analysis might be right on the money and you have minimized risk by creating a margin of safety, still you don’t know WHEN it will happen.  In might be 10 years from today.  In the meantime, you have investors calling you and bitching why hasn’t their portfolio performed well.

Which brings us to the TIMED part of the equation.

I believe it is instrumental to know WHEN something is going to happen. When will that stock start moving in the direction that your fundamental analysis indicates.

If you believe that timing is impossible to predict, you would be WRONG.   And no, it has nothing to do with the technical analysis.

Before we go any further we must define a CRITICALLY IMPORTANT concept.

WHAT IS TIME?

I know it is a deep question. There are libraries full of philosophy and physics books that define time in a million different ways.

For our purpose, we have to ask a question. Is the time linear or is it cyclical?

The stock market chart identifies time as linear (from past to present to future), yet if you begin to actually study what time is you will very soon come to a conclusion that time is anything but linear.  Nature is not linear. Everything in nature is cyclical. It might look linear to an untrained eye, but once you look under the hood, the situation is completely different.

For example, you are born, you grow up, you live, you grow old, you die. The cycle is now complete.

Same thing is with time. Time does not flow at a constant rate nor does it flow in one direction. Time vibrates and cycles at its own speed and rate of vibration.

Before I get in too deep let me restate it from a much simpler perspective as it applies to the stock market or individual stocks.

Because time is cyclical (not linear) and has its own rate of vibration as it applies to the stock market or individual stocks, that rate of vibration can be determined and as such be used to precisely identify WHEN any given stock or the overall market will move in any given direction.

Yes, you have heard it right, my mathematical work clearly indicates that the stock market can be predicted and timed to within daily resolution. Due to this, out sized returns can be achieved.   Just as a note, this has nothing to do with technical analysis as my work moves well beyond TA. 

So, what is TIMED VALUE? It is exactly what you think it is. It is investing in undervalued companies (minimizing risk) while precisely identifying the time of WHEN that move will occur. Once again, identifying the exact timing of the event is not only possible, but a reality. I have proven that fact to my entire satisfaction.

As such, when you implement TIMED VALUE you have accomplished both the reduction of risk and maximization of profit (low risk and high return). What more can you ask for as an investor?

Interested in my TIMING work? Please contact me with any inquiries.