David Geffen on Bill and Hillary Clinton

Everybody in politics lies, but they do it with such ease, it's troubling.

~ David Geffen, February 21, 2007, interview with Maureen Dowd of the New York Times

CNBC's Bob Pisani admires the world's central bankers

Central bankers around the world should have been Time's Person of the Year this year.

~ Bob Pisani, CNBC, 9:40 AM, December 30, 2013

London’s Decca Records: “The Beatles have no future in show business" (1962)

The Beatles have no future in show business... Groups are out; four-piece groups with guitars, particularly, are finished.

~ An executive at London’s Decca Records as he turned down the chance to sign the Liverpool group in 1962 before signing up Brian Poole and the Tremeloes instead

Dow Theory Forecasts uses contrary opinion to justify running with the bullish herd

Despite this year's rally, the 2008 meltdown is still fresh in everyone's mind, causing investor sentiment to remain skittish.  And that could be a good thing.  "The riskiest thing in the investment world is the belief that there's no risk," says Howard Marks, CEO of asset manager Oaktree Capital Group...

~ Richard J. Moroney, Dow Theory Forecasts, December 6, 2013

Jeffrey Saut: Equities in "sweet spot" of 2.5%-3.5% GDP growth

Here in New York the restaurants are full, and just try to get into Century 21, a department store for luxury items at cut-rate prices, because you will have to elbow your way through throngs of folks who are non-English speaking...  Indeed, not only are foreigners transacting in cash, but many Americans are doing the same after having been burned by debt in the 2008-09 credit crisis.  Therefore, I continue to believe the economy is stronger than most think.

I believe GDP numbers will improve to 2.5% to 3.5% in 2014, which should be the "sweet spot" for equities...  When economies grow at a GDP rate of 7%, 8%, 9% - that is when bubbles develop.  I think 2.5% to 3.5% GDP growth is actually the sweet spot for the equity markets; and everyone is underinvested for that simple and sustainable growth rate.

~ Jeffrey D. Saut, December 5, 2013 note to clients, as reported in Barron's "Market Watch," p. M16, December 9, 2013

Fred Hickey: "Fear has left the building"

We all know the markets are driven by two sentiments: fear and greed.  Currently, investors show no fear but plenty of greed as they pile into stocks as if it were 1999 all over again.  The much-watched Investors Intelligence survey of investment newsletter writers last week reported that the percentage of bears was down to 14.4% - a level not seen in 26 years - 1987, before the crash.

The Consensus Bullish Sentiment Index is currently at 77% - putting it firmly in the "market is overbought" territory.  After four consecutive years of withdrawals (2009-2012) investors are now pouring money into stock mutual funds at the fastest pace in thirteen years (since the 2000 top).  Barron's estimates that equity mutual funds and ETFs are on pace to receive more than $450 billion in inflows this year, more than the previous four years combined.  Investors are chasing "story" stocks again.  Anything related to the "cloud," "Big-Data," social media and 3-D printing is fair game to drive into the stratosphere of infinite P/Es.  The Shiller cyclically adjusted price-to-earnings (P/E) ratio is now over 25, a level only exceeded three times before - prior to the 1929, 2000, and 2007 crashes.  According to Credit Suisse, U.S. nonfinancial stocks are 45% more expensive on a price-to-book basis than their global peers, an excess not seen since the 2000 crash period.

The Dow Jones Industrials and S&P 500 indices have risen for eight consecutive weeks, the S&P 500 has leapt 26.6% year to date and the Nasdaq Composite index has soared 34.5%.  There hasn't been a 10% correction since the fall of 2011.  Initial public offerings (IPOs) this year-to-date are more than at any time since 2000, with more than 60% of the IPOs funding money-losing companies.  Secondary stock offerings (over $160 billion) are at the heaviest pace ever (since Dealogic began keeping records in 1995).  Fear has left the building.

~ Fred Hickey, editor, The High-Tech Strategist, "Fear Will Make a Comeback," December 1, 2013

Greenspan spots bubble before the burst

It’s a bubble. It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can.

I do not understand where the backing of Bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual.

~ Greenspan says Bitcoin is a bubble with no intrinsic value, Bloomberg, December 4, 2013

Tepper stays bullish, predicts multiple expansion

I would be worried if I was a long/short guy and not long enough, that's what I'd be worried about. But I'm not worried, because I am long. But if I'm a long/short guy who can only go 60% long … the biggest risk for the market is you'll have multiple expansion, higher growth, 10% earnings growth next year, and you'll have another year of 20%-30%.

~ David Tepper, "David Tepper on why the bulls are right," Bloomberg, December 4, 2013

Alan Greenspan sees no bubble... again (2013)

There are a lot of things that can go wrong, but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.

~ Alan Greenspan, FOX Business News, "Greenspan to FBN: Stocks Aren't in a Bubble," November 26, 2013

Andrew Ross Sorkin on meltdown 2.0 (2013)

There's not going to be a sequel.

~ Andrew Ross Sorkin, CNBC Squawk Box, November 21, 2013 at 8:10 AM ET

Time's Justin Fox on Irving Fisher, "the country's first great economist"

[Irving] Fisher was the country's first great economist, a pioneer of the mathematical approach that came to dominate the discipline after his death. Fisher saw the behavior of the market in rational, mathematical terms. He wasn't completely doctrinaire about this--earlier in his career, he had allowed that investors sometimes behaved like sheep. But in the 1920s, convinced that skilled monetary management at the Federal Reserve and the rise of new, professionally run investment trusts had reduced the riskiness of markets, he lulled himself into believing that the prices prevailing on Wall Street were a reflection of economic reality and not of investor mania or a credit bubble.

~ Justin Fox, Time, "The Myth of the Rational Market," June 22, 2009

U.S. Treasury Secretary Jack Lew: "We're leading the developed world in the quality of our recovery" (2013)

The United States is recovering from worst recession since the Great Depression, and we’re leading the developed world in the quality of our recovery.

~ U.S. Treasury Secretary Jack Lew, November 12, 2013, "Treasury’s Jack Lew says the U.S. economy is thriving," MarketWatch.com, November 13, 2013

Buffett calls Federal Reserve the greatest hedge fund ever

The Fed is the greatest hedge fund in history. It’s generating $80 billion or $90 billion a year probably in revenue for the U.S. government. And that wasn’t the case a few years back. The Fed is under no pressure, none whatsoever to have to deleverage. So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.

~ Warren Buffett, Bloomberg, September 20, 2013

Time reporter Justin Fox on Irving Fisher's prescription for the 1930s bust

For all its flaws, [Irving] Fisher's economic approach delivered genuinely important insights. He proposed in 1911 that the government issue inflation-linked bonds; in 1997, the Treasury Department finally got around to doing so. If anybody in power in Washington had been willing to follow his advice in 1930 or '31 (which essentially amounted to "Print more money"), the Great Depression might not have been so great. For the past two years, the Federal Reserve has been working right out of the Fisher playbook, and while the results haven't been perfect, they've been a lot better than those of the early 1930s.

~ Justin Fox, Time, "The Myth of the Rational Market," June 22, 2009

Irving Fisher sees no crash in stock prices (1929)

There may be a recession in stock prices, but not anything in the nature of a crash.  Dividend returns on stocks are moving higher.  This is not due to receding prices for stocks, and will not be hastened by any anticipated crash, the possibility of which I fail to see.

A few years ago people were as much afraid of common stocks as they were of a red-hot poker. In the popular mind there was a tremendous risk in common stocks. Why? Mainly because the average investor could afford to invest in only one common stock. Today he obtains wide and well managed diversification of stock holding by purchasing shares in good investment trusts.

~ Irving Fisher, September 5, 1929 (two days after the peak of the bull market according to Robert Murphy, author of The Politically Incorrect Guide to the Great Depression and the New Deal)

Fed Governor Randall Kroszner: "US commercial banks are strongly capitalized" (2007)

Effective banking supervision has helped foster a banking system . . . that today is safe, sound and well-capitalized . . . US commercial banks are strongly capitalized, reflecting years of robust profits.

~ Fed Governor Randall Kroszner, September 2007

Fed Governor Kevin Warsh: "We don't see any immediate systemic risk issues" (2007)

We don't see any immediate systemic risk issues. . . . The most important providers of market discipline are the large, global commercial and investment banks.

~ Fed Governor Kevin Warsh, July 2007

Ben Bernanke on housing bubble talk (2005)

Well, unquestionably housing prices are going up quite a bit, but I would note that the fundamentals are very strong – a growing economy, jobs, incomes . . . much of what has happened [with home prices] was supported by the strength of the economy.

~ Ben Bernanke, CNBC, July 2005

San Francisco Fed President: Stocks are not overvalued

If you look at the valuation of stocks today compared to earnings and dividends and relative to historical averages, it’s not obvious that the stock market is overvalued, in fact a lot of models will tell you that it’s undervalued given how strong profits have been.

~ John Williams, president, Federal Reserve Bank of San Francisco, November 5, 2013

(Comments made in a press roundtable following the Asia Economic Policy Conference.)

Brian Belski: "Bull market in its early stages"

This secular bull market remains in its very early stages.

~ Brian Belski, as appeared on CNBC, October 22, 2013

Ralph Acampora sees bull market lasting another 10-15 years

This is a secular bull [market] that has at least another 10 to 15 years to run.

~ Ralph Acampora, as appeared on CNBC, October 21, 2013

Wells Fargo strategist Gina Martin Adams refuses to join "1700 Club"

Obviously, we are all herd-like creatures, and everyone likes to feel good in a group.  But I am out of the group right now.  That is why I have models, so I don't get caught up in the human reaction.

~ Gina Martin Adams, equity strategist, Wells Fargo Securities, "1700 Club Keeps Growing: Several top strategists expect S&P 500 to top mark this year," USA Today, August 8, 2013

(Seven strategists now expect the S&P 500 to top 1700 by the end of the year, up from none at the beginning of the year.)

Barry Ritholz: "We don't really care about the stuff that's going on in D.C."

Earnings are at a very high cyclical level.  And if we do anything to damage that, you risk a 20% to 30% correction in the market if this [government shutdown] goes on for a month or longer,

All the U.S. obligations are money good.  [The Treasury Department could continue to] move stuff around [to temporarily avoid hitting the limit.]

We really don’t care about any of the stuff that’s going on in D.C.  Our view is as long as this is resolved in a week or three, it’ll be okay.  [Late into the third week of a shutdown, the firm would look at hedges and lightening up.]

~ Barry Ritholtz, "A one-month shutdown risks triggering 20% to 30% correction: Barry Ritholtz," The Tell blog (MarketWatch), October 7, 2013

President Obama on Ben Bernanke and Fed policy

They're going to be making sure that they keep an eye on inflation, that they're not encouraging some of the bubbles that we've seen in our economy that have resulted in busts.

~President Obama, Reuters, Oct 2, 2013

Carl Icahn: "It's sad to see Bernanke go"

Our country owes Bernanke a great deal for pulling us out of the mess several of the largest investment banks go us into in ‘08.

Our country has been lucky over its history that it has had the right people to call on in a crisis. It’s sad to see Bernanke go.

~ Carl Icahn, September 24, 2013, Twitter

Thomas Sowell on greed

I have never understood why it is "greed" to want to keep what you've earned, but not greed to want to take somebody else's money.

~ Thomas Sowell

Time magazine's economists advice easing monetary brakes heading into 1970s

Arthur Okun, the former head of the Council of Economic Advisers, calls the chance of either a recession or a continued boom "a long shot." By his handicapping, the Government stands a 50% chance of bringing the inflation rate down to about 4% without causing a politically unacceptable rise in unemployment. Still, Okun insists—as do the other members of TIME's Board of Economists—that it is high time the Federal Reserve eased its monetary brakes.

~ Time, December 19, 1969

Time magazine on the Fed doing "practically nothing" to stop the contraction of the money supply in the early 1930s

[Milton] Friedman blames unknowing monetary policy in large measure for the magnitude of the Depression of the 1930s. Partly because so many banks failed between 1929 and 1933, the U.S. supply of money shrank by 33%—and that compounded a worldwide economic collapse. The Federal Reserve, which took a narrow view of its responsibilities, felt itself almost powerless to reverse the tide of events. Not really understanding what should be done, it did practically nothing to offset the contraction of the money supply.

~  Time, December 19, 1969

Charles Mackay on speculation

Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.

~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1841)

Brian Belski bullish on equities for the next 5 years

The next five years you definitely want to be in equities.

~ Brian Belski, as appeared on CNBC, August 2, 2013, 9:05 AM ET

Jeff Saut: "Secular bull market has many years to run"

Between mid-July and mid-August I think the markets are vulnerable to the first meaningful pullback of the year.  That said, confidence remains high that we are in the midst of a secular bull market that has many years yet to run.

~ Jeff Saut, chief investment strategist, Raymond James Financial, "Market Top Is In; Brace For a Correction," interview with Jeff Macke on Yahoo!Finance, July 31, 2013

Bill Laggner on riding the bull market

Everyone thinks they can ride a wave and leave before a tsunami ruins their day at the beach.

~ Bill Laggner, July 30, 2013

Nouriel Roubini on gold: "The world is not going to end"

Our forecast, medium term—meaning by 2015—is that gold is going down toward $1,000 an ounce, so from current levels, another 25-30 percent correction could occur. We have written extensively on the reasons for this:

1. Tail risks in the global economy are lower than they used to be. The world is not going to end.
2. In spite of the QEs, inflation is going to remain low because growth is weak, and therefore all this extra money is going into the reserves of the banks, as velocity is collapsing. If anything, inflation is now falling both in emerging and advanced economies. So buying gold as a hedge against inflation, in spite of all these QEs, is not a good investment.
3. There is a global economic recovery. There are now other assets that provide both an income and a capital gain—from equities to even real estate—while gold has always been a play on capital appreciation.
4. Real interest rates became very negative in the U.S. and globally. So at current levels, they can only go higher rather than lower because there is a strong relation in gold prices and real interest rates. However, slow as the normalization by the Fed is going to be, eventually there will be one, and the real rates are going to hurt things like gold.
5. In a world where other advanced economies are weak and emerging markets are soft, the dollar may tend to appreciate, affecting the dollar prices of commodities, including gold.

The question always with gold has never been black and white on whether you want to have gold in your portfolio. The issue with gold is always, Do you want to be market weight, overweight or underweight? In our view, in the past, there were reasons you wanted to be overweight. But now there are these five reasons to be underweight. It is because the gold prices are more likely to fall rather than rise.

~ Nouriel Roubini, "Roubini Sees $1,000 Gold, Stronger US Growth," IndexUniverse.com, July 29, 2013

Anonymous on elitism

A fool can put on his coat better than a wise man can put it on for him.

~ Anonymous

Jim Cramer: "Not a soul is bullish"

The only bullish aspect of today is not a soul is bullish and there seems to be no reason to rally.

~ Jim Cramer, Twitter, June 24, 2013

Larry Fink: Investors need to take more equity risk in order to meet retirement needs

We’re not going to change human behavior, but we need to find ways to influence it. Investors don’t take a long-term view. They are too concerned about all the noise out there, all the ups and downs in the markets.  That noise – and the concern people have about outliving their savings – are ironically driving investors to investments they perceive to be safer, like traditional bonds.  But they should do just the opposite, taking advantage of their longer investment horizon to keep their money working for them.

[Pension plans and individuals have long used traditional government bonds to help fund retirement obligations.]  That worked for 30 years of falling inflation and interest rates and eight percent returns on Treasuries. But it doesn’t work today when the 10-year Treasury yields less than two percent. And the very real risk is that people over-allocating to traditional bond funds are going to lose money when interest rates rise.  The old rules of investing – 60 percent equities, 40 percent fixed income and an increasing share of fixed income the closer you got to retirement – won’t work today.

~ Laurence Fink, CEO of BlackRock with $3.936 trillion under management as of March 31, "BlackRock CEO Declares Longevity 'Defining Challenge of Our Age'," Business Wire, May 7, 2013

Alan Greenspan on the Fed's exit strategy

The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve - that everybody agrees is excessive - the better.  There is a general presumption that we can wait indefinitely and make judgments on when we're going to move.  I'm not sure the market will allow us to do that.

~ Alan Greenspan, as appeared on CNBC, June 7, 2013

Ted Aronson on staying the course with stock and bond investments

For good reasons and bad, I’d hold tight. The good include my faith in capitalism and its ability to weather a storm, even one of biblical proportions. The bad reason is, I have no faith in my ability to time this sort of thing. Even if I got out in time, I probably wouldn’t be able to correctly time getting back in!

I remain a broken record. The song remains the same. I am sticking to it. Successful investing includes taking risk (where bonds clearly fall today, I admit), diversifying and keeping costs down.

~ Ted Aronson, head of AJO Partners with $22 billion under management, "Lazy Portfolio creators remain stock bulls," MarketWatch, Paul Farrell, June 22, 2013

Ken Fisher: We're in "the middle of a bull market"

The notion of having a couple of 25% back-to-back years is something that would shock most people.  And we still have a world where most investors over the recent years have been lightening up on equities.  Overall, the notion that it's actually maybe the middle of a bull market, and there's a lot ahead - that's a really impossible concept for most people to get. 

I've got this part of me that's a big fan of John Templeton's line that 'bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,' and I think we're kind of at the point in time where we have one foot in skepticism and one foot in optimism, and we haven't finished straddling that transition.

~ Ken Fisher, interview on Bloomberg TV, June 21, 2013

Kevin Duffy: "We are on the edge of the precipice"

I think we are on the edge of the precipice, a combination of confidence, enthusiasm, selective euphoria, blind optimism, faith (in central bankers), and buy-the-dip mentality (any correction is healthy).  The Bernanke put is the hook.  Everyone fixated on the magical powers of the Fed, totally blind to the utter economic destruction going on.  No one is stopping to consider that stocks are long dated economically correlated assets… and that the economic foundation has been reduced to quicksand. There are signs of delusion everywhere.  Two of my favorites: cash on the sidelines and a wall of bearish sentiment for stocks to climb… patently absurd.

~ Kevin Duffy, June 20, 2013

Niall Ferguson on the limits of monetary policy

The main lesson to be learned this year is the limit of monetary policy.   The story last year was that the Central Banks are the only game in town. The story this year, is that despite stimulus spending which is simply an anti-volatility policy, the economy will not achieve “escape velocity.”

I predict that the limits of monetary policy will be witnessed by the end of this year. We have a structural economic policy problem – not a monetary one.

 

~ Niall Ferguson, Harvard historian, speech given at the 10^th annual Strategic Investment Conference in California, May 3, 2013

Barron's editors: housing bubble blowoff still to come

There seems to be a bubble in news coverage about the housing bubble, which shows editors aren't much different from investors in trying to latch onto a hot trend.  But which stories should contrarians bet against - ones warning of the bubble bursting or those explaining why house prices are unlikely to crash?  In the late 1990s, when tomes forecasting Dow 10,000 came out, bears were slaughtered before they were vindicated.  Indeed, the final blowoff is the most violent phase.  We could be at a point in housing analogous to 3000 on the Nasdaq - which hit 5000 before crashing to 1200.

~ Barron's "Market Week," May 30, 2005

Jim Paulsen on the budget deficit: "laissez faire is taking care of that problem"

[F]or the last four years or more, people have avoided the stock market because of perceived fiscal woes that are overwhelming.  I think laissez faire Adam Smith is taking care of that problem all its own.  We've had deficit-to-GDP ratio that was 10.5% at the end of the '08 recession.  It's now maybe 5.5%.  It's sort of just melting away by about 1% a year, and government really hasn't done that.  It's just been a slow revitalization of economic growth, which is raise tax receipts faster than people appreciated and lower welfare outlays.  And I think that's going to continue.  I wouldn't worry about the deficit so much.

~ Jim Paulsen, Wells Capital Management, as appeared on CNBC (quote starts at 3:13 on video), June 10, 2013

Jim Paulsen on the BOJ, ECB, and Fed monetary experiments

I think Abenomics is working.  And I think thank that both Europe - Draghinomics - and Japan - Abenomics - is adopting the Ben [Bernanke] model of stimulate now and ask questions later, and I think the developed world's on the right track.

~ Jim Paulsen, Wells Capital Management, as appeared on CNBC (quote starts at 3:46 on video), June 13, 2013

Maria Bartiromo: 2-day correction is healthy and a buying opportunity

Finally my observation on this market sell-off today. This may sound strange. As an optimist I was happy the market stayed down and did not rally from the lows into the close. Why do I say that? Well, this market has been trading up in a straight line pretty much since November of 2012. In fact today and yesterday was the worst two-day drop since November. And still the S&P 500 and the Dow are up in the double digits year-to-date. This may be the moment market pros have been waiting for, an opportunity to actually get in at better levels, lower levels. So my point is seeing a pull-back is exactly what you would want from a healthy market.

The question of course has to be has anything really changed? And in some cases it has. Interest rates have begun to move up. The conversation on Wall Street has begun to shift, to not if, but when the Federal Reserve will slow down the stimulus by cutting the amounts of bonds it buys. And even amid the rally there remain a healthy level of skepticism - some 30% of accounts are sitting in cash. (You just heard that from [UBS Group CEO] Sergio Ermotti.)  At some point that money will come back into the market and go to work. And that point could be here in this pull-back. Because any clear-thinking investor knows, nothing goes up in a straight line.

Many traders I spoke with today told me they are hoping for further selling tomorrow because they want to see a clean sweep.  They want to truly believe that there is value to be had by getting in for the long-term at lower prices. And if we are down tomorrow, it would be the first three-day losing streak for the Dow this year. First three-day losing streak this year.  That's incredible, and not normal. There may be more selling to come.  In fact, it would probably be healthy if there was. But long-term, most people do believe it will once again be a buying opportunity.

~ Maria Bartiromo, "Maria's Observation," CNBC, June 5, 2013

Larry Fink on the Australian model of compulsory retirement accounts

Superannuation has been a huge success in supplementing the government pension scheme and taking the strain off it - an attractive prospect as we think about how to relieve the burden on Social Security in this country.  The current system is broken, and we need a comprehensive solution to retirement savings that includes some form of mandatory retirement savings.

~ Larry Fink, CEO of BlackRock, asset manager with nearly $4 trillion under management, from a lecture given to business school students at New York University in May, "Retirement Saving Done Right," Bloomberg BusinessWeek, June 3, 2013

Ralph Acampora: Dow 20,000, public investor "all in cash"

I see no speculation whatsoever...  People are starting to feel a little bit better.  They're willing to take a little bit more risk.  I think perhaps we're on the cusp of going from Phase 1 of disbelief to Phase 2, where we're starting to see belief and trust.  And I love it when people keep talking this market down.  And we haven't even talked about the public being all in cash and money markets and Treasuries.  Maria, this has got a long way to go.

~ Ralph Acampora, Altair Investment Solutions, as appeared on CNBC (quote starts at 2:54 on the video), May 3, 2013

(The DJIA just set a record, breaking 15,000 on May 3rd intraday.  Acampora predicted the Dow would reach 20,000 by 2017.  Keep in mind, he also predicted Dow 21,000 by 2011 on July 18, 2007 - right at the top of the credit - a blemish on his forecasting record interviewer Maria Bartiromo forgot to mention.)

Jim Paulsen: "Rising confidence is driving the stock market higher"

People are having trouble understanding why the market is going up when the economy is growing slowly, jobs are hard to find, and corporate profit growth is slowing, and they are left with the idea that the rally is just a sugar high from the Fed.  My take is that rising confidence is driving the stock market higher, [adding that investors now believe the worst-case fears they've harbored since the 2008 financial crisis won't be realized].

~ Jim Paulsen, chief investment strategist at Wells Capital Management, "Bull Run Gets Solid Footing," USA Today, May 29, 2013

Brian Belski: "The economy is on a stronger footing"

The economic numbers we're seeing are confirming what the U.S. stock market has been telling us all year: The economy is on a stronger footing and improving longer-term.

~ Brian Belski, chief investment strategist at BMO Capital Markets, "Bull Run Gets Solid Footing," USA Today, May 29, 2013

Randall Forsyth on the great central banking experiment

The unprecedented expansion of central bank liquidity, both to spur expansion and accommodate massive fiscal deficits, constitutes an experiment to prove an untested hypothesis.  Not all experiments succeed.  Some seem promising as the outset, but negative side effects can emerge from the novel therapy.

~ Randall W. Forsyth, ""Get Ready for a Summer of Discontent," Barron's Up & Down Wall Street column, May 27, 2013

Hedge fund guru David Tepper on tapering Fed's QE and burying short sellers

There better be a true [Fed] taper or else you might be back into the last half of 1999.  So like guys that are short, they better have a shovel to get themselves out of the grave.

If the Fed doesn't taper back, we're going to get into this hyper-drive market.  It's a backwards argument. To keep the markets going up at a steady pace the Fed has to taper back.

~ David Tepper, as appeared on CNBC's Squawk Box, May 14, 2013

Wilmington Trust analyst bullish: "momentum is really strong"

There isn't a technical level that we have in mind at this point when making decisions. The momentum is really strong, and riding along that momentum is what we should have in mind at this point.

~ Cam Albright, director of asset allocation at Wilmington Trust Investment Advisors, "Correction talk gets old as market sails ahead," Fox Business News, May 18, 2013

The Washington Post on quantitative easing

We can argue all day long about whether quantitative easing policies from the world's central banks are doing much to help the economy. But this much is for darn sure: It is boosting a wide range of financial markets ... So, why are some of the people who you would think would be the biggest beneficiaries of this strategy so angry about it? That was the consistent tone among titans of the hedge fund industry at the Sohn Investment Conference conference [sic] Wednesday ... Zero interest rates from the Fed haven't sparked inflation; interest rates have fallen despite huge government deficits; and the stock market has risen steadily in the face of a still-weak economy ... it may just be more convenient to blame the (bearded) man behind the curtain as the master market manipulator than to own up to your mistakes.

~ The Washington Post, May 9, 2013

Jim Paulsen on gold: "The Armageddon premium is coming out"

People have been told the world is going to end for five years, and it hasn’t, so they’re finally moving on.  So even when crisis flashes now, you don’t get the same upside, and then in good times, you get more downside, and that’s what you’re getting in gold as the Armageddon premium is coming out.

 

~ James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees $325 billion of assets, "Gold Bears Pull $20.8 Billion as BlackRock Says Buy: Commodities," Bloomberg.com, May 12, 2013

Margaret Thatcher on consensus

The process of abandoning all beliefs, principles, values, and policies in search of something in
which no one believes, but to which no one objects.

~ Margaret Thatcher

MarketWatch's David Weidner on the death of gold

You don’t need to have an advanced degree in economics to understand the fascination with the shiny stuff. Gold is the dummy’s hedge. It’s the purview of old people who are understandably confused by modern investing. It’s the realm of conspiracy theorists who worry about collusion between central banks, hyper-inflation and a new world order.

Of all the investments out there, people feel they understand gold.

Maybe it’s the beauty of the metal, but what really is happening when investors think they have a line on where gold is going to go isn’t that much different from a shell game on a street corner.

Hey, if it looks easy, it must be, right?

Well, on Monday they lifted up the shell and the ball wasn’t there. Today that street corner is empty.

Gold is dead, but suckers are born every minute.

~ David Weidner, MarketWatch, "The day gold died," April 16, 2013

Randall Kroszner on continued dovish Fed policy

Until we see sustainable job growth the punch bowl is not going to be taken away.

~ Randall S. Kroszner, former Federal Reserve governor, as appeared on CNBC, April 10, 2013

Kevin Duffy on the Bank of Japan's policy to double its purchases of Japanese government bonds and extend maturities up to 40 years

The BoJ should be careful what they wish for. There is no scenario under which JGBs can rally from these levels. There is no upside with their aggressiveness, only downside. In fact, they risk bringing down the whole house of cards. The central tenet of the asset inflation of the past 2 decades has been central bank omnipotence. The BoJ risks pulling back the curtain on this fantasy. In fact, I think they just did. Have we crossed the Rubicon into a different world, one in which central bankers do not control events and economic laws overwhelm their feeble attempts to do so?

~ Kevin Duffy, April 5, 2013

Raymond DeVoe on reaching for yield

Keeping score on investments is tough. For instance, it can push you to seek out the highest yield you can find on an income-producing investment, rather than balancing yield against risk. More money has been lost reaching for yield than at the point of a gun.

~ Raymond F. DeVoe, Jr., Legg Mason Wood Walker analyst, February 22, 1995

RBS Securities analyst on the return of synthetic CDOs

Synthetic CDOs are sort of the natural evolution, and in many respects the final frontier, of investors’ search for yield against a backdrop of historically low interest rates. I think the big takeaway here is, ironically, the Fed and regulators are forcing investors to the darkest corners of the structured finance market and the structured credit market to find yield.

~ Richard Hill, RBS Securities analyst, "Behold the Ghosts of Bubbles Past," Bloomberg Businessweek, April 1, 2013

Richard Fisher on moral hazard of "Too Big to Fail" and creation of megabanks

Here are the facts: A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system.

Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8 percent and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks.

Their exalted status also emboldens a sense of immunity from the law. As Attorney General Eric Holder frankly admitted to the Senate Judiciary Committee on March 6, when banks are considered too big to fail, it is “difficult for us to prosecute them … if you do bring a criminal charge, it will have a negative impact on the national economy.”[1]

The megabanks can raise capital more cheaply than can smaller banks. Studies, including those published by the International Monetary Fund and the Bank for International Settlements, estimate this advantage to be as much as 1 percentage point, or some $50 billion to $100 billion annually for U.S. TBTF banks, during the period surrounding the financial crisis.[2] In a popular post by editors at Bloomberg, the 10 largest U.S. banks are estimated to enjoy an aggregate longer-term subsidy of $83 billion per year.[3]

~ Richard Fisher, Ending 'Too Big to Fail', Remarks before the Conservative Political Action Conference, National Harbor, Maryland, March 16, 2013

1. For a recap of comments made during the Q&A period following Attorney General Eric Holder’s Senate testimony, see “Holder: Banks May Be Too Large to Prosecute,” Wall Street Journal, March 6, 2013.
2. For one example of the TBTF advantage observed in the spreads paid for longer-term debt, see “BIS Annual Report 2011/12,” Bank for International Settlements, June 24, 2012, pp. 75–6.
3. See “Why Should Taxpayers Give Big Banks $83 Billion a Year?” Bloomberg, Feb. 20, 2013.

Bernanke says easy money policy benefits world

Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor' but rather are positive-sum, ‘enrich-thy-neighbor' actions.

~ Fed Chairman Ben Bernanke, Reuters, March 25, 2013

Felix Zulauf on the Japanese government's massive debt problem

Zulauf: The Japanese government is in a difficult position, with the country's debt running at 230% of GDP. Japan is in a recession. The budget deficit exceeds 8% of GDP, and could top 10% this year and next. The deficit was easy to finance as long as Japan was running a structural current-account surplus and the domestic pool of savings was large enough to do so. In recent times the country's external accounts have deteriorated, and that could continue.

Japanese institutions have always been the largest and steadiest buyers of Japanese government bonds, or JGBs. They recently announced they lack the funding sources to keep buying on the same scale. Japan Post Bank is an example. It formerly was a government institution in which individuals held savings of more than $2 trillion. It was a big buyer of government debt, as were pension funds and life insurers. All said recently they can't keep buying. The moment has arrived where the Bank of Japan needs to bridge the gap and buy more JGBs with newly printed yen. In other words, the supply of yen will increase dramatically. Japanese inflation will be pushed from slightly below zero to 2%, and the yen will be weakened. This is a major change for Japan, because the yen has been one of the world's strongest currencies for a long time, right behind the Swiss franc.

Q: There is definitely a trend here.

Zulauf: Japan's big life insurers are pension-fund-style entities for the Japanese public. They are big investors overseas, and because of the yen's strength, have hedged part of their exposure to the currency. What would happen if they unwound 10% of their hedges? The four largest life insurers would have to buy $25 billion worth of dollars and sell yen. Many pension funds and industrial companies are in a similar position. The potential purchase of dollars and sale of yen is gigantic. Of course, Japanese bond yields would rise under this scenario, which is another problem, as Japanese banks have 900% of their Tier 1 equity capital in JGBs. To prevent the bond yield from rising, the Bank of Japan will have to buy even more bonds, and print more yen. They will keep things under control for a while, but eventually this plan will fail.

~ Felix Zulauf, Barron's Roundtable, January 21, 2013

Rocky White on the housing recovery

Evidence of a housing recovery continues to pile up, but lingering signs of skepticism suggest there's still plenty of sideline cash to fuel further gains. Just last week, the Commerce Department said housing starts rose 0.8% in February, while building permits rose to a four-year high, topping economists' expectations. Furthermore, existing-home sales jumped 0.8% to the highest level since November 2009, the National Association of Realtors (NAR) reported. Technically, the iShares Dow Jones U.S. Home Construction Index Fund (ITB - 24.20) recently bounced from key support at its 80-day moving average. The fund touched a multi-year peak of $24.88 on Wednesday, and is now consolidating atop the formerly resistant $24 level. Among individual equities, KB Home (KBH) and Lennar (LEN) both defied the skeptics, touching their own multi-year highs after reporting solid earnings and announcing plans to ramp up development. Despite bullish magazine covers on the radar -- including "The Great American Housing Rebound" from Bloomberg Businessweek and Money's "Housing is Back" -- pessimism remains prevalent, as evidenced by The Wall Street Journal's recent warning that the sector is "exhibiting froth." Of the 32 names we track under the "builders" umbrella, all are trading north of their psychologically significant 200-day moving averages, yet just 43% of analysts offer up "buy" endorsements -- even less than a year ago.

~ Rocky White, Schaeffer's Investment Research, Monday Morning Outlook, March 25, 2013

Alexis De Tocqueville on empires

Nothing opposes the prosperity and freedom of men as much as great empires.

~ Alexis De Tocqueville, Democracy in America

Mohamed El-Erian compares the Fed to the Wizard of Oz

When you think of it, in today's economy, the role of the wizard is being played by the Federal Reserve Bank. Facing a difficult economic situation, made worse by the inaction of a bickering Congress and essentially paralyzed government agencies, the Fed has found itself forced to take on the role of savior. And since its massive emergency interventions in 2008, it has felt a moral obligation to stay engaged, a role which, over time, it seems to have pursued more willingly.

In trying to do good, the Fed has confronted more than the considerable dark forces of disorderly economic and financial deleveraging. It has also had to overcome the (not-so-occasional) headwinds from a disruptive Congress and a Europe unable to decisively overcome a regional debt crisis.

~ Mohamed A. El-Erian, "The Fed as ‘Oz, the Great and Powerful’," Yahoo!Finance, March 12, 2013

Friedrich Hayek on civilization and central planning

The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

~ Friedrich Hayek

Jack Welch on hedge fund manager David Einhorn

Apple (AAPL) deserves better than the treatment it's getting from David Einhorn.

Look, these guys are after a quick hit. I'd blow him off. I'd give Einhorn the back of my hand.

~ Former GE CEO Jack Welch, CNBC, March 8, 2013

Mark Hulbert on the value of VIX as a contrary indicator

Unfortunately, my research suggests that the CBOE’s Volatility Index (VIX, 13.53 close)  leaves a lot to be desired as a market-timing indicator. In contrast to what many contrarians believe, low VIX levels are not bearish. And high levels are not necessarily bullish either.

~ Mark Hulbert, "Letting the VIX tell us when to get out," MarketWatch, March 6, 2013

Alan Greenspan gives speech defending his bubble record

Fasciano asked whether laissez-faire capitalism inherently gives rise to tail risk, and if so, if this is an acceptable risk.

Greenspan replied that if you want to guarantee that that there will be no bubbles, you should have an economy like the Soviet Union’s. A regimented society does not have bubbles; it also doesn't have Standard Oil. We also wouldn't have bubbles if we didn't have human nature, he said. Bubbles come from euphoria, which is a deep-seated inbred characteristic that vies with fear. When we switch from fear to euphoria, bubbles can be the result. Behavioral economists refer to “herd behavior.” We’ve all observed this, when people run in in one direction in droves, like lemmings running over a cliff. And we do that. Yes, Greenspan said, it happens all the time and always will unless human nature changes, which it won’t. Don't question it.

If we wanted the monetary authorities to impose terrible inflation, we would not have stock market bubbles, “I guarantee it.” So the question is, do we live with these problems – and they are problems, but there’s no way around them – or do we live in a highly regimented society? We could impose enough regulations on the financial system, Greenspan said, that bubbles would not occur. But we can’t have it both ways.  [...]

Greenspan was accorded the moniker “The Maestro,” but he has also been accused of fomenting the housing bubble by keeping interest rates low in the early 2000s, following the collapse of the dot-com bubble.  He's also faced criticism for failing to recognize the existence of that bubble during his tenure as Fed chairman, arguing that "national price distortion" in housing prices was unlikely.  He responded to those claims.

In looking back on the crisis in residential housing, Greenspan said that it was clear at the time that housing was in a bubble. He pointed out, however, that we had just come out of the dot-com bubble, which had virtually no economic effect, and the “so-called” recession 2001 was barely visible. This suggested, he said, that we could probably get through the housing bubble. But he and others made the mistake of recognizing only too late that the dot-com bubble didn't amount to a big problem largely because the toxic assets of the time, which were equities, collapsed in institutions that were not leveraged. Therefore, although there was a very large capital loss, there weren’t the bankruptcies and sequential losses that occur when a leveraged institution holds toxic assets.

The mortgage-debt problem of the 2008 financial crisis was different, according to Greenspan. Mortgages were held in very large leveraged institutions. If we had somehow had the dot-com boom second, it would have been interesting to see how different history might have been, he said.

~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013

Alan Greenspan gives speech on virtues of Fed-induced asset inflation

Another plus Greenspan cited was the state of the equity markets. In his words, equity premiums are now at almost the highest level in American history, which means that the market is pleased with the economic outlook and the downside risk is at a minimum. It was extraordinary, he said, to see how far the markets had gone down by March of 2009, when price-to-earnings ratios were at a level where “human beings don’t allow them to go any further.” Although we’re considerably up from there, there is still the possibility of a further rise, he said.  [...]

People don’t realize the significance of equity prices, and asset prices in general, for day-to-day economic activity, according to Greenspan. His research shows that equity markets are not only a leading economic indicator, but, much more important, they are fundamental creators of economic activity. Approximately 6% of the growth in GDP is funded by a rise in equity values, on average, though this varies considerably. As a result, increasing equity values can be even more important for economic growth than fiscal stimulus.

The problem with fiscal stimulus is that we measure it gross, by how much it puts into the economy, but we don’t put debits against it. The evidence is unambiguous, according to Greenspan, that rapid increases in deficits raise the expectation of taxes, engendering uncertainty in the business community and leading to significant declines in private capital investment. This lowers the impact of a fiscal stimulus by one-fourth to one-half and possibly significantly more, depending upon conditions. An equity stimulus doesn’t have this negative aspect. The data after March 2009 make clear that the equity stimulus drove the economy. Greenspan acknowledged that an equity stimulus brings with it an increase in private debt, “but not more than the system can handle.”  [...]

Although the housing market is recovering – foreclosures are clearly declining, and the market is beginning to clear – Greenspan said he was reminded of 2008. At that time, half of remediated mortgages went into default again after six months. As prices have gone up and people have built up equity in their homes, that proportion has now fallen to 10%. The key to recovery is having people build up equity in their homes. As that happens, it builds up a cushion; as prices go up 10% or 15%, the underwater homes are cleared out. Remediation made no sense. If we had let the markets adjust themselves, that is, allowed the kind of selling climaxes that clean out an illiquid market and caused prices to fall to a level where the market cleared, we would have been far better off, according to Greenspan.  [...]

~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013

Abbey Joseph Cohen on missing the stock market rally

Short-term concerns about the automatic spending cuts notwithstanding, my models peg fair value for the S&P 500 index (^GSPC) at 1,575 - a 4 percent premium to Thursday's close. There are other models, including the Fed model, that show fair value as high as 1,700 or 1,750.

[The rally] is supported by improving fundamentals in the U.S. economy and, very importantly, valuation. [With] equities at a (price-to-earnings) ratio at 14 times earnings, they're just not expensive.

Our sense is that there is a lot of cash on the sidelines.  Investors may do well to put that money to work in stocks - or to shift out of longer-term bonds into stocks, the better investment.

But even in a rising interest rate environment, equity bull markets historically retain some strength for a while, as the market responds to an improving economy.   ~ Abbey Joseph Cohen, Senior Investment Strategist, CNBC, March 1, 2013

Bernanke on being labeled a dove

Well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period -- at least one of the best, about 2 percent average inflation.

~ Fed Chairman Ben Bernanke Senate testimony, Bloomberg, February 26, 2013

Bernanke defends Fed balance sheet expansion, QE

We do not see the potential costs of the increased risk- taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery.  Inflation is currently subdued, and inflation expectations appear well anchored.

~ Fed Chairman Ben Bernanke before the Senate, Bloomberg, February 26, 2013

Seth Klarman on current market environment

Investing today may well be harder than it has been at any time in our three decades of existence. The Fed's relentless interventions and manipulations have left few purchase targets for Baupost. The underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors.

~ Seth Klarman, 2012 Annual letter to partners, 2/17/2013

Ken Fisher on how stock market negatives are digested and discounted

Negatives continue to abound.  So why do I expect stocks to shine in 2013?  Because I’m not a cow, I’m a bull.  Let me explain: Most negatives you hear about are well known and widely discussed, digested and already priced into stocks.  If it’s widely known, it’s either wrong or will have little impact on stocks.

Fear of Europe?  We’ve fretted over it for three years while stocks rose.  Another Obama term—fully four years of fretting under our belts!  The debt crisis—we will be fretting about that forever.

Markets are designed to price in all widely known factors.  I see little now where the cud hasn’t already been chewed and rechewed.   What’s a cud?  A mass of semidegraded food that is regurgitated.  It’s comfort food for cows and other herd animals.   Following the herd can be dangerous to your financial health.

~ Ken Fisher, Forbes, January 2, 2013

Jim Grant on Japan's bull-market system of the late 1980s

More than a bull market, Japan invented what enthusiasts believed was a perpetual bull-market system.  Japanese companies bought each others’stocks, and Japanese banks bought their clients’ stocks. These “cross holdings,” so the argument went, would never be sold, so the shares that did remain outstanding were all the more valuable. The most expansive element of the bull-market system was that banks were able to count a percentage of their stocks as a contribution to their own capital.  Thus, as the stock market rose, so did the banks' capital and so did their lending capacity.  The more the banks lent, the greater the prosperity in the markets in which the loans were spent.

~ James Grant, The Trouble With Prosperity, p. 155