Cramer and Rosenberg on the recent bounce

I like the money supply increase answer for what’s been driving the market up recently.  The WSJ had an article about individual investors staying out of this one, and it certainly hasn’t been from improving news on the economic front.  Here are the two views I heard (I know pitting Jim Cramer against Dave Rosenberg is a bit unfair, but I still find it amusing).

I was listening to CNBC on the drive to campus today, and heard the ever-bullish Jim Cramer cracking the eggheads who call for a double-dip recession (sound effects included). A caller asked how he would answer to the negative interpretations of the employment data, housing data, auto sales, business confidence and consumer confidence.  The answer he gave was amusing (I’m paraphrasing from memory here): 

“I’ve (Jim Cramer) got 30 years experience and have personally met many of the top CEO’s.  I knows which ones to believe in the conference calls and when they’re bullish, I’m bullish, so throw out the economic indicators and focus on individual business earnings on conference calls.” 

Dave Rosenberg, on the other hand, suggested that perhaps part of the story behind the stock market has been jolts of liquidity from the money supply and banks.  The M2 money supply has been expanded $38.5 million in the past 2 weeks as the M1 money multiple has risen from 0.839 to 0.862.  At the same time, “trading assets” on commercial bank balance sheets expanded to $325 billion from $297 billion.  We can just think of this as volatility rather than the ongoing trend.

I thought it was funny the different questions posed to each of them and how they reacted. The bull Cramer was asked how he could explain his positive view despite the sluggish economic data, and after making his point he said that the stock market was confirmation of his view.  The bear Rosenberg was asked to explain positive movements in the stock market despite his bearish view and after making his point he explained how the sluggish economic data was confirmation of his view.

Personally I still like the income theme – safe high yield stocks and bonds, combined with a steady long-term position in Gold. 

I’m still thinking about playing with January puts, betting that the lame-duck congress will bring back cap-and-trade and other unpopular job-killing legislation after the November elections (explained in a WSJ article) and that this might move markets.  Keep in mind though – options are a zero-sum game and are priced against the holders, so buying naked calls or puts for speculation is gambling rather than investing – but it can be worth doing in small amounts if you learn something from it. 

On a side note, there have been interesting articles on Oil in recent weeks.  The one today (WSJ) on the Gulf Moratorium killing off much of the US production in the area was interesting – especially next to the article about a Spanish oil company with foreign manufacturers looking into a deepwater rig in Cuban waters 40 miles from the florida keys.  The gulf of Mexico is surrounded by many countries which would love to bring in employment and tax revenue from oil production – many which will now have lower political risk than the United States – and it is likely that quite a few of the underground oil wells are connected across these boundaries.  BP is contemplating on selling US assets in Alaskan oil fields- a good idea to sell off some of its still valuable US investments to reduce it’s exposure here.  Russia has recently completed a Siberian pipeline to their East Coast to supply the Chinese market, only to find most of the demand to come from the US West Coast, so we’ll have no problem with oil supply. Our oil will just come from foreign countries in tankers rather than domestic production in oil rigs.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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5 Responses to Cramer and Rosenberg on the recent bounce

  1. Jared says:

    The high yield bonds thing makes sense to me so long as you keep it relatively short term (IMHO). I’ve heard chatter (I think I mentioned in another comment) that interest rates are expected to move (who doesn’t expect that?) but when they do it’ll happen relatively quickly. China, I believe has scaled back their Treasury purchases in large measure. Consequently they are also devaluing the Yuan to some extent (can’t say I have any idea what’s pushing this). Which gets me to thinking…

    …Know any sources on information about currency trading? I came across some info on that recently and I thought it looked interesting. I imagine, in the not too distant future, there would be some major fluctuations in currencies (Incidentally, I recall currencies being a major factor in the Rothchild fortune). Not that I would know, but with the influx of capital over the last couple of years, it would only seem logical that the re-balancing happening would lead to some opportunities in that arena.

    p.s. did you see the long post I wrote a couple of weeks ago? There was a lot to comment on that I haven’t heard back on. Just checking.

    • johnonstocks says:

      I just learned the hard way that these responses don’t autosave – and that clicking one of your links will lose everything I just typed. Frustrating. I’ll start my reply again in a word document this time and paste it in.

      • johnonstocks says:

        Thanks for your comments. I partially answered in a following post last week, but I’ve been unusually busy lately. My summer term at USC is a lot more work than I expected, then there was, moving, a great 4th of July trip, a friend’s wedding, and other things. I have been keeping up with the market, the WSJ, and the Rosenberg newsletters though. Anyways…
        The website forum for posting is a good idea, but I’m not sure how to set it up. I’ll try to get something like that, but it will take a while to dig through wordpress help menus to figure it out.
        Currency trading – You can open a free account to try it at, though I haven’t tried it personally. I’ve only traded currencies using ETF’s so far – the FCA, FXC, FXE, FXF & FXY – but that isn’t really the way to make money with them. Consider the major, and uncommon, swing in the Euro this year – yet FXE has a 52-week range of 152-119, only a 21% drop from the peak. Real currency trading requires a lot of leverage, and margin requirements for this are the smallest for any investment type, so getting a margin account to allow currency and/or currency futures trading would be the way to go.
        Interest rates – I tend to agree with Rosenberg’s deflationary view for the near term. He believes that the yield curve will likely flatten further (as happened in Japan before their recessions with central bank rates near zero), meaning that the 10-year treasury (3.12%) will approach that of the 5-year treasury (1.90%). He also suggests this with the long bond (30 year treasury now at 4.11%), but I don’t think it’s safe to be long something I’d feel so uncomfortable holding.
        Keep in mind that the current US & European government moves are deflationary – higher taxes, lower spending, tighter regulation, and bigger reserve requirements for banks. The WSJ just had an article on Florida banks seeking a delay in hiking capital requirements – saying that they are having difficulty raising capital while the gulf economies are struggling after the BP oil spill. Even if these governments keep their deficits, it won’t offset the private sector deleveraging – just like the spending spree in Japan didn’t keep up with rising savings rates in the public sector for the past 20 years.
        When interest rates are getting ready to turn, we will have warning signs as clear as the cracks in the economy in 2007 if we know what to look for. Some things I’d suggest … when the BRICs, particularly China, are ready to sustainably resume rapid growth and this demand drives up commodity prices, then we may hit some demand-driven inflation and a rise in rates as safe, tradable securities (Asian government or AAA corporate bonds?) begin to look preferable to US treasuries for banks and companies to hold. Right now China is still an export-driven economy that is dealing with the aftermath of a government-supported credit binge in 2008 by raising fractional reserve requirements and limiting lending by Chinese banks. A stabilizing US unemployment rate will be another sign – though don’t look at the published rate which has too much noise from people entering & leaving the employment force, but the employment/population ratio and aggregate hours worked. The fed will not raise rates until unemployment stabilizes and begins to improve.
        As for the portfolio management firm, it’s still a dream at this point, but hopefully I can make it materialize someday. The blog, along with good USC contacts and hopefully private sector contacts in future years will be a good place to start looking for investors. Meanwhile I still need to do something to get a real track record. My personal account won’t do – I often use it to try out new strategies or learn about investing – I’ll need a fake-money account that I treat in every respect as a real one, with a prospectus from the start. Meanwhile, I’d be happy to get a job within the finance industry – though in the current environment (lots of finance people with experience moving from banks if regulations require they curb trading) I’ll more likely end up doing consulting or something else once I graduate this December.
        If you’re interested in investing, one of the things I’ve been doing with the Rosenberg newsletter is seeing how he analyzes things, writing down what indicators he likes to use and what he says they’re good at. It’s tough to find an investing newsletter that rigorous – many press their conclusions without showing where they came from, or charge amounts of money that prevent you to use them for learning purposes. Personally I’ve read a lot of history and a few books on investing, but I’m thinking I should pick a book that explains better how the decision making process works in hedge funds and other big market movers. I believe a lot of the reason technical analysis works is because of the way that big firms routinely operate – such as the actual process they would go through to buy up or sell off a large stake in a firm over time. These are the folks we’ll be trading against, and Sun Tzu said you must know your opponent as you know yourself (not that I’ve actually read “The Art of War” though).
        I just searched you by email on Facebook and added you. I’ve got a twitter account now, but haven’t started using it – I’m still relatively new to blogging.

  2. Jared says:

    Remember I’m a layperson. I’m sure you’d rather chat with someone who can challenge you. Maybe in time I’ll catch up. Anyhow…

    I’m trying to wrap my head around you discomfort with Treasury bonds, that being the worlds “go to security – for security” (you know, aside from gold). The more I think about it the more I agree it wouldn’t make much sense. Should yields rise you wouldn’t be able to get out of it without taking a loss. That must be your point. With yields low it may be safe, but you’d be stuck holding a low yield bond for the foreseeable future. Am I following correctly?

    Your comment…
    “The M2 money supply has been expanded $38.5 million in the past 2 weeks as the M1 money multiple has risen from 0.839 to 0.862. At the same time, “trading assets” on commercial bank balance sheets expanded to $325 billion from $297 billion. We can just think of this as volatility rather than the ongoing trend.”

    Given I haven’t read Rosenberg yet, and I’m finding different numbers from the Fed Reserve regarding the M1, it would appear that the point is there is clearly more money in the system as balances rise in demand deposit accounts as well as bank reserves. What this says to me is, possibly along the same lines as Rosenberg, there are deflationary forces abound being counteracted by the influx of cash – hence the lack of inflation (and deflation). Am I off? If this is the case then they’ve managed quite the balancing act. What happens next is the big question isn’t it?

    Gotta go, will get back to this later.

    • johnonstocks says:

      With treasury bonds, I was referring specifically to the 30-year bond when I said I wouldn’t feel comfortable holding them. In trading these bonds, they go down in value as rates go up… it’s always easier to think about it when you think about the effect of holding it personally. If you buy 30-year treasuries that pay you 4%/year and rates go up to say 6%, you lose out because the same investment would have given you more money. If you try to sell the bonds, you will get less money for them than you paid because you have to discount to make up for the 6% paying ones other people can buy. If you hold to maturity, you won’t lose the nominal value of the money but can still lose wealth if it isn’t high enough above inflation (the $1000 principal you paid 30 years ago won’t even fill up your gas tank – and the $40/year you got while waiting was taxed to boot!).
      As an individual investor it’s best not to get into treasuries or AAA debt in general though (except perhaps for trading) – these assets always pay very little because they are heavily in demand by banks and other institutions that can account for them as “tier 1 capital,” or as good as cash (basically they have legal and liquidity reasons to hold them that individuals don’t). Individual investors can typically get much better returns for their risk with higher yield debt (not necessarily distressed companies, but decent companies that will most likely pay but hold a lower credit rating) or with high dividend stocks (if the dividends are reliable- not like financial company dividends in 2008).
      The M1/M2 stuff is just measures of money supply. The actual M1 figure is the balance sheet of the fed – the amount of dollars they have out in the system so to speak. The M1 money multiplier and M2 go up as banks lend more money. The reason I think that inflation will happen relatively fast when it does is because with more money out for the banks to lend (the M1 went from ~800 billion in 2007 to ~$2 trillion now), the money in circulation has the potential to increase faster. Also, you can look at historical data: This page lists historical CPI data from 1913 to 2010, and you can see that the annual increase in CPI has quite a few spikes – where it increases a lot in a year or two and significantly less in the prior and following years. What drives the danger home for me of holding long-term debt in these periods is the story of my grandfather’s pension – quite reasonable to live off when he retired in the late 60’s, but became worth so little in the 70’s that my grandmother had to start working full time to support them (It was an old private-sector pension, which, like typical treasury bonds, didn’t increase with the CPI … the few pension systems remaining today usually have some kind of cost-of-living adjustments).
      The reason I don’t think we’ll see inflation in the near term is because it takes excess demand to drive up the prices – whereas excess cash is currently more likely to go toward paying off debt than excess spending. Right now banks will build back capital cushions & offload bad debt from their balance sheets (foreclosures in process, etc), consumers will reduce their debt load (at 122% of annual discretionary income when I last read about it a few weeks ago), and governments will focus on deficit reduction (higher taxes, less spending).
      As for the M1/M2 relation to the stock bounce, Rosenberg was just saying that the banks were loaning out more money, some of which was going to the stock market, and increasing “tradable securities” such as stocks on their balance sheets (I can’t really think of a better way to explain it right now).
      It was probably a stronger point when Rosenberg mentioned that institutional investors were net short on the stock market prior to the recent bounce and are net long today – meaning it was a short-covering rally as these investors closed out their positions rather than new buying. This shows less resolve in holding the higher values, because funds that actively short don’t act like long term holders, and they will start building up short positions again in the future – which will push down values later unless long-term holders pick up buying.
      The fed certainly does have a balancing act with the dual mandates of “full employment” and low, steady inflation rates. Employment is affected by many factors outside of their control – such as government regulations, market interventions, taxes & subsidies, and a stable/predictable or unstable/unpredictable environment for investment – and low fed rates alone can’t fix all these problems. Meanwhile, fed rate hikes in essence add costs to borrow and invest while increasing incentives to save – thus counteracting inflation by pulling money out of the marginal business investments that create job growth. Expanding or shrinking the fed balance sheet has similar effects, but lower or raise borrowing costs by affecting the amount of money banks have to lend rather than by direct interest rate changes (if the fed sells some of the securities on its balance sheet, banks or investors purchasing these assets from the fed will have less money to invest elsewhere).
      I hope this clarifies things … I try to keep my posts short so that people will read them, but then I run the danger of making things unclear. If you show every step in a math problem, the original point for solving it is lost in the excess lines – yet if you skip too many steps it is nearly impossible to understand.

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