This guy works for Bill Gross, the best bond market guru and manager. Mohamed is brilliant and is interviewed on CNBC when important crises are afoot.
They don’t have six weeks,” said Mohamed A. El-Erian, chief executive of Pimco, the world’s largest bond manager. He said fear had reached the very core of the 17-nation group that uses the euro currency, with the price of insurance on German debt rising substantially this week.
“The light already is flashing yellow,” Mr. El-Erian said. “They can’t allow it to flash red. You have to give people a vision of what you want the euro zone to look like.”
Showing posts with label Bill Gross. Show all posts
Showing posts with label Bill Gross. Show all posts
Saturday, September 24, 2011
Tuesday, December 22, 2009
Bill Gross's Utility Play
Guru Screen
Utilities Good Enough For Gurus And Bill GrossJohn Reese, Validea.com, 12.21.09, 06:50 PM EST
Utility stocks that sport fat yields or specialize in natural gas score well with models based on the world's best investors.
The historically low, near-zero interest rates that the Federal Reserve has kept in effect for the past year or so have been a boon for companies and corporate profits as we emerge from the credit crisis of 2008. Those low rates have a dark side, of course: They've made money market accounts useless for those looking to growth their cash and they've also made it tough to find nice yields among investment grade corporate bonds.
This low-rate climate is something PIMCO's Bill Gross discusses in his most recent investment outlook, a piece entitled, "Anything but .01%," a reference to the yield he says he's getting on his own money-market account.
The minuscule returns on cash and weak returns on many bonds have driven Gross to look at equities, and in particular to one specific sector. "In a low growth environment, it seems to me that a company’s stock should yield more than its less risky debt," he writes, "and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunication companies now yield between 5% and 6%, whereas their 10- and 30-year bonds yield less and at a higher tax rate to you the investor."
Coach (COH), Garmin (GRMN) and Aeropostale (ARO) all appear in the Buffett-style portfolio. Click here for a look at all of the guru buys when you try the Validea Hot List .
Gross' comments got me thinking about utilities, and the sector then caught my eye again last week for another reason, whenExxon Mobil ( XOM - news - people ) snatched up natural gas specialist XTO Energy ( XTO - news - people ). Exxon's CEO said natural gas is expected to be the fastest-growing major energy source, and the move led to speculation that other big oil players could follow with natural gas acquisitions of their own.
With all of this in mind, I decided to see which utilities get high marks from my "Guru Strategy" computer models, each of which is based on the approach of a different investing great. What I found was that that many of the highest yielders don't have the fundamentals needed to make the grade, making them what you might call "yield traps" (i.e., their businesses may not have the strength to sustain their high dividend payouts or their stock prices over the long haul).
Some utilities did score rather well with the strategies, particularly the approach I base on the writings of the great Peter Lynch. Here's a look at some of the favorites, including some that have the strong yields that Gross might like, as well as some that would stand to benefit from increased use of natural gas.
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RWE AG (RWEOY.PK): This Essen, Germany-based holding company manages RWE Group, the largest power producer in Germany and the second-largest in the U.K. It is involved in the generation, transmission, sale, and trading of electricity and gas, as well as the water business. The firm has 20 million electricity customers and 10 million gas customers, and it has plans to significantly reduce its current coal operations and almost double its gas operations from 2007 levels by 2020. The $47.2 billion market cap company is currently rewarding shareholders with a stellar 6.1% dividend yield.
RWE gets approval from the Guru Strategy I base on the writings of Lynch, one of the most successful mutual fund managers in history. Its 19.9% earnings per share growth rate (I use an average of three-, four-, and five-year EPS figures) and high sales ($68.3 billion over the past year) make it a "stalwart" according to the Lynch approach -- the kind of large, steady firm that Lynch found offered protection during downturns or recessions.
To find growth stocks selling on the cheap, Lynch famously used the P/E/Growth ratio, adjusting the "growth" portion of the equation to include yield for stalwarts, since they often pay solid dividends; yield-adjusted P/E/Gs below 1.0 are acceptable to my Lynch-based model, with those below 0.5 the best case. When we divide RWE's 11.3 P/E by the sum of its growth rate (19.9%) and yield (6.1%), we get a yield-adjusted P/E/G of 0.43 -- a sign that it's a bargain.
Lynch also liked conservatively financed companies, and RWE passes one of my Lynch model's balance sheet bonus tests, the net cash/price ratio. Lynch defines net cash as cash and marketable securities minus long-term debt, and a high net cash/price ratio (above 30%) dramatically cuts down on the risk of a security. At 45.8%, RWE easily makes the grade.
FirstEnergy Corp. ( FE - news - people ): This Akron, Ohio-based utility is the parent of seven electric utilities that form the U.S.'s fifth-largest investor-owned electric system. The $14 billion market cap firm serves 4.5 million customers throughout Ohio, Pennsylvania and New Jersey. Its stock is currently yielding about 4%.
FirstEnergy is another "stalwart" (18.2% long-term EPS growth rate and $16.5 billion in annual sales) that gets approval from my Lynch-based model. Its yield-adjusted P/E/G ratio is 0.51, falling just outside the strategy's best-case category, a sign that it's a bargain. FirstEnergy's debt/equity ratio (180%) is higher than 80% upper limit my Lynch-based approach uses for most firms, but because utilities generally carry higher debt loads than companies in other industries, the model doesn't see that as a problem.
DPL Inc. ( DPL - news - people ): Since I wrote about it back in early July, DPL--the parent of The Dayton Power and Light Company -- has gained almost 20% while paying a strong dividend yield. Dayton Power and Light supplies power to about 500,000 customers in West Central Ohio, generating a total capacity of 3,700 megawatts of electricity at 10 power plants. The stock, with a $3.4 billion market cap, is currently yielding a bit over 4%.
DPL remains a favorite of my Lynch-based approach, as it was back in July. While utilities usually produce slow or moderate growth, DPL's 22.6% long-term EPS growth rate makes it a "fast-grower" according to my Lynch model--Lynch's favorite type of investment. For fast-growers Lynch also used the P/E/G ratio, though he didn't adjust for yield since they typically don't pay the hefty dividends that stalwarts or slower-growing firms do. But even putting its solid 4% yield aside, DPL still has a 0.57 P/E/G, easily passing the Lynch-based model's most crucial test.
This Houston-based natural gas utility has about 20,000 miles worth of pipeline in the U.S., and serves more than half a million natural gas end-users in Missouri and Massachusetts. It has a market cap of about $2.7 billion.
Unlike the utilities I've mentioned so far, Southern Union isn't a big yielder--its 2.7% yield is decent, but slightly below the market average. But the firm is the lone U.S. utility in my database that gets approval from two of my Guru Strategies, earning high marks from both my Lynch-based model and my James O'Shaughnessy-based approach.
The Lynch model considers Southern Union a "fast-grower" because of its 26.4% EPS growth rate (based on the average of the three- and five-year figures). That growth rate and the stock's 11.4 P/E ratio make for a stellar 0.43 P/E/G ratio, indicating that the fast-grower is a bargain at its current price.
My O'Shaughnessy-based growth model, meanwhile, isn't as concerned with magnitude of growth as it is persistence. It targets firms that have upped EPS in each year of the last five-year period, and Southern has done just that. The O'Shaughnessy model also uses a critical pair of variables: the price/sales ratio, and relative strength. O'Shaughnessy found that stocks with high RS scores and low P/S ratios were being embraced by the market, but hadn't yet become overpriced. With a 1.19 P/S ratio and 73 RS, Southern looks good on both counts.
Entergy Corporation ( ETR - news - people ): Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, and delivers electricity to 2.7 million utility customers in Arkansas, Louisiana, Mississippi and Texas. It also supplies natural gas to close to 200,000 customers in Louisiana, and is the second-largest nuclear generator in the United States.
With a 12.1% long-term growth rate and annual sales of more than $11 billion, Entergy is another stalwart that my Lynch-based model likes. The firm is currently yielding about 3.6%, which is part of why it has a solid yield-adjusted P/E/G of 0.94. Entergy, which has upped EPS in six straight years, also has a reasonable amount of debt for a utility, with a debt/equity ratio of 131%.
John P. Reese is founder and CEO of Validea.com and Validea Capital Management, and co-author of the new investing bookThe Guru Investor: How to Beat the Market Using History's Best Investment Strategies (John Wiley & Sons). He is also co-author of The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Click here for more of Reese's insights and analysis, and to subscribe to the Validea Hot List.At the time of publication, John Reese was long SUG and XOM.
Friday, July 10, 2009
Bill Gross -- On Consuelo Mack July 3
July 3, 2009
Consuelo Mack WealthTrack - July 3, 2009
CONSUELO MACK: This week on WealthTrack's Great Investors series: the man the investment world has crowned the bond king. PIMCO's Bill Gross runs the world's largest bond fund, advises governments and moves markets. He'll share his outlook and strategies next on Consuelo Mack WealthTrack. Hello and welcome to this edition of WealthTrack. I'm Consuelo Mack. This weekend we are celebrating the launch of our fifth season and we are doing so by introducing a "Great Investors" summer series. For this week's interview, I sat down for a lengthy discussion with PIMCO's bond king Bill Gross in Newport Beach, California. Next week I'll be talking to First Pacific Advisors stock and bond fund legend Robert Rodriguez from Los Angeles. Meanwhile, as we close the first half of the year and embark upon the second, a couple of observations: the first rule among many of our great investors is don't lose money. We are finding out first hand why it is extremely difficult to recover from the kind of big losses investors have experienced over the last year. Although the S&P 500 rallied nearly 35% from what many, including Gross, are calling the bear market low of March 9th, it is still 41% below its all time high reached in October of 2007. One of the reasons that Bill Gross is so exceptional is he manages to avoid losses most of the time. Last year his Total Return Fund, now the largest mutual fund in the world, delivered a positive 4% plus return, beating the competition in its bond fund category by an astounding nine percentage points. Over the last ten years, Total Return has clocked in average annualized returns of nearly 6.5%, also ahead of its peers. My second observation is how involved the government now is in the financial world. Independent research firm ISI Group points out that at the peak of the mortgage boom in 2006, only 3% of mortgage originations were explicitly backed by the government. Today that figure is 94%. You heard that right, 94% of mortgage originations are government backed. That dominance was not lost on Gross and his colleagues. A major investment theme of PIMCO's has been "shake hands with the government" and he has done so big time. At the end of May, 61% of the Total Return Fund was invested in mortgage bonds. However, after the Chrysler and General Motors experience with the government changing the rules for investors, Gross told me he is backing away from a firm handshake with the government, now preferring comedian Howie Mandel's germophobe version of touching fists and protecting yourself. My final comment is how low returns have become, especially on the least risky investments, namely cash. How low? Would you believe it will take 360 years to double your money at current rates on three month Treasury bills? As Merrill Lynch's Michael Hartnett pointed out in his recent report, "360 Years Is A Long Time." Gross will share his views on how low he expects returns to be in the future. That said, in a world awash in debt, I asked Gross if it is an exciting time to be a bond manager?
BILL GROSS: Oh, it couldn't be more exciting. Not just a bond manager but an investment manager of all sorts whether it's real estate, equities, private equities. The whole world is changing to what we call a new normal. And in trying to decipher when we renormalize and where the new normal is perhaps the biggest challenge in my career. And that's a 35 year stretch.
CONSUELO MACK: So talk to me about the new normal that PIMCO is talking about. What is the new normal going to look like?
BILL GROSS: The new normal to our way of thinking is a world of slower growth, certainly in the U.S. A world that is delevering as opposed to levering.
CONSUELO MACK: Right.
BILL GROSS: Taking on more debt. A world in which the consumer is forced to save money as opposed to spend it. And a world in which the government plays a more significant part relative to the private sector. For all of those reasons, the new normal in terms of growth, in terms of an unemployment rate, in terms of returns on stocks and bonds and other investments may be substantially different than what we're used to.
CONSUELO MACK: So that if it's slower growth in the U.S. in particular and does this extend to the rest of the world? I mean certainly the advanced economies, for instance?
BILL GROSS: Right, for most of it. Certainly for G-7, G-10 developed types of economies that you just suggested. Those countries are faced not only with high debt levels but with a demographic problem for the most part where many of their people are aging, are boomers, basically are typical of many other countries. And so these two headwinds so to speak, the headwind that forces more savings is not just a function of the leverage that was built up over the past 20 or 25 years but the fact that boomers now are thinking at least of retiring and will require more and more services in the form of health, in the form of pensions and so on.
CONSUELO MACK: That tells me it is going to be a much lower standard of living. You just said we're to the going to be the economic drivers of the world. So this transition, you know, what is this going to mean for the investment environment?
BILL GROSS: Sure. It will be not a lower standard of living but a slower growth in our standard of living. We basically expect growth. We're not in the Rubini camp or old Rubini camp, expecting disaster, deflation and the like. But we expect growth to be one to two percent. And that, Consuelo, basically translates into profit, very small levels of profit growth. We are delevering, uncertain as to how much we are delevering. And of course the government is trying to fill the hole by writing checks. But we're delevering and on that basis, real growth, really can't be assumed to match what we have grown used to over the past 20 to 25 years which has been 3 to 4% in terms of real GDP. To the extent it only grows at 1 to 2% than profit growth, it is barely above the line. And stocks, of course, would barely, you know, creep higher as opposed to mimicking the double-digit returns that many economists told us were our destiny.
CONSUELO MACK: Right.
BILL GROSS: I mean the seagull stocks of the long run.
CONSUELO MACK: This 11% return that we've learned, been taught to expect over the long run, you're saying that's over.
BILL GROSS: That's over. And of course the government will be doing all they can, and have about over the past six months to reflate this economy, to produce inflation. Because that's one of the ways to get out from under the 16 tons of the old Tennessee Ernie Ford song that spoke to the burden of debt.
CONSUELO MACK: How concerned are you about the rate of inflation, really being profoundly, you know, different going forward considering the amount of cash that governments all over the world are putting into the system?
BILL GROSS: Well, it's still a big question mark. And to be fair, if your viewers remember this piece 12 months down the road, they probably won't have seen much on the inflationary front. I mean we've had what's called a liquidity trap in which debt and equity and wealth has been destroyed. Just vanished, 10, 20, 30 trillion dollars worth of wealth. And for policymakers to try and fill that gap, to fill that hole, it's a very difficult proposition. So over the next 12 to 24 months, probably not. But if they keep on keeping on, if they produce monetary and fiscal stimulation in the trillions, which is what we're seeing now in the United States, with a trillion and a half dollar deficit and with check-writing programs from the Federal Reserve close to a trillion and a half dollars as well, then the potential for reflation is there.
CONSUELO MACK: So what's your biggest concern as far as the stimulation that we've seen? And I'm particularly concerned about the U.S. and the fact that foreigners own over half of our Treasury supply and that we're dependent upon them to finance us. So I mean, how big a risk is that with this continuous issuance of government debt?
BILL GROSS: Well, I think that is an enormous risk. And one of the reasons why the Fed has been buying 3 or 400 billion of Treasuries and by the way, a trillion and a quarter of mortgages; I means that's a check for a trillion and a half plus that has been used to fill the gap for buyers that just haven't shown up. Those, of course, would be the Chinese, would be other holders of Treasuries that at the moment are beginning to signal that they've had about enough.
CONSUELO MACK: Chinese, Russians, Brazilians.
BILL GROSS: Of course. And it's connected to the dollar, but also to the returns that they're getting from their Treasury investments. I mean the Chinese, if they're investing in Treasury bills are only earning 0.15 or 0.25%, that's a beggar's portion and they are, to a certain extent, unwilling to continue that. What the Fed and the government then have to do is either cut the deficit which looks to be problematic, especially in the face of new health-care programs, or else keep on writing checks. It's that check writing that is causing some problems. We saw the problems first of all in terms of the TARP, the public, the Congress, basically, had had it up to here and wanted no more.
CONSUELO MACK: Right.
BILL GROSS: Less obvious has been the trillion and a half of check writing by the Federal Reserve. It's not well understood. But it's certainly true that they can't keep on writing checks in those amounts and expect not only the Chinese to buy, but the PIMCO's of the world as well.
CONSUELO MACK: Is there any investment area that are you excited about long-term?
BILL GROSS: No. To get excited over an investment that would return 5, 6, or 7%, that wouldn't be the proper adjective, I guess. And it's not to suggest that we're moving back into bear markets and that an investor will be more concerned about the return of his or her principal as opposed to the return on it. But nonetheless, those are not excitable types of returns going forward. There's still some attraction in our opinion with what we call hybrid preferreds that yield 9, 10, 11%. That is where some of my personal money would go, and some of our PIMCO money as well, of course. But there's not much there from this point forward that would produce the double-digit returns that we have grown so used to.
CONSUELO MACK: Bill, I'm going to quote you: "Capitalism is about risk-taking. And if you are not a risk-taker, you should have your money in the bank or T-bills or a savings bond." Those are fighting words. And you know, you and I growing up, for the last 30 years of our professional careers, I, at least, have been taught that investing is part of savings. And you're making a very important distinction that investing, which is risk-taking, is separate and distinct from savings.
BILL GROSS: Well, it is. I mean savings to the extent it is government-guaranteed. And most savings are. You know, it provides a risk-free environment which is comforting and wonderful quantity to go to sleep with and to know that when you wake up, your money is there. In this environment though, with money market yields close to 0, it is akin to stuffing that money in a mattress. And so an investor, an investor willing to take some risk with their money, you know, basically must move out on the risk spectrum in order to earn a 6, 7, 8% return- lower than double digits, of course, but much higher than 0%. So the investor today is caught between 0% money market yields and the risk, you know, of losing some capital and some principal in this delevering, very volatile type of environment.
CONSUELO MACK: So what do we do?
BILL GROSS: Well, I think some cash is helpful. I mean it is good to know that you have got some money to pay the bills, to pay for education when and if, you know, that becomes required. But in order to keep up and to at least mildly prosper in this type of environment, you've got to extend out on the risk spectrum in the bond world. You know, there are examples, typically in what are known as closed-end funds that can be bought on the New York Stock Exchange.
CONSUELO MACK: And PIMCO runs--
BILL GROSS: --runs some of those. And we work them and work at them, you know, very hard in order to produce as high a yield as possible with the lowest risk. But they yield in many cases 10, 11, 12, 13% for investment grade types of corporate bonds. And so there's the contrast. Yes, some risk in terms of corporate bond space but a much higher return for those that require something more than mattress stuffing money.
CONSUELO MACK: When your poorer relatives come to you and ask you what should they do with their money in the new normal, what do are you telling them?
BILL GROSS: My wife Sue has basically said no mas on the poor relatives. Because whenever I recommend something and it goes down they are on the phone immediately. But if that policy were still to be followed, you know, I would recommend, yes, the corporate closed-end funds. I would recommend some bank preferred stocks which, you know, have been written up recently in some of the periodicals just this last week in Barrons. But those are double digit types of returns that I think are relatively safe going forward. And as well, you know, if are you interested in equities, in the common stock world of risk, you know, there should be and there are in fact, companies with very steady cash flows, steady income streams and reliable dividend streams. And they would be companies, the old standards that we know, the Procter & Gambles, the AT&Ts, the Verizons of the world where you can project forward even in a new normal slow-growth type of world, a reliable flow of dividends and perhaps some growth as well.
CONSUELO MACK: If we've learned anything in the last couple of years, it is that stocks were by far the riskiest asset in our portfolios. And that bonds, in fact, balanced many of the losses that we saw in the stock part of the portfolio. And one of the things that you've written about as well that, I guess 40 years ago, that bonds were the preferred investment and that stocks had to give you much higher yields in order to convince you to put a portion of your investments in stocks. Are we going back to the days where bonds will be the core holdings in the portfolio, do you think going forward?
BILL GROSS: Well, I don't think back to the '40s and the '30s. I mean those are the very conservative periods of time following the crash in '29. But to the extent that the policy portfolio- that being 60% stocks, 40% bonds or if you are young, 90% stocks, 10% bonds- I think that's disappearing, that's what has to be questioned. The policy portfolio, the standard thinking that basically suggested that stocks will always return more than bonds or that real estate will always perform better than Treasury bills, you know, really has to be questioned because, you know, up until at least the first quarter of 2009, bonds for the past 10, 25 and 40 years, that's a long time, had outperformed stocks.
CONSUELO MACK: Treasury bonds.
BILL GROSS: Treasury bonds. You know, it's hard to suggest that from this point forward with a 30-year Treasury at 4-and-3/4% that that should outperform a good stock. But it should awaken investors to the fact that stocks and risk-oriented investments don't always, and even for long periods of time, don't always outperform less risky investments. And so the public policy portfolio, the standard thinking that you should have inflation protection with stocks, that the only way to accumulate wealth within a portfolio is by taking risk in these areas, I think it has to be questioned going forward.
CONSUELO MACK: So, Bill, what are you going to do differently going forward? Are you going to invest differently now after the experience we've had in the last year and a half, and given the fact that you think there's going to be a new normal? What are you going to be doing differently?
BILL GROSS: I think you have to. For instance, in the high-yield area, you have to focus on industries and companies that have less financial and operational leverage. Example: General Motors had huge operational leverage to the extent that they had to keep those factories running, that they had to keep employing those people. You know, they depended upon a 15 million annual sales rate in order to generate a profit. Now we're below 10 million and you are seeing what happens. They were also a company that was financially levered. They took on too much debt and so as car sales dropped, paying the lender, so to speak, became an unbearable burden. So you want companies that have a minimum of operational leverage, that can basically reduce capacity, can layoff people without having to pay unreasonable amounts of money. And in addition are not financially levered so that when the big "R" comes, the big recession, the great recession, they can continue to make those interest payments as opposed to default. So yeah, there's a substantial transition underway in which what worked before in the past 10, 20, 30 years, leverage and operational leverage based upon a faster and faster rate of consumption, where that's moving now to just the opposite. And so you want to look for industries that are less levered operationally and financially.
CONSUELO MACK: And you touched on it earlier but let me ask you to elaborate. So what are you doing with your personal portfolio that's different?
BILL GROSS: Well, I think now I've got some cash, some of that 25 basis point or .25% cash by is eating at me. You know, you like to earn some money. In my personal portfolio, I have a lot of corporate closed-end funds that yield 10, 11 and 12%. And I have a substantial holding in those bank preferreds. These are preferreds issued by JP Morgan, by Wells Fargo, by Bank of America and in some cases Citi, you know, the big four or five. They yield 10, 11 and 12% and much of it because they come in the form of dividends or tax sheltered. They get the same treatment as a dividend from common stock. It's not exactly a municipal bond but it comes close in terms of the tax advantages and the tax sheltering, at least for now. So those are attractive returns in this type of a world, certainly when the government is investing in banks as well with their TARP preferred and with their guarantees. And now that banks are, in many cases, issuing stock and recapitalizing, it appears to be a relatively safe investment with certainly an attractive rate of return. So that's where my money is going.
CONSUELO MACK: Basically the investment future, is it overseas and how should we skew our portfolios much more to internationals?
BILL GROSS: Oh, I think so. Ultimately, you know, a domestic investor, a U.S. investor has two things working against him or her. One, slower real growth. And those low-interest rates on the short end of the curve and the cash account. Secondly, though, in terms of the fact that those holdings are denominated in dollars, the long-term future of the dollar is suspect. I mean I have talked in recent months about the potential for the reserve currency status of the dollar to disappear. That won't happen for five to ten years. But it may happen in mild gradations all along the way as countries such as China and Russia and Brazil put together separate currency types of arrangements. So if the dollar declines, an investor in the United States basically feels that as prices of imports begin to increase, that's the natural result of a declining dollar. So ultimately, yes, an investor has to go overseas, hopefully in the emerging market countries, in the BICs- Brazil, India, China and the look-alikes in Southeast Asia. Those will be countries with strong currencies. Those will be countries with much stronger growth and that combination provides a much higher, positive return than what you get here in the United States. So in your portfolios, look from the standpoint of equity and from the standpoint of bonds. Look to some of the developing countries as opposed to the United States. Brazil, for instance, Brazil, this morning I bought for PIMCO 50 to one hundred million of the Brazilian five year bonds and they yield 10 to 11 to 12%. Brazil perhaps is not the United States but 10 to 20 years from now, you know, it would be looking pretty good relative to the United States. And so that type of return with that type of prospect becomes an enticing possibility.
CONSUELO MACK: Bill Gross, co-CIO of PIMCO, thank you so much for joining us.
BILL GROSS: Thanks, Consuelo.
CONSUELO MACK: Next week, in our Great Investors series, another investment phenomenon- this one with the exceptional distinction of running both a top performing stock and bond fund for 25 years. I'm going to sit down with First Pacific Advisors outspoken contrarian and Porsche racing portfolio manager, Robert Rodriguez. We also want to welcome our new sponsors to the WealthTrack family: New York Life, Loomis Sayles and Annaly Capital Management. We are delighted to have you. Until next week, have a happy Fourth of July weekend and make the week ahead a profitable and a productive one.
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Consuelo Mack WealthTrack - July 3, 2009
CONSUELO MACK: This week on WealthTrack's Great Investors series: the man the investment world has crowned the bond king. PIMCO's Bill Gross runs the world's largest bond fund, advises governments and moves markets. He'll share his outlook and strategies next on Consuelo Mack WealthTrack. Hello and welcome to this edition of WealthTrack. I'm Consuelo Mack. This weekend we are celebrating the launch of our fifth season and we are doing so by introducing a "Great Investors" summer series. For this week's interview, I sat down for a lengthy discussion with PIMCO's bond king Bill Gross in Newport Beach, California. Next week I'll be talking to First Pacific Advisors stock and bond fund legend Robert Rodriguez from Los Angeles. Meanwhile, as we close the first half of the year and embark upon the second, a couple of observations: the first rule among many of our great investors is don't lose money. We are finding out first hand why it is extremely difficult to recover from the kind of big losses investors have experienced over the last year. Although the S&P 500 rallied nearly 35% from what many, including Gross, are calling the bear market low of March 9th, it is still 41% below its all time high reached in October of 2007. One of the reasons that Bill Gross is so exceptional is he manages to avoid losses most of the time. Last year his Total Return Fund, now the largest mutual fund in the world, delivered a positive 4% plus return, beating the competition in its bond fund category by an astounding nine percentage points. Over the last ten years, Total Return has clocked in average annualized returns of nearly 6.5%, also ahead of its peers. My second observation is how involved the government now is in the financial world. Independent research firm ISI Group points out that at the peak of the mortgage boom in 2006, only 3% of mortgage originations were explicitly backed by the government. Today that figure is 94%. You heard that right, 94% of mortgage originations are government backed. That dominance was not lost on Gross and his colleagues. A major investment theme of PIMCO's has been "shake hands with the government" and he has done so big time. At the end of May, 61% of the Total Return Fund was invested in mortgage bonds. However, after the Chrysler and General Motors experience with the government changing the rules for investors, Gross told me he is backing away from a firm handshake with the government, now preferring comedian Howie Mandel's germophobe version of touching fists and protecting yourself. My final comment is how low returns have become, especially on the least risky investments, namely cash. How low? Would you believe it will take 360 years to double your money at current rates on three month Treasury bills? As Merrill Lynch's Michael Hartnett pointed out in his recent report, "360 Years Is A Long Time." Gross will share his views on how low he expects returns to be in the future. That said, in a world awash in debt, I asked Gross if it is an exciting time to be a bond manager?
BILL GROSS: Oh, it couldn't be more exciting. Not just a bond manager but an investment manager of all sorts whether it's real estate, equities, private equities. The whole world is changing to what we call a new normal. And in trying to decipher when we renormalize and where the new normal is perhaps the biggest challenge in my career. And that's a 35 year stretch.
CONSUELO MACK: So talk to me about the new normal that PIMCO is talking about. What is the new normal going to look like?
BILL GROSS: The new normal to our way of thinking is a world of slower growth, certainly in the U.S. A world that is delevering as opposed to levering.
CONSUELO MACK: Right.
BILL GROSS: Taking on more debt. A world in which the consumer is forced to save money as opposed to spend it. And a world in which the government plays a more significant part relative to the private sector. For all of those reasons, the new normal in terms of growth, in terms of an unemployment rate, in terms of returns on stocks and bonds and other investments may be substantially different than what we're used to.
CONSUELO MACK: So that if it's slower growth in the U.S. in particular and does this extend to the rest of the world? I mean certainly the advanced economies, for instance?
BILL GROSS: Right, for most of it. Certainly for G-7, G-10 developed types of economies that you just suggested. Those countries are faced not only with high debt levels but with a demographic problem for the most part where many of their people are aging, are boomers, basically are typical of many other countries. And so these two headwinds so to speak, the headwind that forces more savings is not just a function of the leverage that was built up over the past 20 or 25 years but the fact that boomers now are thinking at least of retiring and will require more and more services in the form of health, in the form of pensions and so on.
CONSUELO MACK: That tells me it is going to be a much lower standard of living. You just said we're to the going to be the economic drivers of the world. So this transition, you know, what is this going to mean for the investment environment?
BILL GROSS: Sure. It will be not a lower standard of living but a slower growth in our standard of living. We basically expect growth. We're not in the Rubini camp or old Rubini camp, expecting disaster, deflation and the like. But we expect growth to be one to two percent. And that, Consuelo, basically translates into profit, very small levels of profit growth. We are delevering, uncertain as to how much we are delevering. And of course the government is trying to fill the hole by writing checks. But we're delevering and on that basis, real growth, really can't be assumed to match what we have grown used to over the past 20 to 25 years which has been 3 to 4% in terms of real GDP. To the extent it only grows at 1 to 2% than profit growth, it is barely above the line. And stocks, of course, would barely, you know, creep higher as opposed to mimicking the double-digit returns that many economists told us were our destiny.
CONSUELO MACK: Right.
BILL GROSS: I mean the seagull stocks of the long run.
CONSUELO MACK: This 11% return that we've learned, been taught to expect over the long run, you're saying that's over.
BILL GROSS: That's over. And of course the government will be doing all they can, and have about over the past six months to reflate this economy, to produce inflation. Because that's one of the ways to get out from under the 16 tons of the old Tennessee Ernie Ford song that spoke to the burden of debt.
CONSUELO MACK: How concerned are you about the rate of inflation, really being profoundly, you know, different going forward considering the amount of cash that governments all over the world are putting into the system?
BILL GROSS: Well, it's still a big question mark. And to be fair, if your viewers remember this piece 12 months down the road, they probably won't have seen much on the inflationary front. I mean we've had what's called a liquidity trap in which debt and equity and wealth has been destroyed. Just vanished, 10, 20, 30 trillion dollars worth of wealth. And for policymakers to try and fill that gap, to fill that hole, it's a very difficult proposition. So over the next 12 to 24 months, probably not. But if they keep on keeping on, if they produce monetary and fiscal stimulation in the trillions, which is what we're seeing now in the United States, with a trillion and a half dollar deficit and with check-writing programs from the Federal Reserve close to a trillion and a half dollars as well, then the potential for reflation is there.
CONSUELO MACK: So what's your biggest concern as far as the stimulation that we've seen? And I'm particularly concerned about the U.S. and the fact that foreigners own over half of our Treasury supply and that we're dependent upon them to finance us. So I mean, how big a risk is that with this continuous issuance of government debt?
BILL GROSS: Well, I think that is an enormous risk. And one of the reasons why the Fed has been buying 3 or 400 billion of Treasuries and by the way, a trillion and a quarter of mortgages; I means that's a check for a trillion and a half plus that has been used to fill the gap for buyers that just haven't shown up. Those, of course, would be the Chinese, would be other holders of Treasuries that at the moment are beginning to signal that they've had about enough.
CONSUELO MACK: Chinese, Russians, Brazilians.
BILL GROSS: Of course. And it's connected to the dollar, but also to the returns that they're getting from their Treasury investments. I mean the Chinese, if they're investing in Treasury bills are only earning 0.15 or 0.25%, that's a beggar's portion and they are, to a certain extent, unwilling to continue that. What the Fed and the government then have to do is either cut the deficit which looks to be problematic, especially in the face of new health-care programs, or else keep on writing checks. It's that check writing that is causing some problems. We saw the problems first of all in terms of the TARP, the public, the Congress, basically, had had it up to here and wanted no more.
CONSUELO MACK: Right.
BILL GROSS: Less obvious has been the trillion and a half of check writing by the Federal Reserve. It's not well understood. But it's certainly true that they can't keep on writing checks in those amounts and expect not only the Chinese to buy, but the PIMCO's of the world as well.
CONSUELO MACK: Is there any investment area that are you excited about long-term?
BILL GROSS: No. To get excited over an investment that would return 5, 6, or 7%, that wouldn't be the proper adjective, I guess. And it's not to suggest that we're moving back into bear markets and that an investor will be more concerned about the return of his or her principal as opposed to the return on it. But nonetheless, those are not excitable types of returns going forward. There's still some attraction in our opinion with what we call hybrid preferreds that yield 9, 10, 11%. That is where some of my personal money would go, and some of our PIMCO money as well, of course. But there's not much there from this point forward that would produce the double-digit returns that we have grown so used to.
CONSUELO MACK: Bill, I'm going to quote you: "Capitalism is about risk-taking. And if you are not a risk-taker, you should have your money in the bank or T-bills or a savings bond." Those are fighting words. And you know, you and I growing up, for the last 30 years of our professional careers, I, at least, have been taught that investing is part of savings. And you're making a very important distinction that investing, which is risk-taking, is separate and distinct from savings.
BILL GROSS: Well, it is. I mean savings to the extent it is government-guaranteed. And most savings are. You know, it provides a risk-free environment which is comforting and wonderful quantity to go to sleep with and to know that when you wake up, your money is there. In this environment though, with money market yields close to 0, it is akin to stuffing that money in a mattress. And so an investor, an investor willing to take some risk with their money, you know, basically must move out on the risk spectrum in order to earn a 6, 7, 8% return- lower than double digits, of course, but much higher than 0%. So the investor today is caught between 0% money market yields and the risk, you know, of losing some capital and some principal in this delevering, very volatile type of environment.
CONSUELO MACK: So what do we do?
BILL GROSS: Well, I think some cash is helpful. I mean it is good to know that you have got some money to pay the bills, to pay for education when and if, you know, that becomes required. But in order to keep up and to at least mildly prosper in this type of environment, you've got to extend out on the risk spectrum in the bond world. You know, there are examples, typically in what are known as closed-end funds that can be bought on the New York Stock Exchange.
CONSUELO MACK: And PIMCO runs--
BILL GROSS: --runs some of those. And we work them and work at them, you know, very hard in order to produce as high a yield as possible with the lowest risk. But they yield in many cases 10, 11, 12, 13% for investment grade types of corporate bonds. And so there's the contrast. Yes, some risk in terms of corporate bond space but a much higher return for those that require something more than mattress stuffing money.
CONSUELO MACK: When your poorer relatives come to you and ask you what should they do with their money in the new normal, what do are you telling them?
BILL GROSS: My wife Sue has basically said no mas on the poor relatives. Because whenever I recommend something and it goes down they are on the phone immediately. But if that policy were still to be followed, you know, I would recommend, yes, the corporate closed-end funds. I would recommend some bank preferred stocks which, you know, have been written up recently in some of the periodicals just this last week in Barrons. But those are double digit types of returns that I think are relatively safe going forward. And as well, you know, if are you interested in equities, in the common stock world of risk, you know, there should be and there are in fact, companies with very steady cash flows, steady income streams and reliable dividend streams. And they would be companies, the old standards that we know, the Procter & Gambles, the AT&Ts, the Verizons of the world where you can project forward even in a new normal slow-growth type of world, a reliable flow of dividends and perhaps some growth as well.
CONSUELO MACK: If we've learned anything in the last couple of years, it is that stocks were by far the riskiest asset in our portfolios. And that bonds, in fact, balanced many of the losses that we saw in the stock part of the portfolio. And one of the things that you've written about as well that, I guess 40 years ago, that bonds were the preferred investment and that stocks had to give you much higher yields in order to convince you to put a portion of your investments in stocks. Are we going back to the days where bonds will be the core holdings in the portfolio, do you think going forward?
BILL GROSS: Well, I don't think back to the '40s and the '30s. I mean those are the very conservative periods of time following the crash in '29. But to the extent that the policy portfolio- that being 60% stocks, 40% bonds or if you are young, 90% stocks, 10% bonds- I think that's disappearing, that's what has to be questioned. The policy portfolio, the standard thinking that basically suggested that stocks will always return more than bonds or that real estate will always perform better than Treasury bills, you know, really has to be questioned because, you know, up until at least the first quarter of 2009, bonds for the past 10, 25 and 40 years, that's a long time, had outperformed stocks.
CONSUELO MACK: Treasury bonds.
BILL GROSS: Treasury bonds. You know, it's hard to suggest that from this point forward with a 30-year Treasury at 4-and-3/4% that that should outperform a good stock. But it should awaken investors to the fact that stocks and risk-oriented investments don't always, and even for long periods of time, don't always outperform less risky investments. And so the public policy portfolio, the standard thinking that you should have inflation protection with stocks, that the only way to accumulate wealth within a portfolio is by taking risk in these areas, I think it has to be questioned going forward.
CONSUELO MACK: So, Bill, what are you going to do differently going forward? Are you going to invest differently now after the experience we've had in the last year and a half, and given the fact that you think there's going to be a new normal? What are you going to be doing differently?
BILL GROSS: I think you have to. For instance, in the high-yield area, you have to focus on industries and companies that have less financial and operational leverage. Example: General Motors had huge operational leverage to the extent that they had to keep those factories running, that they had to keep employing those people. You know, they depended upon a 15 million annual sales rate in order to generate a profit. Now we're below 10 million and you are seeing what happens. They were also a company that was financially levered. They took on too much debt and so as car sales dropped, paying the lender, so to speak, became an unbearable burden. So you want companies that have a minimum of operational leverage, that can basically reduce capacity, can layoff people without having to pay unreasonable amounts of money. And in addition are not financially levered so that when the big "R" comes, the big recession, the great recession, they can continue to make those interest payments as opposed to default. So yeah, there's a substantial transition underway in which what worked before in the past 10, 20, 30 years, leverage and operational leverage based upon a faster and faster rate of consumption, where that's moving now to just the opposite. And so you want to look for industries that are less levered operationally and financially.
CONSUELO MACK: And you touched on it earlier but let me ask you to elaborate. So what are you doing with your personal portfolio that's different?
BILL GROSS: Well, I think now I've got some cash, some of that 25 basis point or .25% cash by is eating at me. You know, you like to earn some money. In my personal portfolio, I have a lot of corporate closed-end funds that yield 10, 11 and 12%. And I have a substantial holding in those bank preferreds. These are preferreds issued by JP Morgan, by Wells Fargo, by Bank of America and in some cases Citi, you know, the big four or five. They yield 10, 11 and 12% and much of it because they come in the form of dividends or tax sheltered. They get the same treatment as a dividend from common stock. It's not exactly a municipal bond but it comes close in terms of the tax advantages and the tax sheltering, at least for now. So those are attractive returns in this type of a world, certainly when the government is investing in banks as well with their TARP preferred and with their guarantees. And now that banks are, in many cases, issuing stock and recapitalizing, it appears to be a relatively safe investment with certainly an attractive rate of return. So that's where my money is going.
CONSUELO MACK: Basically the investment future, is it overseas and how should we skew our portfolios much more to internationals?
BILL GROSS: Oh, I think so. Ultimately, you know, a domestic investor, a U.S. investor has two things working against him or her. One, slower real growth. And those low-interest rates on the short end of the curve and the cash account. Secondly, though, in terms of the fact that those holdings are denominated in dollars, the long-term future of the dollar is suspect. I mean I have talked in recent months about the potential for the reserve currency status of the dollar to disappear. That won't happen for five to ten years. But it may happen in mild gradations all along the way as countries such as China and Russia and Brazil put together separate currency types of arrangements. So if the dollar declines, an investor in the United States basically feels that as prices of imports begin to increase, that's the natural result of a declining dollar. So ultimately, yes, an investor has to go overseas, hopefully in the emerging market countries, in the BICs- Brazil, India, China and the look-alikes in Southeast Asia. Those will be countries with strong currencies. Those will be countries with much stronger growth and that combination provides a much higher, positive return than what you get here in the United States. So in your portfolios, look from the standpoint of equity and from the standpoint of bonds. Look to some of the developing countries as opposed to the United States. Brazil, for instance, Brazil, this morning I bought for PIMCO 50 to one hundred million of the Brazilian five year bonds and they yield 10 to 11 to 12%. Brazil perhaps is not the United States but 10 to 20 years from now, you know, it would be looking pretty good relative to the United States. And so that type of return with that type of prospect becomes an enticing possibility.
CONSUELO MACK: Bill Gross, co-CIO of PIMCO, thank you so much for joining us.
BILL GROSS: Thanks, Consuelo.
CONSUELO MACK: Next week, in our Great Investors series, another investment phenomenon- this one with the exceptional distinction of running both a top performing stock and bond fund for 25 years. I'm going to sit down with First Pacific Advisors outspoken contrarian and Porsche racing portfolio manager, Robert Rodriguez. We also want to welcome our new sponsors to the WealthTrack family: New York Life, Loomis Sayles and Annaly Capital Management. We are delighted to have you. Until next week, have a happy Fourth of July weekend and make the week ahead a profitable and a productive one.
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Sunday, June 21, 2009
Wednesday, December 3, 2008
Bill Gross Interview on CNBC This Morning
8:40 AM 12/3/2008
interview with bill gross @ PIMCO coming up next.
8:43 AM 12/3/2008
you're back into stock forecasting business again
stocks -- not our world anymore
past 50 yrs was based on a leveraged economy
about to reverse
intergenerational change
10 yr bond now at 2.7%
corp yields make corp bonds attractive
bonds "A" rated yields 6-8%spreads 5 more than treasuries and very attractive
we haven't been buying govts.
what doing now
not buying hwp bonds yet
banks which have benefited from TARP capital
morgan stanley bonds can be bought can be bought at 6-8% yield
Aaron: title of your piece is "Dow 5000"
not predicting this, but...
govt needs a 4 1/2 to 5% on the 30-yr fixed mortgages so that rate should come down to that
interview with bill gross @ PIMCO coming up next.
8:43 AM 12/3/2008
you're back into stock forecasting business again
stocks -- not our world anymore
past 50 yrs was based on a leveraged economy
about to reverse
intergenerational change
10 yr bond now at 2.7%
corp yields make corp bonds attractive
bonds "A" rated yields 6-8%spreads 5 more than treasuries and very attractive
we haven't been buying govts.
what doing now
not buying hwp bonds yet
banks which have benefited from TARP capital
morgan stanley bonds can be bought can be bought at 6-8% yield
Aaron: title of your piece is "Dow 5000"
not predicting this, but...
govt needs a 4 1/2 to 5% on the 30-yr fixed mortgages so that rate should come down to that
Thursday, November 13, 2008
Battle for the Soul of Capitalism
Let's start with one of my few remaining heroes in the investing world, Cramer and that Pimco guy being the other(s) that comes readily (and not so readily) to mind -- oh, yeah, Bill Gross, and Jim Grant, Marty Zweig having retired long ago and Bernie Schaeffer having gone commercial a couple of years ago:
Bogle:
http://books.google.com/books?id=jjPX-wB8KTcC&dq=bogle+vanguard&pg=PP1&ots=PChVNMPdPX&source=in&sig=Qm8UOn0me8g-FRVtjQCb2LOFxos&hl=en&sa=X&oi=book_result&resnum=14&ct=result#PPP1,M1
Bogle:
http://books.google.com/books?id=jjPX-wB8KTcC&dq=bogle+vanguard&pg=PP1&ots=PChVNMPdPX&source=in&sig=Qm8UOn0me8g-FRVtjQCb2LOFxos&hl=en&sa=X&oi=book_result&resnum=14&ct=result#PPP1,M1
Monday, November 3, 2008
Bill Gross and Auction Rate Securities
Update April 5th, 2008This page will be consolidated with
Auction Rate Securities (ARS) Fraud ForumMarch 30, 2008 Update
Date: Sun, 30 Mar 2008 19:07:36 -0400From: XXXXXXXXc@gmail.comTo: russkyserge@hotmail.comSubject: Your ARS predicament...
Dear Sir:
I found your website in doing research into the current fiasco. Just thought you might be interested in a detail that I found.
In reading Bill Gross' free-wheeling letters, you can find a lot of clues that might really be confessional. In one previous to the "OId Maids" letter, he's rambling on about big fish and little fish he writes that "if you look around and can't tell who is the Fish, you are the Fish." FISH is the acronym for an F-class institutional level ARP that Pimco has issued - one of the illiquid holdings in the portfolio of a very worried friend of mine. Yet, there is Bill Gross, continuously being quoted by the media or commenting in the media as if he really cared.
from Bill Gross' speech on March 31st, 2003
But before I leave this topic of structural investing, let me use a poker analogy to sum up what I hope you’ve heard over the past few minutes. Warren Buffett is fond of saying that if you sit down at a poker table and you can’t look around and find the fish,then you be the fish. The same thing should apply in investing although in this day and age it would be unwise to assume that any investor,especially any institutional one, is a fish. If WAMCO, Blackrock, and other formidable bond shops be fish,then they be sharks just like PIMCO. Still from a structural standpoint, there may be marketparticipants that due to their inherent character or role that they play, provide profits to structuralinvestors taking the other side of the bet. Those fish, as I’ve been explaining over the past few minutes,are probably most easily identified as (1) the American homeowner and (2) the investorin short-term cash and money markets that requires near overnight liquidity and perpetual overnight peace of mind.These are the fish that our “Bonds +” and volatility sales programs depend upon and which form the schoolsof structural plankton upon which mighty whales depend.
SincerelyRXXX XXXXXXXXX
var addthis_pub = 'Serge_Oprano';
Auction Rates Securities - Bill Gross opinion
There is no more respected and feared name in bonds than Bill Gross of PIMCO. PIMCO is also a company that marketed a number of preferred securities of closed end funds.
Just digest what he said (excerpt from another website) and it should make you realize that all these companies, Nuveen, Blackrock, Eaton Vance etc. knew what their market was and they did what they had to do to sell the preferreds to the public and the financial advisers bought into it hook, line and sinker.
"Bill Gross, manager of the world's biggest bond fund, said auction-rate preferred securities, even those sold by his own company, are the latest "old maid'' card to be foisted on investors."
"And so the game goes on and on,'' said Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California. "
"Its most recent twist involves an asset class known as auction-rate preferred stock and the astounding revelation that its holders didn't even know they were playing cards to begin with.''
"Old Maid is a child's card game in which the objective is to avoid holding the card of the old maid at the end and being declared the loser."
" Investors should have thought twice about'' about buying preferred auction-rate securities, including those sold by Pimco, Gross wrote in a follow up e-mail."
The lawsuits should and I strongly suspect will be targeting these companies that created and marketed the preferred securities. These things were knowingly misrepresented and negligently marketed to the unsuspecting public. They could be looking at significant damage awards.
I maintain this web page to gather as much information as possible and spread the word to help other victims of this financial misrepresentation and alleged crime by the major financial institutions.
I can be reached via e-mail at russkyserge@hotmail.com
Serge Birbrair and I am not just a web page publisher, but also a victim who trusted UBS and got burnt. Do YOU want to be next?No? Don't believe everything you hear from your Financial Adviser, as they are played by the management too.
Is this the BIGGEST Financial Fraud of the 21st Century?
Auction Rates Securities victims saw this information.
Auction Rate Securities (ARS) Fraud ForumMarch 30, 2008 Update
Date: Sun, 30 Mar 2008 19:07:36 -0400From: XXXXXXXXc@gmail.comTo: russkyserge@hotmail.comSubject: Your ARS predicament...
Dear Sir:
I found your website in doing research into the current fiasco. Just thought you might be interested in a detail that I found.
In reading Bill Gross' free-wheeling letters, you can find a lot of clues that might really be confessional. In one previous to the "OId Maids" letter, he's rambling on about big fish and little fish he writes that "if you look around and can't tell who is the Fish, you are the Fish." FISH is the acronym for an F-class institutional level ARP that Pimco has issued - one of the illiquid holdings in the portfolio of a very worried friend of mine. Yet, there is Bill Gross, continuously being quoted by the media or commenting in the media as if he really cared.
from Bill Gross' speech on March 31st, 2003
But before I leave this topic of structural investing, let me use a poker analogy to sum up what I hope you’ve heard over the past few minutes. Warren Buffett is fond of saying that if you sit down at a poker table and you can’t look around and find the fish,then you be the fish. The same thing should apply in investing although in this day and age it would be unwise to assume that any investor,especially any institutional one, is a fish. If WAMCO, Blackrock, and other formidable bond shops be fish,then they be sharks just like PIMCO. Still from a structural standpoint, there may be marketparticipants that due to their inherent character or role that they play, provide profits to structuralinvestors taking the other side of the bet. Those fish, as I’ve been explaining over the past few minutes,are probably most easily identified as (1) the American homeowner and (2) the investorin short-term cash and money markets that requires near overnight liquidity and perpetual overnight peace of mind.These are the fish that our “Bonds +” and volatility sales programs depend upon and which form the schoolsof structural plankton upon which mighty whales depend.
SincerelyRXXX XXXXXXXXX
var addthis_pub = 'Serge_Oprano';
Auction Rates Securities - Bill Gross opinion
There is no more respected and feared name in bonds than Bill Gross of PIMCO. PIMCO is also a company that marketed a number of preferred securities of closed end funds.
Just digest what he said (excerpt from another website) and it should make you realize that all these companies, Nuveen, Blackrock, Eaton Vance etc. knew what their market was and they did what they had to do to sell the preferreds to the public and the financial advisers bought into it hook, line and sinker.
"Bill Gross, manager of the world's biggest bond fund, said auction-rate preferred securities, even those sold by his own company, are the latest "old maid'' card to be foisted on investors."
"And so the game goes on and on,'' said Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California. "
"Its most recent twist involves an asset class known as auction-rate preferred stock and the astounding revelation that its holders didn't even know they were playing cards to begin with.''
"Old Maid is a child's card game in which the objective is to avoid holding the card of the old maid at the end and being declared the loser."
" Investors should have thought twice about'' about buying preferred auction-rate securities, including those sold by Pimco, Gross wrote in a follow up e-mail."
The lawsuits should and I strongly suspect will be targeting these companies that created and marketed the preferred securities. These things were knowingly misrepresented and negligently marketed to the unsuspecting public. They could be looking at significant damage awards.
I maintain this web page to gather as much information as possible and spread the word to help other victims of this financial misrepresentation and alleged crime by the major financial institutions.
I can be reached via e-mail at russkyserge@hotmail.com
Serge Birbrair and I am not just a web page publisher, but also a victim who trusted UBS and got burnt. Do YOU want to be next?No? Don't believe everything you hear from your Financial Adviser, as they are played by the management too.
Is this the BIGGEST Financial Fraud of the 21st Century?
Auction Rates Securities victims saw this information.
Wednesday, September 24, 2008
Bill Gross
He's one of my all-time heroes.
new_york_times:http://www.nytimes.com/2008/09/25/business/economy/25pimco.html
By EDWARD WYATT
Published: September 24, 2008
NEWPORT BEACH, Calif. – One of the many concerns expressed on Capitol Hill this week about the Treasury Department’s $700 billion rescue plan was how to keep the Wall Street firms that helped to create the crisis from making a killing if they are hired to help contain it.
management of the assets of the bailout fund.
William H. Gross, the manager of the country’s largest bond mutual fund, has a solution for that: He is offering to do it free.
“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for Pacific Investment Management Company, said Tuesday in an interview at the company’s headquarters here. “And I’d even be willing to say that if the Treasury wanted to use our help, it would come, you know, free and clear as long as every other firm would do the same.”
Mr. Gross explained his offer – which he later repeated, without the caveat about other firms following his lead – as a philanthropic one. With Pimco’s $830 billion under management, “we make fees aplenty,” he said. “We’d like to be recognized for the way we’ve seen this crisis coming, and for the way we’ve talked about what’s required.”
For more than a year, Mr. Gross, whose investment expertise has earned him a net worth estimated at more than $1 billion, according to Forbes, has played the role of the financial markets’ Cassandra. Beginning in July 2007, he warned that subprime mortgage crisis would get far worse before it got better. Other sectors of the financial markets, he predicted, also could seize up if the Federal Reserve and Treasury did not do something to keep markets liquid.
But Mr. Gross and Pimco have also attracted criticism, most recently when it became clear that his Pimco Total Return fund earned more than $1.7 billion on the day the federal government bailed out Fannie Mae and Freddie Mac.
Mr. Gross had been loudly advocating for such a move for more than a year, at the same time that was moving more than 60 percent of his fund’s assets in government-agency bonds. The shift in investment strategy began in earnest shortly after Pimco hired Alan Greenspan, the former Federal Reserve chairman, as an adviser earlier last year.
Mr. Gross said there was nothing wrong with that advocacy because Pimco had no official role in formulating the plan to rescue Fannie Mae and Freddie Mac.
“We had a role on CNBC,” he explained, “in that every time we were asked, or I guess every time that The New York Times would call, they would say, ‘What are you doing?,’ and we would say: ‘Well, we want safe, agency-guaranteed mortgages. We don’t want to take a lot of risks in subprime space.’ ”With the liquidity crisis extending into virtually every sector of the investment markets, any firm in a position to advise the Treasury on its rescue plans would have potential conflicts of interest, Mr. Gross said.
“There’s fewer of them here than anywhere else,” he added. “Simply because we saw the crisis coming and we don’t have much of this paper.”
The Pimco trading floor is less like the cacophonic pits that cable news channels usually use to illustrate stories about financial market turmoil, and more like a library. The sound of clacking keyboards often drowns out the low murmur of conversation among portfolio managers. Mr. Gross, a lanky 64-year-old who practices yoga and who sometimes speaks so softly that co-workers lean toward him, as if on an E. F. Hutton commercial, drifts around the room, an unknotted pale blue Hermès tie draped around his neck like a scarf, his gray and brown hair extending down over his ears, a style reminiscent more of the 1970s than today.
Pimco’s headquarters building sits on a bluff overlooking the Pacific Ocean, where on a clear day the view extends westward beyond Catalina Island, which sparkles like a jewel in the midday sun.
The windows on the Pimco trading floor, however, where Mr. Gross spends most of his time, face in the opposite direction – eastward, toward Wall Street and Washington, two arenas where Mr. Gross and his firm carry outsized influence.
That is why some investors might be keen to hear Mr. Gross’s thoughts about the Treasury’s rescue plan. He favors broader relief for homeowners and others weighed down by unmanageable debt and recommends that foreign banks should be allowed to take part in the program. But he also argues against any measures that would try to restrict executive compensation.
“I don’t even know if it’s legal,” he said of attempts to limit executive pay. “And so I think that complicates the situation. That’s not to defend those that are making big checks, but I don’t think it should be attached to this.”
Mr. Gross is also skeptical of proposals to have the Treasury take ownership stakes in banks that sell troubled assets to the government.
Buying a pool of subprime mortgages is not like buying part of a company, he said. The Treasury will own something – the mortgages themselves, which if they pay the right amount for those loans, could earn the Treasury a return of 12 to 13 percent.
“So that’s 100 percent equity in these pools they’ll be buying, and they can take capital gains on them because they own them and all the capital gains will accrue to the Treasury,” he said. “There’s tons of equity here. It’s just that it’s very difficult for American taxpayers to understand.”
The key, of course, is price, which is where the Treasury’s adviser would come in. Much of the opposition to the plan has come from a misunderstanding that the Treasury would buy troubled mortgage bonds for their face value, Mr. Gross said.
On the contrary, Mr. Gross said he would advise the Treasury to pay something closer to 65 or 60 cents on the dollar for the mortgage bonds.
“If the price is right, the Treasury’s going to make money,” Mr. Gross said. “They made money on Chrysler. They can make money on this.”
Mr. Gross also advocates allowing foreign banks to take part in the Treasury’s program to buy troubled assets – a necessary step to keep markets liquid. “Foreign banks have branches here in Newport Beach, they have branches everywhere. And so to discriminate in terms of ownership would again cut off your nose to spite your face. It’s these foreign branches that are lending money to the American public.”
Even if the Treasury’s $700 billion program is approved and carried out under the management of the most selfless investment professionals, that is not likely to solve all of the financial sector’s problems. Asked his view of the economy here and abroad over the next year, Mr. Gross responded simply: “Not pretty.”
“There will definitely be a prolonged period of either slow growth or recession for 12 to 18 to 24 months,” he predicted. “We’re not going to get out of this easily or scot-free. It’s just gone too far to now turn around quickly and to move into a positive growth mode.”
In the meantime, a surge in regulation of the financial sectors will be unleashed, probably an inevitable result of the meltdowns and rescues of recent months. “Twelve to 24 months down the road, all of these high-flying investment banks and banks will be re-regulated and downsized,” Mr. Gross said.
“They won’t become arms of the government, but they will supervised and held on a tight leash. And in addition to the slow-growth-slash-recession that I talked about, what the American economy and the American public can look forward to is a substantially different private sector than what you saw before.”
The greater regulation should draw people back to the investment and financial markets and away from what seems to be their current strategy – stuffing their cash in a mattress.
Even Mr. Gross admits that he has been at times reluctant to commit.
“We were offered this morning a six-month sizable piece of Morgan Stanley,” he said Tuesday. “Here’s the surviving investment bank that just last night got equitized or bailed out by a Japanese bank. We were offered a sizeable piece of a six month Morgan Stanley obligation at a yield of 25 percent, O.K.?”
Pimco didn’t buy the bonds, however, “because we thought we could get it even cheaper,” Mr. Gross explained. “That’s where the fear builds in and makes for totally illiquid markets. Where no one trusts anybody; no one trusts any price. There’s a total lack of trust and confidence in the markets. And that’s what a market depends on.”
new_york_times:http://www.nytimes.com/2008/09/25/business/economy/25pimco.html
By EDWARD WYATT
Published: September 24, 2008
NEWPORT BEACH, Calif. – One of the many concerns expressed on Capitol Hill this week about the Treasury Department’s $700 billion rescue plan was how to keep the Wall Street firms that helped to create the crisis from making a killing if they are hired to help contain it.
management of the assets of the bailout fund.
William H. Gross, the manager of the country’s largest bond mutual fund, has a solution for that: He is offering to do it free.
“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for Pacific Investment Management Company, said Tuesday in an interview at the company’s headquarters here. “And I’d even be willing to say that if the Treasury wanted to use our help, it would come, you know, free and clear as long as every other firm would do the same.”
Mr. Gross explained his offer – which he later repeated, without the caveat about other firms following his lead – as a philanthropic one. With Pimco’s $830 billion under management, “we make fees aplenty,” he said. “We’d like to be recognized for the way we’ve seen this crisis coming, and for the way we’ve talked about what’s required.”
For more than a year, Mr. Gross, whose investment expertise has earned him a net worth estimated at more than $1 billion, according to Forbes, has played the role of the financial markets’ Cassandra. Beginning in July 2007, he warned that subprime mortgage crisis would get far worse before it got better. Other sectors of the financial markets, he predicted, also could seize up if the Federal Reserve and Treasury did not do something to keep markets liquid.
But Mr. Gross and Pimco have also attracted criticism, most recently when it became clear that his Pimco Total Return fund earned more than $1.7 billion on the day the federal government bailed out Fannie Mae and Freddie Mac.
Mr. Gross had been loudly advocating for such a move for more than a year, at the same time that was moving more than 60 percent of his fund’s assets in government-agency bonds. The shift in investment strategy began in earnest shortly after Pimco hired Alan Greenspan, the former Federal Reserve chairman, as an adviser earlier last year.
Mr. Gross said there was nothing wrong with that advocacy because Pimco had no official role in formulating the plan to rescue Fannie Mae and Freddie Mac.
“We had a role on CNBC,” he explained, “in that every time we were asked, or I guess every time that The New York Times would call, they would say, ‘What are you doing?,’ and we would say: ‘Well, we want safe, agency-guaranteed mortgages. We don’t want to take a lot of risks in subprime space.’ ”With the liquidity crisis extending into virtually every sector of the investment markets, any firm in a position to advise the Treasury on its rescue plans would have potential conflicts of interest, Mr. Gross said.
“There’s fewer of them here than anywhere else,” he added. “Simply because we saw the crisis coming and we don’t have much of this paper.”
The Pimco trading floor is less like the cacophonic pits that cable news channels usually use to illustrate stories about financial market turmoil, and more like a library. The sound of clacking keyboards often drowns out the low murmur of conversation among portfolio managers. Mr. Gross, a lanky 64-year-old who practices yoga and who sometimes speaks so softly that co-workers lean toward him, as if on an E. F. Hutton commercial, drifts around the room, an unknotted pale blue Hermès tie draped around his neck like a scarf, his gray and brown hair extending down over his ears, a style reminiscent more of the 1970s than today.
Pimco’s headquarters building sits on a bluff overlooking the Pacific Ocean, where on a clear day the view extends westward beyond Catalina Island, which sparkles like a jewel in the midday sun.
The windows on the Pimco trading floor, however, where Mr. Gross spends most of his time, face in the opposite direction – eastward, toward Wall Street and Washington, two arenas where Mr. Gross and his firm carry outsized influence.
That is why some investors might be keen to hear Mr. Gross’s thoughts about the Treasury’s rescue plan. He favors broader relief for homeowners and others weighed down by unmanageable debt and recommends that foreign banks should be allowed to take part in the program. But he also argues against any measures that would try to restrict executive compensation.
“I don’t even know if it’s legal,” he said of attempts to limit executive pay. “And so I think that complicates the situation. That’s not to defend those that are making big checks, but I don’t think it should be attached to this.”
Mr. Gross is also skeptical of proposals to have the Treasury take ownership stakes in banks that sell troubled assets to the government.
Buying a pool of subprime mortgages is not like buying part of a company, he said. The Treasury will own something – the mortgages themselves, which if they pay the right amount for those loans, could earn the Treasury a return of 12 to 13 percent.
“So that’s 100 percent equity in these pools they’ll be buying, and they can take capital gains on them because they own them and all the capital gains will accrue to the Treasury,” he said. “There’s tons of equity here. It’s just that it’s very difficult for American taxpayers to understand.”
The key, of course, is price, which is where the Treasury’s adviser would come in. Much of the opposition to the plan has come from a misunderstanding that the Treasury would buy troubled mortgage bonds for their face value, Mr. Gross said.
On the contrary, Mr. Gross said he would advise the Treasury to pay something closer to 65 or 60 cents on the dollar for the mortgage bonds.
“If the price is right, the Treasury’s going to make money,” Mr. Gross said. “They made money on Chrysler. They can make money on this.”
Mr. Gross also advocates allowing foreign banks to take part in the Treasury’s program to buy troubled assets – a necessary step to keep markets liquid. “Foreign banks have branches here in Newport Beach, they have branches everywhere. And so to discriminate in terms of ownership would again cut off your nose to spite your face. It’s these foreign branches that are lending money to the American public.”
Even if the Treasury’s $700 billion program is approved and carried out under the management of the most selfless investment professionals, that is not likely to solve all of the financial sector’s problems. Asked his view of the economy here and abroad over the next year, Mr. Gross responded simply: “Not pretty.”
“There will definitely be a prolonged period of either slow growth or recession for 12 to 18 to 24 months,” he predicted. “We’re not going to get out of this easily or scot-free. It’s just gone too far to now turn around quickly and to move into a positive growth mode.”
In the meantime, a surge in regulation of the financial sectors will be unleashed, probably an inevitable result of the meltdowns and rescues of recent months. “Twelve to 24 months down the road, all of these high-flying investment banks and banks will be re-regulated and downsized,” Mr. Gross said.
“They won’t become arms of the government, but they will supervised and held on a tight leash. And in addition to the slow-growth-slash-recession that I talked about, what the American economy and the American public can look forward to is a substantially different private sector than what you saw before.”
The greater regulation should draw people back to the investment and financial markets and away from what seems to be their current strategy – stuffing their cash in a mattress.
Even Mr. Gross admits that he has been at times reluctant to commit.
“We were offered this morning a six-month sizable piece of Morgan Stanley,” he said Tuesday. “Here’s the surviving investment bank that just last night got equitized or bailed out by a Japanese bank. We were offered a sizeable piece of a six month Morgan Stanley obligation at a yield of 25 percent, O.K.?”
Pimco didn’t buy the bonds, however, “because we thought we could get it even cheaper,” Mr. Gross explained. “That’s where the fear builds in and makes for totally illiquid markets. Where no one trusts anybody; no one trusts any price. There’s a total lack of trust and confidence in the markets. And that’s what a market depends on.”
Monday, June 30, 2008
This is Close to Being The Crux
Bill Gross
By REUTERS
Published: June 30, 2008
Filed at 12:07 p.m. ET
Skip to next paragraph
NEW YORK (Reuters) - Longer-term U.S. Treasury bond yields have bottomed and will steadily rise because of inflation pressures as the U.S. economy clambers out of the current downturn, the manager of the world's biggest bond fund wrote on Monday.
"Intermediate and long-term yields on government bonds have already bottomed and will gradually rise" during the term of the next president, due to start in January, wrote Bill Gross, chief investment officer of Pacific Investment Management Co., or PIMCO, in his monthly "Investment Outlook" letter for July.
The benchmark 10-year Treasury note's yield, which moves inversely to its price, dipped to 3.285 percent in January, the lowest since 2003, on signs of a weakening economy and escalating credit market strains.
But since then, surging commodity prices and rising inflation expectations have pushed the 10-year yield up by about one percentage point, to above 4.30 percent last week.
Over time, current negative real interest rates, the Federal Reserve's extraordinary liquidity provisions to the banking system and the government's fiscal stimulus measures should promote reflation, Gross said.
"This economy will need an additional jolt of $500 billion or so of government spending real quick," he wrote.
This month's investment outlook letter was addressed to Democratic White House hopeful Barack Obama, as if he had been elected.
The next president has little choice but to step up fiscal stimulus to revive the economy, Gross said.
"You've inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions," he wrote. "Your administration will produce this nation's first trillion dollar deficit."
Foreign central banks and private investors may not continue to buy Treasuries at the same rate as in previous years a trend that has kept Treasury yields lower than they would otherwise be. Absent these low interest rates to aid the economy, "what you need now is fiscal spending and lots of it," Gross wrote.
The housing market's decline will continue, he forecast.
By January, U.S. home prices will have fallen nearly another 10 percent, "and our Japanese-style property deflation will be in full stride," Gross wrote.
Japan's real estate markets crashed in the early 1990s and have yet to fully recover.
"Dear President Obama," the letter began. "You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans," Gross wrote. "He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love."
(Reporting by John Parry; Editing by Dan Grebler)
By REUTERS
Published: June 30, 2008
Filed at 12:07 p.m. ET
Skip to next paragraph
NEW YORK (Reuters) - Longer-term U.S. Treasury bond yields have bottomed and will steadily rise because of inflation pressures as the U.S. economy clambers out of the current downturn, the manager of the world's biggest bond fund wrote on Monday.
"Intermediate and long-term yields on government bonds have already bottomed and will gradually rise" during the term of the next president, due to start in January, wrote Bill Gross, chief investment officer of Pacific Investment Management Co., or PIMCO, in his monthly "Investment Outlook" letter for July.
The benchmark 10-year Treasury note's yield, which moves inversely to its price, dipped to 3.285 percent in January, the lowest since 2003, on signs of a weakening economy and escalating credit market strains.
But since then, surging commodity prices and rising inflation expectations have pushed the 10-year yield up by about one percentage point, to above 4.30 percent last week.
Over time, current negative real interest rates, the Federal Reserve's extraordinary liquidity provisions to the banking system and the government's fiscal stimulus measures should promote reflation, Gross said.
"This economy will need an additional jolt of $500 billion or so of government spending real quick," he wrote.
This month's investment outlook letter was addressed to Democratic White House hopeful Barack Obama, as if he had been elected.
The next president has little choice but to step up fiscal stimulus to revive the economy, Gross said.
"You've inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions," he wrote. "Your administration will produce this nation's first trillion dollar deficit."
Foreign central banks and private investors may not continue to buy Treasuries at the same rate as in previous years a trend that has kept Treasury yields lower than they would otherwise be. Absent these low interest rates to aid the economy, "what you need now is fiscal spending and lots of it," Gross wrote.
The housing market's decline will continue, he forecast.
By January, U.S. home prices will have fallen nearly another 10 percent, "and our Japanese-style property deflation will be in full stride," Gross wrote.
Japan's real estate markets crashed in the early 1990s and have yet to fully recover.
"Dear President Obama," the letter began. "You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans," Gross wrote. "He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love."
(Reporting by John Parry; Editing by Dan Grebler)
Tuesday, April 22, 2008
There's a Reason Why We Have Banks...
Except for a few sectors like energy, you can forget about making money in the stock market for a few years:
http://www.nytimes.com/2008/04/22/business/22bank.html
http://www.nytimes.com/2008/04/22/business/22bank.html
Sunday, March 23, 2008
Credit Default Instruments Etc.
A major piece in today's New York Times.
http://www.nytimes.com/2008/03/23/business/23how.html?ref=business&pagewanted=all#
Sunday, September 2, 2007
Bill Gross Fund Overweighted in Mortgages
and Bill Gross wants a bailout? Interesting article. Click on title.
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