Bill Gross, the founder and managing director of PIMCO, just released his latest “Investment Outlook” for September 2008. This month, Gross talked about the need for the U.S. government to start using more of its money to support markets in order to prevent an asset and debt liquidation of near historic proportions. He brought up a phrase that is repeated often by CNBC’s Jim Cramer on his “Mad Money” show, which is, “Remember, there’s always a bull market somewhere!” Gross addressed this by saying:

So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but not now because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:

What Happens During Delevering

1. Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.

The legendary bond investor talked about where the United States is at in the delivering process. Gross wrote:

This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.

As a result, Gross prescribed the following:

Common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something… knows something,” it is time for the Treasury to do likewise.

Source:

“There’s A Bull Market Somewhere?”
Bill Gross
PIMCO, September 2008

Yesterday, Bloomberg’s Sree Vidya Bhaktavatsalam reported that Pacific Investment Management Co., which was founded by legendary investor Bill Gross and is the biggest manager of bond funds, is actively seeking as much as $5 billion to purchase mortgage-backed debt, according to two investors with knowledge of the matter. Bhaktavatsalam wrote:

The Distressed Senior Credit Opportunities Fund will invest in “senior” and “super-senior” securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private. Senior debt is first to be paid off in a default…

The new Pimco fund, dubbed Disco, will focus on commercial loans as well as residential debt that doesn’t carry explicit government guarantees or the implied backing of securities issued by companies such as Fannie Mae or Freddie Mac, the investors said. It also will seek investments in securities backed by home-equity, credit-card and auto loans, they said, and can invest in debt secured by collateral outside the U.S.

The Disco fund has a 15-month investment period and a 5-year life. It will be jointly managed by Pimco’s credit teams in the U.S. and Europe, the investors said.

Bloomberg Bhaktavatsalam also noted in the piece:

Gross’s Total Return Fund advanced 9.4 percent in the past year to beat 99 percent of competing bond funds, according to data compiled by Morningstar Inc. in Chicago. The fund had 61 percent of its assets in mortgage securities as of June 30, up from 53 percent a year earlier.

Source:

“Pimco Seeks as Much as $5 Billion for Distressed Debt (Update1)”
Sree Vidya Bhaktavatsalam
Bloomberg, August 27, 2008

According to the Wall Street Journal this morning, the world’s largest bond fund company Pacific Investment Management Company (PIMCO) favors agency mortgage-backed securities instead of government debt. PIMCO was founded by legendary bond investor Bill Gross, who serves as chief investment officer of the California-based investment firm. Min Zeng wrote this morning:

Despite the woes rocking mortgage companies Fannie Mae and Freddie Mac, bond-fund company Pacific Investment Management Co. continues to favor agency mortgage-backed securities over government debt.

Steve Rodosky, head of Treasury and derivatives trading at Newport Beach, Calif.-based Pimco, said the unit of Allianz SE prefers agency mortgage-backed securities, or MBS, the so-called pass-throughs sold by federally chartered firms, over debentures of the two companies as well as Treasurys as they provide more attractive yields.

“The best opportunities in the markets are in high-quality agency MBS,” Mr. Rodosky said in an interview Thursday. “You are getting a collateralized piece of paper at a significantly wider spread.”

The Journal’s Min Zeng noted:

Pimco’s flagship $129.56 billion Total Return Fund increased its mortgage-bond holdings last month to 65% from 61% in June, according to the data from the company’s Web site. In contrast, the fund continued to shed government-debt holdings, including Treasurys and agency debt last month for the seventh straight month. The fund is the world’s largest bond fund and is run by Bill Gross, the company’s chief investment officer.

Source:

“Despite Fuss, Mortgage-Backed Bonds Have Fans”
Min Zeng
Wall Street Journal, August 22, 2008

PIMCO’s Bill Gross appeared on CNBC yesterday and talked about the U.S. housing crisis. According to Gross, home prices will go down another 10 to 15 percent. He also discussed troubled American mortgage giants Fannie Mae and Freddie Mac:

CNBC: Bill, is your assumption that Fannie and Freddie will both have stocks priced at $0, and they will get some sort of a federal bailout?
GROSS: Well, I think so. At three and four dollars per share, respectively, at the moment, in effect, the market is valuing both of these companies at zero. I mean, these are perpetual options at these prices, you know, with three to four dollar prices that effectively use a strike price of zero for the common stock. So at the moment, that’s what the market is saying.

CNBC’s Erin Burnett asked the founder and chief investment officer at PIMCO what an investor needs to hear from the U.S. government to restore confidence in Fannie and Freddie. Gross replied:

They need to hear not only that they’re willing to stand behind Fannie and Freddie but that their money is going to do that. And, in terms of the amount, 15 to 20 billion per institution in the form of preference or preferred stock that hopefully will be at the same level of the existing preferred stock… Yes, we need 15 to 20 billion per institution coming in at the preferred level.

You can view the 7 minute 2 second CNBC segment here.

Source:

Bill Gross Interview
CNBC, August 20, 2008

Bond expert Bill Gross spoke to CNBC about the federal funds rate and a host of other issues on Friday. Writing for the financial news network, JeeYeon Park reported:

Bill Gross, founder and chief investment officer of Pimco, does not believe the U.S. Federal Reserve will raise interest rates, he told CNBC on Friday.

“I don’t think so,” he said when asked if he foresees a rate hike. “The concerns about inflation have got to be coming down… with oil prices down maybe 25 percent from the peak. Other commodity prices — gold down 20 percent, silver down 10 percent today alone… Those at the helm, so to speak, have to be observant of what’s happening in the commodities sector, and that’s been the biggest push in terms of inflation for the past six to 12 months.”

Though he sees uncertainty in the bond sector, Gross remain optimistic about the rest of the quarter.

“I think the third quarter will be fine based on some technical adjustments with inventory and continued strong trade. But the fourth quarter and the first quarter of 2009 do not look good—it is all dependent upon housing prices.”

According to CNBC’s Park, the founder and chief investment officer of PIMCO is uncertain as to when the U.S. housing market will reach a bottom. However, Gross went into detail about what he expected for the fourth quarter and beyond. Park wrote:

Gross said he believes that 2009 will call for “dramatic actions” from the government in terms of fiscal spending and in terms of new programs to provide liquidity for financial markets.

Gross expects “a deficit near $500 billion to move into the $600 to 700 million category in 2009 as the U.S. sees new programs such as healthcare move onto the agenda.”

Source:

“Pimco’s Gross: Fed Will Not Raise Interest Rates”
JeeYeon Park
CNBC, August 19, 2008

PIMCO founder and chief investment officer Bill Gross told Bloomberg that he thinks the U.S. government will have no choice but to prop up mortgage giants Fannie Mae and Freddie Mac. Bloomberg’s Shannon D. Harrington and Kathleen Hays wrote yesterday:

Bill Gross, who manages the world’s biggest bond fund, said the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.

“By the end of the third quarter, the preferred stock in Fannie and Freddie will be issued, the Treasury will have bought it,” Gross, co-chief investment officer at Pacific Investment Management Co., said today in an interview on Bloomberg Television. “We’ll be on our way toward a joint Treasury-agency combination.”

Gross adds to a growing chorus of investors and analysts predicting U.S. Treasury Secretary Henry Paulson will need to use his newly won power to prop up Freddie and Fannie. Freddie posted a second quarter loss that was three times wider than analysts estimated and said credit losses doubled in three months, heightening concerns it may not be able to weather the worst housing slump since the Great Depression.

Source:

“Pimco’s Gross Says U.S. Will Rescue Fannie, Freddie (Update2)”
Shannon D. Harrington, Kathleen Hays
Bloomberg, August 6, 2008

Well-known bond-fund manager Bill Gross appeared on CNBC yesterday and talked about the Federal Reserve, the federal funds rate, and where to invest these days. From the CNBC website:

Reacting to the Fed’s move to hold its key interest rate at 2 percent, Gross called talk of rate hikes “comical.”

“We’re in a recession. When has the Fed ever raised rates in a recession?” he said. “Unemployment is headed toward 6 percent, mortgage rates on home buyers are at 7 percent, and these guys want to raise rates?”

PIMCO’s founder and chief investment officer outlined what he thought the Federal Reserve should be doing now. According to CNBC:

Gross said the central bank has a responsibility now to provide liquidity.

“We’re in an asset deflation of near-historic proportions. That calls for the use of the government’s balance sheet and not for the Federal Reserve to raise interest rates,” he said. “To the extent that the central banks now must prevent that deflation, interest rates don’t go up, they go down.”

However, Gross said the Fed cannot lower its key rate, but rather he called on central banks across the world to examine their monetary policy.

“In the US, 2 percent is pretty much the floor. I think the Fed made that clear,” he said. “They’re going to provide liquidity in different forms and fashions.”

Gross, who Warren Buffett calls one of the smartest individuals he knows, told CNBC viewers where, and where not to, invest. From the CNBC piece:

As for investments at this point in the market, Gross advised against junk bonds and toward government-backed securities.

“We want to stay under the umbrella to the extent that we have an umbrella that shelters large banks and to the extent that we have an umbrella that shelters the agencies, Fannie and Freddie, that’s where you want to be,” he said. “Why mess with junk bonds? Let’s stick to high quality and stay under that umbrella. Let’s stay dry.”

The 4 minute 52 second CNBC segment can be viewed here.

Source:

“Pimco’s Gross: Fed Can’t Raise Rates Due to Economy”
CNBC, August 5, 2008

It appears the “King of Bonds” likes debt issued by U.S. mortgage giants Fannie Mae and Freddie Mac. Bloomberg’s Daniel Kruger wrote yesterday:

The fastest inflation in 17 years and a fourth straight quarter of U.S. profit declines are turning debt sold by Fannie Mae and Freddie Mac into the favorites of the world’s biggest bond investors.

Pacific Investment Management Co., T. Rowe Price Group Inc., RiverSource Institutional Advisors and U.S. Bancorp’s FAF Advisors, which oversee more than $1 trillion, say the government’s decision to stand behind the beleaguered U.S. housing finance companies and their yields compared with Treasuries make the bonds a buy. The Senate approved legislation on July 26 allowing the U.S. to inject capital into Fannie and Freddie. President George W. Bush plans to sign it into law.

“We like it,” said Bill Gross, who oversees the $128 billion Total Return Fund, the largest bond fund in the world, for Newport Beach, California-based Pimco. “This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we’re close to that point.”

Source:

“Mortgage Debt Least of Bad Bets as Investing Sinks (Update2)”
Daniel Kruger
Bloomberg, July 28, 2009

This morning I was alerted to the fact that legendary bond investor Bill Gross just released his latest “Investment Outlook” on the PIMCO website. As usual, an informative, as well as entertaining, read. In “Mooooooo!” the managing director of Pacific Investment Management Company discussed the ongoing credit crunch in the United States, and specifically talks about the slumping housing market here. Gross wrote:

Yet housing, unlike other asset classes, carries with it an aura more like a bad dream than a fairy tale. Unlike the frog that when kissed turns into a handsome prince, housing can morph a froglike economy into something resembling Godzilla. That is because it is the most levered asset class and the one held by more “investor” citizens than any other. U.S. homes are market valued at over 20 trillion dollars with nearly half of the value supported by mortgage finance of one sort or another. At first blush that appears to be reasonably levered, but at the margin, homes purchased in 2004 and beyond are now at risk of turning upside down – negative equity – and there are some 25 million or so of those. The “upsidedownness” in many cases results in foreclosures, or outright abandonment and most certainly serves as an example of what not to do for millions of twentysomethings or new citizens choosing between homeownership and renting. The dominoes fall month-by-month, forcing prices ever lower as shown in Chart 1 provided by Case-Shiller. An asset deflation in turn becomes a debt deflation, as subprimes, alt-As, and finally prime mortgages surrender to the seemingly inevitable tide. PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”

“…nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble.” Bloomberg estimates that the global credit squeeze, triggered by housing, has resulted in more than $468 billion in write-downs and losses at banks and brokerages to date.

Gross talked about how to reverse housing’s deterioration. He began by saying:

Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again. That, however, is easier said than done. One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again.

All joking aside, the “King of Bonds” suggested:

…the yield on a 30-year agency mortgage-backed loan has actually risen since the Fed somewhat unexpectedly began to lower Fed Funds in early September of 2007. Add to that of course, the increased fees, points, and total spread that an actual homebuyer pays to finance his purchase now as opposed to then, and it is obvious that homes are not the bargains that starving realtors claim they might be…

Blow them up? Well, yes, I suppose if we could. But absent that, lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.

His latest “Investment Outlook” can be accessed from the PIMCO website here.

Source:

“Mooooooo!”
Investment Outlook, August 2008
Bill Gross
PIMCO, July 25, 2008

I’ve heard that legendary bond investor Bill Gross had become a U.S. dollar bull. However, I wasn’t able to find much out there from “The King of Bonds” on his outlook for the American currency, besides the following from Internet news site Newsmax.com:

While the dollar has dropped to yet another record low against the euro, the greenback will recover in coming months, according to superstar money manager Bill Gross and other heavyweights.

Rising European interest rates have pushed the euro up nearly 35 percent against the dollar over the past three years, to a high of $1.60.

But a growing number of experts believe the economies of Europe will slump even further than the U.S., forcing the European Central Bank to reverse this month’s interest-rate increase.

The euro will slip about 6.5 percent to $1.50 by year-end and then slide further to $1.45 by the middle of next year, according to the median of 37 currency analysts surveyed by Bloomberg News.

Gross, co-CEO of Pacific Investment Management Co. (Pimco), has turned bearish on the euro for the first time since the common European currency was created in 1999. Pimco runs the world’s largest bond fund.

Grapic Art By Yaroslav B, stock.xchng

Source:

“Bill Gross: Euro Overvalued by 30 Percent”
Newsmax.com, July 17, 2008