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

Reuters’ Jennifer Ablan reported yesterday that legendary money manager Jeremy Grantham recently acquired distressed debt for his personal portfolio. Ablan wrote:

The allure of moribund mortgage bonds and corporate debt has grown so strong that Wall Street’s biggest money managers are picking over their carcasses…

Even influential investor Jeremy Grantham said he has doled out money to three such funds for his personal account. “A well-managed distressed fund will no doubt do very well and will have great opportunities,” Grantham, chairman of global investment management firm GMO, said in an interview.

Source:

“Big money managers bet big on distressed debt”
Jennifer Ablan
Reuters, August 7, 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

Money managers from around the world gathered in Chicago last week for the CFA Institute’s annual investment seminar. Yesterday, the Chicago Tribune’s Gail MarksJarvis talked about two of the speakers- Jeremy Grantham and Marc Faber. The personal finance columnist wrote:

“I am officially scared,” GMO investment manager Jeremy Grantham told professionals from as far away as Abu Dhabi and Malaysia. “In 2000, we had a technology bubble. But this is massive, a massive credit crisis and a bubble in global housing, global equity and global land.”

Grantham, whose clients have included Vice President Dick Cheney and 2004 presidential candidate John Kerry, warned that the world is working its way through the “first truly global bubble.”

The British money manager shared his investment outlook with seminar participants. MarksJarvis wrote:

When asked by a money manager what he would buy now, Grantham said, “long mattresses” — jesting about the stereotypical nervous behavior of hoarding cash. He seriously suggested: “Put money into something incredibly safe, like a high-quality hedge fund.”

Grantham said rather than buying stocks for the long run now, he would only “short” them, or bet that they will decline in price. He sees “nothing interesting in quality corporate bonds,” and he has been shorting oil. “Commodities had a good run, but that’s over,” he said.

Although downtrodden mortgage-related bonds might be a good deal now because some are selling for 59 cents on the dollar, he said he wonders if the price will seem compelling if home prices fall another 20 percent or 25 percent.

He confessed to the group that “I bought my first gold last week, and I hate gold. It doesn’t pay a dividend. I would only do it if I was desperate.”

MarksJarvis noted:

Generally, when bubbles burst, the asset prices stay down for lengthy periods. Grantham isn’t expecting the stock market to hit its low until 2010.

The Tribune columnist also talked about Marc Faber, who publishes the monthly investment newsletter The Gloom Boom & Doom Report. She quoted the Swiss-born investor as saying:

The Fed has created a bubble in everything — stocks in emerging market, real estate everywhere in the world, commodities, art. The only asset class that is down is the U.S. dollar…

It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset bubble will lead to a colossal bust.

MarksJarvis also noted:

And with commodity prices so inflated, he expects an “increase in international tensions” over resources.

Source:

“Even the pros may be stuffing the mattresses”
Gail MarksJarvis
Chicago Tribune, July 29, 2008

Yesterday, the financial publication InvestmentNews ran a piece about a roundtable that took place in June that focused on the prospects for markets and opportunities for institutional investors. Jeremy Grantham, chairman of GMO LLC of Boston, was one of those who participated. Grantham, a well-known money manager whose clients have included U.S. Vice President Dick Cheney and 2004 presidential candidate John Kerry, responded to the following questions:

IN: So is the credit crisis over?
GRANTHAM: The stock market never does lags very well. They always expect that the first impact is the whole ballgame. So you have the first impact of the credit crisis, the first round of the effects on the housing market, and then people missed the point that the longer-term effects of less credit burn through very slowly over two, three — and even longer — years. For me, that’s all part of the credit crisis.

Step one is, you recognize you have a problem in housing. Step two, in consumer debt. Step three, that the whole debt structure was much too high. Step four, you bring the debt leverage everywhere down. The debt-to-GDP ratio in ‘82 was 125[%], one and a quarter times [gross domestic product]. The cumulative debt rose to over three times. So we had a dazzling rise, and people learned to adjust their businesses to live in a world where all kinds of debt — financial debt, consumer debt — were rising. Now they have to change all that, and the changing period is lumpy and long-winded and painful. I expect we’ll have a lot of unexpected consequences because we never had this collection of problems before.

The idea that you would solve a long-term problem of too much debt by paying people to take debt, by having a negative real rate, brings to mind the hair of the dog that bit you. The guy is a drunk and you’re offering him a kind of early morning pick-up. It may get him to the office feeling reasonably good but it doesn’t do much for his cirrhosis of the liver.

Later on, the roundtable turned its attention to the topic of fixed income and the economy:

IN: Let’s turn to the bond markets and the economy. How will they play out over the next 18 months?
GRANTHAM: The inflation versus deflation argument is the central issue for investors for the next two or three years. Whether the credit crisis cools down the economy and commodity crisis and so on, is that the central issue or is the inflation coming through — particularly in the Middle Eastern and some third-world countries — induced mainly by huge sustained demand and pressure on commodities? Which of those two is going to tilt the scale the most? I don’t know. It’s what I spend my nights waking up sweating about. The consumer polls now say they’re expecting 7% inflation, which is higher than almost the last 20 years. Whether they’re right or not, I’m not sure. In general, I think the economy over 18 months will simply play out weaker globally than expected by a little bit.

I would like to, however, back up. You mentioned before, “What have we learned?” No one addressed that, and I would like to.

We’ve learned that there aren’t too many adults around. There’s nothing but easy solutions and easy answers. I think we’ve learned that the Fed is intellectually nearly bankrupt, that it’s stretched the law in bailing out investment banks and in the process compromised, as [Mr.] Volcker said, some long-established principles, which he obviously valued.

We’ve learned that the Fed has to think about asset-class bubbles, with the problem being that we have such academic members of the Fed that they’re not sure that bubbles could exist in an efficient world. It would be a real help to have a Fed boss who lived in this real world.

I have a job description for the Fed, which is a lot simpler than the compromising combination of growth and inflation, and that is to protect the integrity of the U.S. financial system. It does seem to me entirely appropriate for the Fed to have that on the list. They have totally allowed the integrity of our financial system to erode in the last 20 years and they should be ashamed of themselves.

Source:

“The market has been battered, but some opportunities exist”
InvestmentNews, July 28, 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

Jim Rogers, the chairman of Rogers Holdings, spoke to Bloomberg’s Betty Liu from Singapore on Thursday on a number of topics. Below are some notable excerpts from their conversation:

Financial Sector

LIU: All right. Jim, first, talk to us about the story of the week that we’ve seen so far, Lehman Brothers, you know, you’ve been very critical so far about what’s been going on on Wall Street, the accounting, all of that. Do you believe, I mean this is relevant - do you believe that Lehman Brothers is in fact in so good shape that they’ve got no liquidity problems or what’s your view on this right now?
ROGERS: Well, okay, I am still all - short all of the investment banks on Wall Street through the ETF. I know they are all in trouble. I know most of them have phony accounting. And you know, in bear markets, they all go down to eight. So, I just presume they are all going to go to eight before it’s over, before the bear market is over.
LIU: Do you believe that we could another Bear Stearns as we did in March?
ROGERS: Oh, why not, sure. There are certainly - and I’m also short Citibank and I’m also short Fannie Mae. So, you know, some of these companies have - have horrendous balance sheets and if the bear market has a ways to go, which in my view, it does, then you are going to see some really, really low prices. But, Betty, there’s nothing unusual about this, just go back and look at any previous bear market. Financial stocks sell at unbelievably low prices during bear markets. This was not going to be any - well, this one may be a little different because it’s just going to be worse for the financial companies during this bear market, because the excesses during the past five or ten years have been so horrendous in the financial communities.

The co-founder of the Quantum Fund with George Soros and Bloomberg’s Liu revisited the topic of financials later on in the interview:

LIU: All right. And Jim, you know, I want to turn back to, of course, the Fed and the banks and all of that. You were talking before about some of the stocks that you’re short on. Are you short on Lehman Brothers?
ROGERS: I’m short the ETF, Betty, the investment bank ETF, which means I’m short all of them. I am not short any specific investment banks. First of all, I have too many friends at all of those places, I don’t want to short any of them specifically. So, I am just short at the ETF, which means I am short all of them, I mean some would do well, some will do probably too badly, but the ETF in my view is going to go down a lot more.
LIU: Well, does what happened with Lehman Brothers over the past week, does it perhaps stoke your interest in shorting Lehman along with Citigroup? And Fannie, I believe is the one you talked about as well.
ROGERS: I’m already short Fannie Mae and Citibank, and have been for sometime. I’m just going to kind of stay with the ETF. It’s easier for somebody like me, who’s too lazy to spend a lot of time on any specific one, except for Citibank and Fannie Mae.

Monetary Policy

LIU: All right, Jim. So, tell us, you have also been very critical of the Fed and Ben Bernanke. I want to ask you first one thing. How do think the Fed has handled so far what’s been going on on Wall Street? You think that they helped situations or actually made things worse?
ROGERS: They made things worse, Betty. They printed huge amounts of money, which has caused great inflation which could cause the dollar to go down, and the Federal Reserve has taken on something like $400 billion of bad assets on to its balance sheet. Now, you and I as American taxpayers are going to have to pay off that debt some day. What’s Bernanke going to do? Get in his helicopter, and fly around, collecting bad debt? Is he going to start repossessing cars, repossessing houses that go bad? I mean, this is insane Betty, the Federal Reserve has $800 billion on its balance sheet. They have already committed $400 billion to bad debt. What then they are going to do next? Where are they going to get the money the next time things start going wrong?

Investment Strategy

LIU: Okay. Okay, well, given that scenario, Jim, as an investor, where are you going to put your money right now?
ROGERS: I own commodities, I have been buying agriculture, I bought airlines today. I bought a lot of airlines around the world today, both stocks and bonds. Swiss franc, Japanese yen, renminbi, these are the few things I have been buying recently.

Airlines

LIU: You bought airlines? A lot of people are very bearish on the airlines, talking about the fuel cost. Why are you buying airlines?
ROGERS: Well, Betty, you just got through the same why, everybody is very bearish. No, I don’t buy things just because people are bearish, but I fly a lot, and the planes are full. You cannot buy a new – if you order a new plane today, you couldn’t get it for several years. This Boeing and Airbus have problems. You read every day that the airlines are cutting back their capacity. Fares are going up. I mean, Betty, everybody knows about the fuel cost. Is there any airline left that doesn’t know we have fuel problems? They are adjusting for all of it.
LIU: Well, that’s true. But there’s also talk about bankruptcies in the airline industry. And you think some could go bankrupt?
ROGERS: How much more bullish in the news do you want? Twenty-four airlines have gone bankrupt this year. That’s great news. You know, five out of the seven largest American airlines went bankrupt during this decade. So, fine. Bankruptcies are signs of bottoms, not signs of tops.

Commodities

LIU: Right. You know, staying with oil and commodities, we’ve seen a pullback in some commodities in recent months. But which commodities do you like right now, Jim, and which don’t you like?
ROGERS: Well, I mean, yes, a lot of commodities have come down pretty hard. If people are talking about a bubble, I’d like to know what they’re talking about. I mean, many commodities, nickel, zinc, lead are down 50 percent. Silver is down 80 percent from its all-time high. Sugar is down 80 percent from its all-time high. What kind of bubble is that? Cotton is down 40 percent from its all-time high. Coffee is down 60 percent from its all-time high. I have been buying agriculture recently, I’m holding off a little bit right now because it looks like Congress is determined to do something to drive down commodity prices. If they do, it’ll be a fantastic buying opportunity and I’ll buy more.
LIU: Jim, you - .
ROGERS: But what I bought most recently is more agriculture.
LIU: More agriculture? In China, did you buy?
ROGERS: I bought agriculture stocks in China. It’s not legal for - I mean, it’s almost impossible for foreigners to buy commodities - commodities and sales in China.
LIU: Right. Okay, also, you’ve said before that we’re half- way through the commodity bull run. You still think that, or I mean how long can this bull run last for?
ROGERS: Well, Betty, there are number of acres devoted to wheat farming. It’s been declining for 30 years. The inventory of food is at the lowest level in 50 or 60 years. We are burning a lot of our agricultural products in fuel tanks now, as fuel. That’s useless, that’s hopeless. Talk about a bubble, that’s a bubble. It’s crazy that we’re spending so much money burning our agricultural products as fuel. But you can go on a long time, nobody has discovered any major oil fields for over 40 years. Betty, all the oil fields in the world are in decline. I mean, there’s been one lead mine opened in the world in 25 years. The last lead smelter built in America was built in 1969. Unless somebody starts bringing on a lot more capacity soon, that bull market has got a ways to go.

Oil

LIU:All right. Jim, also talk to us about oil. You know, you’ve been very bullish on oil. We’ve had a lot of people talk about, you and I had a debate about whether or not there’s speculation in oil markets right now. You say no, others say yes, like Soros, he says it’s going to bubble. What do you know that others don’t about the oil market?
ROGERS: Look, look, Betty, there are always speculators in every market. Look at the New York Stock Exchange right now. You think there aren’t any speculators down there on the floor of the stock exchange? There are always speculators. That’s what business is all about. I submit to you that most of the people and - I don’t know about most of the people, I shouldn’t say that, but we know that the IEA, the definitive authority on oil has said that the world has an oil problem. The Saudis have told Bush that we have an oil problem. Betty, if there is lot of oil, please, would somebody tell us where it is, so we can all invest in it? The world has a serious oil problem. Now, Betty, that does not mean that oil cannot go down 50 percent. During this bull market since 1999, oil has gone down twice by 50 percent, going down by 50 percent in 2001 and again, in 2000 whatever it was, ‘05 or ‘06. So sure, you can have big reaction in any bull market. But that’s not the end of the bull market. There is no supply of oil unless you - somebody can tell us where the oil is, the bull market in oil has years to go despite new corrections which may or may not come.
LIU: Well, but you know, and I know you always hate having me ask you about - about limits or caps and all of that. But, given the supply/demand situation that you’re talking about, how high can oil go?
ROGERS: Betty, I know you - how you’re paid to ask questions like that, but I don’t know the answer. I’m not smart enough. I know that unless somebody discovers a lot of oil, the price of oil can go to $150, $200. You pick the number.

U.S. Dollar

LIU: All right, Jim. And I’ve got to turn to the dollar very quickly. What do you make of the comments by Bernanke earlier this week, noting the dollar slide, you have been very, very critical of Bernanke on this.
ROGERS: It is astonishing. Now, this is a man that under oath in Congress said, “If the price of the dollar goes down, it doesn’t affect ordinary - it doesn’t affect most Americans.” So, I almost fell out of my chair when I saw him say that. We know the man doesn’t know about markets, we know he doesn’t know about the currencies. Now, we know he doesn’t even understand civil economics, simple economics. So, I was astonished to see him, what, two or three days -
LIU: Right.
ROGERS: - suddenly said, “Well, if the dollar goes down, it affects us all.” It’s called inflation. So, somebody’s been teaching him economics. It’s about time, he should go back and take Economics 101.

The 11 minute 49 second Bloomberg interview can be viewed here.

Source:

“Rogers Says Bull Market in Oil Has ‘Years to Go’ (Transcript)”
Bloomberg, June 6, 2008

Here’s something to chew on this morning (from Minyanville on Wednesday):

Yesterday afternoon on CNBC Bill Gross, the Co-chief Investment Officer and Founder of PIMCO, was asked a question from Dylan Rattigan: “What position do you feel the most confidence in?”

Gross responded:

“Well, the one we are most confident of is the one which we label ‘the Fed’s umbrella’. We want to buy securities that are safely protected by the Fed’s umbrella – that’s banks and that is investment banks that have come now under the “guarantee”- so to speak - of the Fed window. Primary dealer and bank credit securities, loans and hybrid preferred’s yielding 8% plus are our favorite types of security in this type of environment. Certainly not 2-3% yield Treasury securities.”

Source:

“Under the Fed Umbrella”
Minyan Peter
Minyanville, June 4, 2008

Last Thursday, Bill Gross, chief investment officer of PIMCO, appeared on CNBC. Gross, known as “The King of Bonds,” told network viewers that inflation expectations for the United States should be around 3 to 4 percent for 2008 due to strong global demand for commodities. CNBC’s Robin Knight noted that Fed policymakers predicted in April that consumer prices, minus food and energy, would rise by only 2.2 to 2.4 percent this year. The problem, suggested Gross, is that economists and some central bankers are focusing too much on wage inflation, and too little on commodity inflation.

The founder and managing director of the PIMCO family of bond funds had this to say about how investors should operate within this environment:

CNBC: So how are you recommending, or how are you playing this environment then, Bill, with this strong inflation impact?
GROSS: Well, you know, it’s a bond negative. There’s no doubt about that. And it’s a commodity positive. That doesn’t mean that anyone can guess the price of oil in terms of its ups and downs on a daily basis. But, no doubt, you want to be in real assets that can re-price subject to supply and demand considerations on a global basis. You want to be out of fixed-income instruments that do not accurately reflect the current rate of inflation. That’s most egregious, I think, in the United States, less so in Euroland and the UK.

You can view the 6 minute 15 second CNBC segment here.

Source:

“Pimco’s Gross Says Rampant Inflation Here to Stay”
Robin Knight
CNBC, May 29, 2008