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

Billionaire investor George Soros spoke to Reuters recently in a phone interview and painted a grim picture when it comes to the outlook for mortgage giants Fannie Mae and Freddie Mac, the dollar, and the larger U.S. economy. Reuters’ Jennifer Ablan wrote this morning:

“This incident (with Fannie and Freddie) is not the last one,” Soros told Reuters in a phone interview, adding the year-long global financial market turmoil represented “the most serious financial crisis of our lifetime.”

“Freddie Mac and Fannie Mae have a solvency crisis not a liquidity crisis,” said Soros. “There’s no problem in their borrowing. And in fact, insofar there is a problem, the Fed is there to provide the liquidity.”

That said, both Fannie and Freddie are “extremely leveraged,” he said. “The deterioration in the housing market, the foreclosures are going to cause losses which exceed their equity,” said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.

The former partner of Jim Rogers added that problems with the greenback would continue as well. Soros told Reuters:

I think the dollar is vulnerable because the economy is going into a recession and the actions of the authorities do involve the accumulation of debt. There is various ratios by which the creditworthiness of a country’s assurances are deteriorating.

The ongoing credit crisis is taking a toll on the larger U.S. economy. The Hungarian-born investor said:

It is an idle dream to think that you could have this kind of crisis without the real economy being affected.

Soros believes the options available to Ben Bernanke and the Federal Reserve are extremely limited. From the Reuters piece:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said.

However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession.

“Therefore, his options are limited — he is boxed in,” Soros said.

Source:

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

According to Reuters yesterday, legendary bond investor Bill Gross suspects the U.S. Treasury and Federal Reserve are engineering a “bailout” for U.S. mortgage giants Fannie Mae and Freddie Mac, which will likely involve the sale of preferred stock upon approval by government officials. From the Reuters piece:

“This is a bailout by any other name,” Mr Gross, chief investment officer at Pacific Investment Management Co, known as Pimco, told Reuters in an email.

Mr Gross said he expected both mortgage companies to sell preferred stock to the Treasury or the public — probably the Treasury — once the authority is approved by Congress and the President.

“This will be consistent with Secretary Paulson’s desire to not bailout stockholders but to maintain the creditworthiness of both companies and in the process support the economy and the housing market,” he said.

Mr Gross, who manages the $US130 billion Pimco Total Return Fund, said while this does not explicitly guarantee the bonds of Fannie Mae and Freddie Mac, “it tells the market that the government will not allow them to fail.”

Source:

“Pimco: US actions a bailout for Fannie, Freddie”
Reuters, July 14, 2008

Looks like billionaire hedge fund manager Eddie Lampert thinks the U.S. housing bust is almost over. According to the Wall Street Journal this morning, Lampert has been acquiring shares in beaten-up home builders, mortgage lenders, and a home-improvement retailer. The Journal’s Gary McWilliams wrote:

Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.

ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.

McWilliams also noted that Lampert, who is also the chairman of Sears Holding Corp., added to his holdings of home-improvement retailer Home Depot. His hedge fund now owns about 22.7 million shares (valued at $590 million), up from 16.7 million shares in 2007.

Source:

“Lampert Puts Money On Housing Rebound”
Gary McWilliams
Wall Street Journal, June 12, 2008

Yesterday, Bloomberg’s Sree Vidya Bhaktavatsalam talked about the recent investment activities of Bill Gross, founder and managing director of the PIMCO family of bond funds. The reporter noted that the 64-year-old Gross:

• Shunned riskier corporate debt in 2006, resulting in a 4% drop in Gross’ $128 billion Total Return Fund during the first half of 2006
• Avoided subprime-linked debt, which saw the fund rise 12% in the past year to beat 95% of its rivals
• Started moving money back into mortgage bonds to take advantage of depressed prices. In April, fund holdings in mortgage-related debt were at their highest since 2000.
• Lowered his exposure to U.S. Treasuries, calling them “overvalued”

Bhaktavatsalam said on Wednesday that as of the end of April, 65% of PIMCO’s Total Return Fund holdings were in mortgage debt, with an additional 6% of assets in emerging market debt.

The Bloomberg reporter wrote:

“You want to invest where the growth is,” Gross said yesterday. “The growth is in Asia and the growth is outside the United States.” To be invested in U.S. fixed income is to be “at a disadvantage twice,” he said.

Source:

“Greenspan Helped Pimco Make Billions, Gross Says (Update3)”
Sree Vidya Bhaktavatsalam
Bloomberg, May 21, 2008

It’s great to be back after several days away from Investorazzi.com. However, I expected a little bit more from my “leads” than a story about pop star Michael Jackson and his Neverland Ranch. Nevertheless, I decided to address this because legendary real estate investor Tom Barrack, Jr., somehow got involved with a last-minute deal to save the 49-year-old American entertainer’s property in Santa Barbara, California, from foreclosure. Barrack is famous for calling the top of the U.S real estate market in 2005.

E!Online’s Gina Serpe wrote this morning:

The seemingly perpetually indebted Michael Jackson narrowly escaped a foreclosure auction on his Neverland Ranch Sunday after the real-estate investment firm Colony Capital bought the loan to the property in a last-minute deal to save the estate.

The purchase of the 2,700-acre ranch was said to have set Colony back $23.5 million, and the company has wasted no time getting into discussions about possible repayment terms with the onetime king of pop, with founder Tom Barrack Jr. saying they were already speaking “with regard to the ranch and other matters.”

“Blame it on Tito”

Barrack’s Colony Capital, one of the largest private-equity firms devoted solely to real estate, has achieved a 24% annualized internal rate of return (IRR) over the last 17 years.

Source:

“Neverland Saved From Auction Block”
Gina Serpe
E!Online, May 12, 2008

Bloomberg’s Deborah Finestone did some research yesterday and found that Pacific Investment Management Co.’s Bill Gross increased holdings of mortgage debt in the world’s largest bond fund to the highest since 2000, while at the same time put on the biggest bet against government debt since at least the same year.

Finestone wrote yesterday:

The $125.1 billion Pimco Total Return Fund had 59 percent of assets in mortgage debt in March, up from 52 percent the prior month and 23 percent in March 2007, according to data on the Newport Beach, California-based firm’s Web site. The fund’s cash position dropped to 32 percent, the lowest since July 2006, from 34 percent in February…

The fund also increased derivative positions that make it short in Treasuries, meaning it will profit from declines in the securities. It held negative 18 percent of assets in government debt in March, the most bearish stance since at least June 2000, according to data compiled by Bloomberg News.

PIMCO, which is a unit of Munich-based insurer Allianz SE, manages $746.3 billion. The Total Return Fund, which through Wednesday had earned 4.03 percent this year, has outperformed all competitors in the intermediate bond fund category, according to Chicago-based research firm Morningstar.

Source:

“Pimco’s Gross Holds Most Mortgage Debt Since 2000 (Update1)”
Deborah Finestone
Bloomberg, April 10, 2008

Came across the following this morning in the online edition of the Wall Street Journal. According to the Journal’s Liz Rappaport:

Still, some investors found value in parts of the market that were hit hardest. Bill Gross, who manages the $123 billion Pimco Total Return fund at Allianz SE’s Pacific Investment Management Co., has said he is buying both municipal bonds and agency mortgage debt.

Source: City of Perris, CA

Source:

“Eroding Economy Pressures Bond Market”
Liz Rappaport
Wall Street Journal, April 1, 2008

Yesterday, Bill Gross, founder and chief investment officer at PIMCO, participated on a CNBC panel that discussed the Federal Reserve rate cut. Gross argued that the reduction in the federal funds rate will not resolve the major crisis at hand, which is housing deflation. He told CNBC’s Erin Burnett:

We have an asset deflation of significant proportions underway here… We need the government in some form or fashion to begin to buy mortgages, and in the process begin to support housing prices.

Responding to Ms. Burnett’s point about an inflationary threat, the legendary bond investor said:

Our view is that the demon at the moment is deflation as opposed to inflation… We have a housing deflation of significant proportions… Let’s fight the fire at the moment, and that’s housing deflation.

In response to the question of “What are you buying right now?” Gross answered:

Well, we like munis too. But, you know, let’s face it, a good investor gets out in front of policy changes to the extent that they can anticipate them. And, you know, we have a sense that, you know, while the government per say may not be buying mortgages anytime soon over the next few weeks, that Fannie and Freddie Mac in terms of their increased authority, and so, you know, PIMCO has been buying, and I would suggest others buy 30-year agency-backed mortgages because that will be the asset du jour, so to speak, once Congress gives them the authority to move beyond those capital limitations.

The 5 minute 25 second video can be accessed from CNBC’s website here.

Source:

“Bonds & the Fed”
CNBC, March 18, 2008