Bill Gross

[-dol-]

No surprise here. Good ol' Bill has been publicly declaring his intentions to bid for a slice of these "assets" (toxic as they are) to be managed even before the ill-fated first bailout package was even conceived.

And note this: He will even do it for FREE!

Bill says that all he wants in return for helping the Treasury Department is for Pimco “to be recognized for the way we’ve seen this crisis coming, and for the way we’ve talked about what’s required.”

Great publicity, I would say.

[millionairemind]

Investment Outlook
Bill Gross | October 2008

Nothing to Fear but McFear Itself

A Simple Explanation
We are to the point of fearing fear itself. America in all its resplendent free market capitalistic glory is on the auction block with few bidders. How this came to be is obvious in retrospect: too much exuberant leverage, not enough regulation; too strong a belief in asset-based prosperity, too little common sense that prices could go down as well as up; excessive “me first” greed, too little concern for the burden of future generations; a political morass unworthy of our Founding Fathers. You may have more to add to the list, but frankly there isn’t enough time. Historians can sit back and reflect, but at this very moment, America is for sale and there is fear and trembling in the auctioneer’s voice.

Average Americans know little of the ways of Wall Street nor will they ever, I suppose. Every day, these days, is on-the-job training for yours truly, so how could Jane or John Doe ever understand the complexities of overnight repos or reverses, the selling or buying of protection on corporations via Credit Default Swaps (CDS), or the reasons why some investment banks are saved while others are allowed to fail? They cannot. So let me put it simply. Credit markets are based on trust and when there is no trust, markets can freeze up. My Co-CIO Mohamed El-Erian has a great everyday example. Imagine yourself at the drive-thru ordering a Big Mac. At one window you order and pay, at the other – 20 feet ahead – you pick up your lunch. What if you thought that after paying at the first window, your 1000 calorie sandwich might not be waiting for you a few seconds later. You might not pay; business as usual might not take place. That is what is happening in the credit markets. They are frozen in “McFear.” After the failure of Lehman Brothers – an investment bank which took orders at one window, and promised to pay at another for trillions of dollars of those CDS, swaps, and other derivative “sandwiches” – institutional investors said that they’d prefer to stay at home and have peanut butter instead of risking their money ordering a Big Mac. And so their money goes into that figurative mattress instead of the register at McDonald’s, people are laid off, profits go down, bank loans become less available,
our economic center cannot hold.

A More Sophisticated Explanation
PIMCO’s Investment Committee to a man (no women yet) believes that capitalism is the best and most effective economic system ever devised, but it has a flaw: it is inherently unstable. Every economy, capitalist, socialist, or communist requires long-term capital assets to allow it to function: buildings, roads, factories, homes, all of which have expected lives of 30 years or more. A classic communist system would build these things and it would be done – no financing, no debt coming due, and no worries. Capitalism, however introduces an instability because it uses short-term profit maximization via the buying and selling of debt and equity that finance these same capital projects. Because capitalism has a dynamic of profit maximization at its core, companies and households take on more debt or less, issue more stock or less, and then trade these obligations amongst each other, creating the possibility of bubbles and bankruptcy, faux prosperity and instability.

It is during these periods of potential bankruptcy and accelerating instability, however, that capitalism becomes particularly vulnerable. Confidence is replaced by fear. Any economy requires a continual replenishment of buildings, roads, and yes homes in order to survive. But whereas an old-style communist government would simply budget them into their new 5-year plan and direct their people to build them, capitalism must accomplish the same task via prices, markets, and confidence that this invisible hand will lead to future profits. Take your home for instance. While housing prices for long periods of time in the 20th century didn’t go up or down much, it’s fair to say that you would be reluctant to buy a house (and your bank reluctant to lend you a mortgage) if you thought it was going to go down in price. Same thing when companies build factories and invest in research and development; profits and in turn higher prices are fundamental drivers of the capitalistic ethic.

A month ago when I spoke to a potential financial tsunami, it was not to bail out our position of already well protected Agency mortgage-backed bonds. It was to alert you and yes, policymakers, that this inherent instability in our capitalistic system was threatening to feed on itself first in the housing market and then spreading to financial institutions – banks, investment banks and insurance companies as the sale of assets in the process of delevering led to home foreclosures and then bankruptcies for weak institutions that held assets of all kinds. That was not, I think, an inaccurate assessment as recent events have proven. But importantly, because prices are going down in every asset class, the threat to future investment in long-term capital projects and the real economy becomes magnified. That doesn’t mean of course that capitalist investors must be guaranteed a profit. Far from it. But when prices in all asset categories decline by double-digits, well then Washington, London, Frankfurt, Tokyo, and Beijing – we have a problem. I reproduce last month’s asset price chart to accentuate my point.

Now, as recognition of a systemic period of capitalistic instability becomes apparent, the focus has legitimately shifted to a systemic solution. Much of the focus has been on U.S. policy and rightly so. It is here where the excesses of exuberance were most pronounced. But, up until the Treasury’s $850 billion rescue package, the policy responses may have been necessary and significant, but they were ad hoc and perhaps insufficient. A systemic delevering likely requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds. We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past.

Whether these steps are successful depends in part on whether fear of fear itself has gone too far. They also depend on global coordination of policy because American-style capitalism is not just the bastion of America anymore. Almost all important economies have adopted it in one form or another and in doing so have assumed its inherent instabilities as well. Unlike the old days, however, policy responses are not dominated by the U.S. nor are they coordinated and identical. Some central banks have recently just finished raising interest rates (Brazil), while others have focused on tightening, not loosening liquidity (China). The net/net of all of this on a global-wide basis may not be as salutary as headlines indicate. And hopes for a unified global response may not be validated. Yesteryear’s supranational agencies centered on the IMF and World Bank cannot provide the solution nor have there been hints of a Plaza or Louvre Accord in the immediate future. Each economy appears to be pretty much on its own despite dollar swap arrangements and the like between Europe and U.S. central banks.

Summary and Investment Conclusions
Future economic textbooks will likely teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient when there is a delicate balance between private incentive and government oversight. The benevolent fist of government will now join hands with Adam Smith in a most visible manner. Because it will, expect a lengthy recession but not depression, accelerating government deficits approaching a trillion dollars as forecast here in this Outlook several months ago, and the eventual rise of inflation and longer dated bond yields. For now however, it is best to focus on the potential unfreezing of commercial paper and a globally coordinated policy rate cut. Own the front ends of Treasury/LIBOR yield curves. Agency mortgage-backed securities will also benefit from Treasury buybacks. Stay liquid, remain in high quality. It is prudent at the moment to fear McFear itself.

[millionairemind]

A good article below by Gross

http://www.pimco.com/LeftNav/Featured+M ... +CQish.htm

[LenaHuat]

Bill Gross is far too modest. Duke is where Melinda Gates graduated from. We all know abt the Duke Medical School (who has a presence in Singapore via the Duke-NUS Medical School) and its famous liberal arts faculty. It's very much like Japan's Tokyo University and S Korea's Seoul National University. U only need to gain entry and no1 cares how well U graduate from these universities.

Now back to PIMCO's conclusions :

PIMCO would focus on the following:

(1) A continued above-average allocation to agency mortgage-backed securities – now yielding close to 6%.

(2) An overweight position in bank capital – bonds and preferred stock in companies where the Treasury has an equity stake. With Uncle Sam as your partner, default seems remote.

(3) A focus on the frontend of the yield curve. The Fed will stay low for an extended period of time while the inevitable inflationary pressures of government bailouts lay further out on the yield curve.

How does 1 benefit from PIMCO's conclusions To me, it signals confidence is returning to the housing sector, in banks and that equities are beginning to show value as interest rates stay low.

[winston]

INTELLIGENCE: (USD) PIMCO's Gross: Better to own corporate bonds

(USD) PIMCO's Gross says it's better to own corporate bonds than corporate stocks and stock P/E are cheap but only slightly below their mean average for the past century, in his outlook.

He believes in stocks for the l-t, but only if purchased at the right price. Says days of narrow yield spreads and low real corporate interest rates are gone.

[winston]

Bill Gross Says Stocks Aren’t as Cheap as They Appear (Update1) By Michael J. Moore

Dec. 2 (Bloomberg) -- Bill Gross, manager of the world’s biggest bond fund, said stocks aren’t as cheap as they appear given that the era of deregulation, low borrowing costs and tax cuts is over.

“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates,” Pacific Investment Management Co.’s Gross wrote in a market commentary posted on the Newport Beach, California-based company’s Web site. “That world, however, is in our past not our future.”

Gross said that while equities appear inexpensive according to price-to-earnings multiples and the so-called Q ratio, which compares prices with the replacement cost of net assets, the new economic reality means traditional techniques are sending false signals. The 64-year-old money manager didn’t say whether he expects stocks to climb or fall, although he argued that corporate bonds are better investments.

“More regulation, lower leverage, higher taxes and a lack of entrepreneurial testosterone are what we must get used to -- that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner,” Gross wrote in his commentary.

The Dow Jones Industrial Average is unlikely to decline to 5,000 or surge to 14,000, he said. The benchmark stock index, created in 1896, sank to a five-year low of 7,552.29 last month after closing at an all-time high of 14,164.53 in October 2007. In 2002, Gross predicted the Dow would decline to 5,000 at a time when the measure was at about 8,500.

$1 Trillion

The Standard & Poor’s 500 Index has fallen 46 percent since its record almost 14 months ago as credit losses and writedowns at financial firms approach $1 trillion and more economists forecast that the U.S. recession will be one of the most severe in the post-World War II era.

Cheap financing won’t be available once the government is finished intervening in the credit markets, which will reduce corporate earnings, Gross wrote. The U.S. government has pledged more than $8.5 trillion on behalf of American taxpayers during the past 15 months, according to data compiled by Bloomberg.

Corporate tax rates, which declined during President George W. Bush’s administration, won’t keep falling once Barack Obama takes office in January, Gross said in the note.

His Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco’s Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings.

Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management.

[winston]

Long Article:-

What is fair value for stocks? Are they now cheap? You can certainly make that argument by comparing valuations based on past performance. But repeat after me, "Past performance is not indicative of future returns." The investment climate of today is almost certainly going to be quite different than that of the 80's and 90's. Thus, to expect stocks to repeat the performance of the last bull market in a climate of government intervention, deleveraging and increased regulations may not be realistic?

http://www.investorsinsight.com/blogs/j ... redux.aspx

[millionairemind]

Investment Outlook
Bill Gross | January 2009
Andrew Mellon vs. Bailout Nation

2008 was the year when the United States led the charge of bailout nations, lending and literally guaranteeing trillions of dollars of private liabilities in an effort to avoid the advent of another Great Depression. Nothing, with the possible exception of George Bush’s IQ was the subject of greater debate. To begin with, the rescue plan itself was controversial even amongst its implementers: Congress voted against it, then a week later voted for it; Treasury Secretary Paulson designated it “TARP” (short for “Troubled Asset Relief Program”), then a month later did a 180°, refusing to buy subprime mortgages and asserting his right to change his mind because the facts themselves had changed. But the broader question reached beyond politics and into the realm of the dismal science itself. Was it necessary and productive to mutate 21st century American-style capitalism into a thinly disguised knock-off of the New Deal?

Better, some thought, to have followed the advice of early 1930s Treasury Secretary Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers – purge the rottenness from the system.” The Mellons of the world argued that bailouts were akin to pouring gasoline on a fire, adding trillions of dollars of new debt to a domestic and global economy that had broken down because of, because of, well, because of – too much debt.

Wall Street, the Fed, and Newport Beach took the other side. Those steeped in economic history felt that the Great Depression and more recently the “lost decade” in Japan had both experienced a “liquidity trap,” a monetary black hole where lenders, savers, and ultimately consumers were frightened into stuffing their money into a mattress rather than circulating it in classic capitalistic fashion. Sensing a freezing of credit markets following the default of Lehman Brothers, policymakers decided it was better to become a bailout nation than a sunken ship.

The debate, of course, can never be resolved. You can’t prove a negative nor recreate history to show what might have been. What we do know, however, is that even with U.S. and indeed global bailouts, almost every major economy entered recessionary territory in 2008 and that the “D” word, while unmentionable in official policy circles, was nevertheless on the tip of their tongues and at the forefront of their contingency plans. As we closed the year, “quantitative easing” was the publically acknowledged future policy of the Federal Reserve, which in short meant “buy assets, support Wall Street, and in the process, hope that some of it might trickle down to labor and the farmers.” Ben Bernanke is no Andrew Mellon. There may be rottenness in the system, but our Chairman surely doesn’t believe in starving a cold, or pneumonia for that matter. The Fed’s willing accomplice was the United States Treasury and the FDIC, extending not only $350 billion of TARP money but literally guaranteeing three quarters of the liabilities of U.S. banks. For those who fear nationalization of our financial system, the destination seemed just over the horizon.

Still, while such a transformation is, to put it mildly, undesirable, the policies are necessary. As outlined in these pages, the U.S. and many of its G-7 counterparts over the past 25 years have become more and more dependent on asset appreciation. Under the policy-endorsed cover of technology and somewhat faux increases in financial productivity, we became a nation that specialized in the making of paper instead of things, and it fell to Wall Street to invent ever more clever ways to securitize assets, and the job of Main Street to “equitize” or, in reality, to borrow more and more money off of them. What was not well recognized was that these policies were hollowing, self-destructive, and ultimately destined to be exposed for what they always were: Ponzi schemes, whose ultimate payoffs were dependent on the inclusion of more and more players and the production of more and more paper. Bernie Madoff?

As with every financial and economic crisis, he will probably go down as this generation’s fall guy – the Samuel Insull, the Jeffrey Skilling, of 2008.

But Madoff’s scheme has a host of culpable look-alikes and one has only to begin with the mortgage market to understand the similarities. Option ARMs or Pick-A-Pay home loans allowed homeowners to make monthly payments that were so small they did not even cover their interest charges. Two million mortgagees either chose or were sold this Ponzi/Madoff form of skullduggery, believing that home prices never go down and that shoppers never drop. One can add to this the trillions in home equity/second mortgage loans that extracted “savings” in order to promote current instead of future consumption, and one begins to realize that Bernie Madoff and our cartoon’s Wimpy had company all these years.

What about the shabby performance of the rating agencies? Were they not equally at fault for perpetrating a giant charade that was bound to end in tears? Of course: Aaa subprimes structured like a house of straw; Aaa monoline insurers built like a house of sticks; Aaa credits like AIG, FNMA, and FHLMC where only a huff and a puff could expose them for what they were – levered structures dependent upon asset price appreciation for their survival. Ponzi finance.

I will go on. Municipalities with begging bowls now extended for over a trillion of Federal taxpayer dollars, based their budgets and their own handouts on the perpetual rise in home prices, the inevitable upward slope of sales taxes, and the never-ending increase in employment and personal income taxes. To add injury to insult, they conveniently “balanced” their books with a host of accounting tricks that Bernie Madoff could never have come up with in his wildest imagination. Now, with cash flow insufficient to meet current outflows, they are proving my point that we have met Mr. Ponzi and he is us – all of us: auto companies that siphoned sales dollars to make labor peace instead of research and design expenditures; hedge funds that preposterously billed investors for 2% and 20% of nothing; a President and politicians who thought they could fight a phony war for free and distract the nation’s attention from $40 trillion of future social security and health care liabilities. Ponzi, Ponzi, Ponzi.

Still, future policymakers must confront the reality that is, not the one that should have been. And investors must do likewise, casting aside personal philosophies for a clear-headed view of the future horizon. PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks, and senior bank debt; Aaa asset-backed securities such as credit card, student loan, and auto receivables. These have been well-advertised PIMCO strategies over the past 6 months but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well – unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot.

Here’s another thought. While TIPS or inflation-protected securities cannot logically be a recipient of Uncle Sam’s checkbook over the next 12 months, they can benefit if and when the government’s efforts to reflate begin to take hold. 2½% real yields cannot possibly be maintained unless deflation as opposed to inflation becomes the odds-on favorite. What bond investors know as “breakeven inflation rates” are currently signaling a future where the U.S. CPI averages -1% for the next 10 years. Possible, but not likely. As an additional strategy, global bond investors should recognize the value in high-quality investment-grade corporate bonds in many markets. Yields of 6%+ for intermediate maturities are still common and readily available.

There is legitimate concern as to the ultimate destination and outcome of our “bailout nation.” Realistically, quantitative easing, a two-trillion-dollar expansion of the Fed’s balance sheet, and the near certainty of future budget deficits approaching 6-7% of GDP should alert bond investors to once again become vigilant as was the case in the 1980s and 90s. Vigilantes we should be, but that is a battle to be fought in the Treasury market where low yields offer little reward and increasing risk. For now, our Ponzi-style economy and its policy remedies encourage bond investors to mimic Uncle Sam and its global compatriots. Buy what they buy, but get there first. Andrew Mellon would surely have disapproved. Liquidation was his game. Wimpy? Well, he’s gonna have to start paying for those burgers on Monday, even in a bailout nation.

William H. Gross
Managing Director

[winston]

On Bloomberg now.

Bill Gross is saying that the Stimulus Program is not enough. The stimulus should be in trillions.

[winston]

Gross Says More Bond Buying by Fed Needed to Spur U.S. Growth By Kathleen Hays and Dakin Campbell

March 19 (Bloomberg) -- Bill Gross, co-chief investment officer of Pacific Investment Management Co., said the Federal Reserve’s purchases of Treasuries and mortgage securities won’t be enough to awaken the economy.

“We need more than that,” Gross said today in a Bloomberg Television interview from Pimco’s headquarters in Newport Beach, California. The Fed’s balance sheet “will probably have to grow to about $5 trillion or $6 trillion,” he said.

The Fed said yesterday it will buy an additional $750 billion in mortgage-backed securities, up to $300 billion of Treasuries and as much as $100 billion more in agency debt. The Fed said earlier it would buy $600 billion in mortgage and agency debt.

The central bank has $1.9 trillion on its balance sheet now, according to Bloomberg data. The programs announced yesterday would expand it by about $1.25 trillion.

Gross manages the $138 billion Total Return Fund, the world’s biggest bond fund. The fund gained 4.8 percent last year and outperformed 99 percent of its peers over the past five years, according to data compiled by Bloomberg. The average government and corporate bond fund lost 8 percent in 2008, Bloomberg data show.

Pimco is a unit of Munich-based Allianz SE, Europe’s largest insurer.