Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Archive for the ‘Pimco’ Category

Why is Bill Gross Buying Utilities?

Posted by Larry Doyle on November 23rd, 2009 9:35 AM |

Pimco's Bill Gross

Pimco's Bill Gross

There is no doubt that the Fed and Treasury are compelling investors to allocate capital and savings into the market. With savings rates effectively at or near 0%, holding cash is expensive both in terms of no return and opportunity cost. That said, what is one to do when large parts of the market appear to be “bubbling” over due to Uncle Sam’s excessive liquidity and the economy remains strapped?

Let’s check in with one of our Sense on Cents Economic All-Stars, Pimco’s Bill Gross. In his December 2009 Investment Outlook, Gross makes the case for investing in utilities.  Why utilities? As with any investment, we should focus on risk-adjusted returns. Gross provides a reasoned assessment of the current environment and a rationale case for investing in utilities. He writes:

The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until. To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements. The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds. (more…)

Bill Gross Making Sense on Cents

Posted by Larry Doyle on October 14th, 2009 12:56 PM |

Looking beyond the liquidity provided by the Treasury and Federal Reserve to refloat our equity markets, what will be the drivers of our economy and markets going forward? While Uncle Sam may think he can leave rates at 0-.25% for an extended period, at some point even ‘extended’ runs out. Will the Uncle Sam economy have adapted and implemented the structural changes necessary to move on to a new phase of growth and prosperity?

I am very concerned and reiterate that our markets are masking significant embedded issues in our economy and overall fiscal health.

As much as I found Pimco to be challenging when trading with them, and question their integrity in handling their outstanding Auction-Rate Securities issuance, I respect their views on the markets and economy. In fact, I think Bill Gross and Mohamed El-Erian consistently provide a lot of “sense on cents.”  What does Mr. Gross have to say about our economic landscape lately? He writes:

What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.

Regrettably, more and more capital here at home is being directed toward the servicing of our massive deficit. Additionally, taxes will surely increase to do the same. Over and above those two definites, I believe strongly  that capital will increasingly look for opportunities outside our nation given the pressure on our greenback.

Gross touches upon an issue which I strongly believe is a MASSIVE drag on our current economy and our future well being, that is our  secondary schools which rank 18th overall in the developed world. Gross writes:

What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.

Do the powers that be in Washington and in the state houses possess the necessary discipline to right our ship and set sail on smoother seas? If so, they will have to display a set of values and practices which are entirely inconsistent with how our government operates. While I remain bullish on those who want to educate themselves, practice discipline, and save for better days, I am bearish on people who think Washington or other entities can provide those necessary values. Gross is also cautious in concluding:

Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a  “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.

If we think a return to business as usual is the proper path, we will merely go in circles and end up right back in this same spot….if not worse.

I welcome comments from those who share or differ with these assessments.

LD






Recent Posts


ECONOMIC ALL-STARS


Archives