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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…)






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