Dow 5,000 Redux
December 8, 2008
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?
This week Bill Gross, the Managing Director of PIMCO (and one of my favorite analysts) moves away from his familiar neighborhood of bonds and offers a few thoughts on stock market valuations. This is not a lengthy read, but it is one you might want to read twice, as the concepts are important. And not just for stocks but for investments of all types. I trust you will enjoy this week's Outside the Box.
Fooling With Inflation
June 9, 2008
This week in Outside the Box we look at Bill Gross's recent essay on measuring inflation. How you measure inflation makes a difference not only in social security payments but also in what your real returns on bonds are. As Bill notes, there is a significant difference in how the world measures inflation and how it is done in the US. He gives us some insights that are very thought-provoking.
In the last decade economists regularly argued the CPI over-stated inflation by 1%. Now Gross suggests that it may understate inflation by 1%. This week's OTB makes for very interesting reading. Bill Gross is managing director of PIMCO. (www.pimco.com)
Pyramids Crumbling
January 14, 2008
This week look at a short but very important piece by Bill Gross. He has my same concern about credit default swaps, but he puts a number to it. He thinks the cost to the world economic system could be in the $250 billion dollar range. Add that to the $250 billion in losses due to the subprime markets, and you are starting to talk real money. The Shadow Banking System is at the center of the problem. I trust you will find this of interest.
Bill Gross was just named Fixed Income Manager of the Year by Morningstar. He sits on the largest pile of bonds in the world at PIMCO and is their Managing Director.
But before we get to Gross's piece, let's look at these few paragraphs which set the scene for the problem in the CDS market from good friend Michael Lewitt of HCM:
"This brings us to the second and, in our view, greater concern raised by Mr. Seides, which is the financial strength (or weakness) of counterparties and their ability to post additional collateral when their positions move against them. This is undoubtedly going to be a growing concern as mortgage and other credit losses swell in 2008. The dirty little secret in the leveraged finance market is that many participants, including many CDS counterparties, are "weak hands." A "weak hand" is an investor whose capital base is subject to erosion due to losses or investor redemptions, such as a hedge fund. "Weak hands" are usually significant employers of leverage as well.
"It is a widely acknowledged fact that many of the participants in the CDS market are hedge funds whose capital is subject to the whims of performance-chasing investors. As the disappointing performance of some previous top performing hedge funds demonstrated last year, investment banks and other financial institutions that are counting on these counterparties to fulfill their part of the bargain in CDS contracts could be left holding the bag if the current credit environment continues to deteriorate, as many of us expect.
"A case in point was the collapse of Dublin-based Structured Credit Company (SCC) in December 2007, which is seeing its 12 trading partners lose about 95 percent of what they are owed, according to the Financial Times. SCC was just a couple of years old and was one of a new brand of Credit Derivative Product Companies (observation: these companies should use a "skull and crossbones" as their corporate logo). It had no credit rating (although HCM would not have been surprised to see it obtain one since the rating agencies were handing out ratings left and right during this period) and $200 million of capital on top of which it wrote $5 billion of credit default swaps. We will save our readers from doing the math ? that is 25-to-1 leverage (significantly less than many Structured Investment Vehicles, just to place this insanity in some kind of context). Low and behold, when the credit markets collapsed last summer and SCC was required to post additional collateral on its trades, there was ? to quote Gertrude Stein ? "no there there."
"Court documents show that collateral demands rose from $55 million to $438 million, but SCC ran out of funds after managing to post $175 million, and the game was up. Was such an outcome unforeseeable? Only for someone completely ignorant of the last 500 years of economic history, HCM supposes. SCC boasted, of course, that "we have stress-tested our capital to the ?nth' degree and believe that the platform we have is the most flexible and comprehensive you could have." Right. HCM would respectfully suggest that the only ones more misinformed than SCC itself were those who were lured into taking the other side of their trades and are now nursing $250 million of losses (and frankly it's shocking that the losses aren't much larger). Of course, these firms included some of the largest financial institutions in the world, so once again HCM finds itself scratching its head in amazement at the madness of crowds."
25 to 1 leverage and stress testing do not belong in the same sentence or marketing pitch. This type of ending for various funds is going to become all too common.
The Shadow Knows
December 10, 2007
This week in Outside the Box we will look at Bill Gross of Pimco's latest essay, addressing the ever expanding economic repercussions of the poorly understood CDO/CLO market, the off balance sheet structured investment vehicles (SIVs) and the economic abyss Bernanke and Company are attempting to lead the market out of with neither light nor guide. Bill sits on the top of the largest bond firm in the world, so they have some very unique insights into what is happening. I always pay attention to what Bill says, and you should too.
What Do They Know?
October 1, 2007
We are in a world far different than the one I learned about in economic text books. As I have written, the shadow banking system of hedge funds and CDOs, CLOs, PIPES, etc. have created a new financing economic reality far different than the traditional banking system was just 20 years ago. Does the Fed have the tools in its toolkit to deal with the new reality?
This week, Bill Gross of Pimco fame looks at the problem in a manner that is truly Outside the Box. Bill Gross has been called "the nation's most prominent bond investor," by the New York times, managing Pimco's Total Return Fund, the world's largest bond fund.
Enjoy your week.
Looking for Contagion in All the Wrong Places
July 23, 2007
This Week in Outside the Box we Join Bill Gross of Pimco in his July 2007 Investment Outlook as he strives to address the implications of the Bear Stearns hedge fund debacle, the toxic waste that is Wall Streets' innovative derivative products and their respective valuation, rather, lack thereof.
If Dear reader you have not been party to the excess of the Wall Street you may have not heard of the two Bear Stearns hedge Funds focusing on the subprime market that were subsequently liquidated on account of their inability to meet margin calls, thus wiping out investors. Mr. Gross believes that while significant, we ought not to look to Wall Street to see the repercussions of our excess but to the heart lands of America and the real estate there financed via subprime loans to witness the true folly of our capitalist ways.
How We Learned to Stop Worrying (so much) and Love "Da Bomb"
May 21, 2007
Humans, by nature, tend to let things worry them a bit more than they ought to. Whether it's a job situation, relationship issue or investment decision, we all tend to blow the small things out of proportion and lose sight of the bigger picture at hand. In this week's Outside the Box, PIMCO Managing Director Bill Gross does an excellent job at explaining why we need to worry less and grab a hold of some of the larger trends behind today's markets.
In his article "How We Learned to Stop Worrying (so much) and Love 'Da Bomb,'" Bill discusses the four big picture topics of globalization, technology, freer markets/financial innovation and favorable public policy as well as show how these forces will affect economies across the globe. He also points out some potential threats that could disrupt the asset markets overall. One particular point that I found of interest was Bill's explanation of a shift in the credit creation process from that of the Central Bank's to those of more private agents such as hedge funds.
Bill always does a superb job of taking a lot of variables and boiling them down to their key metrics. I trust that you will enjoy his commentary and find it to be both valuable and "outside the box."
Grim Reality
April 9, 2007
As I glanced over at the TV in my office this morning, the latest news on the ticker wire was that American Home Mortgage Investment Corp. (AHM) is trading down over 16%. While the company is not of any particular importance to me, it spurred my thinking regarding how the housing market will affect the economy throughout the remainder of the year. And as I have written it is not really a matter of the housing market affecting the economy so much as it is a matter of tightening credit spreads that will do the damage.
This week's Outside the Box is written by PIMCO Managing Director Bill Gross where he discusses his views regarding the correlation between housing, credit spreads, the bond market and FED policy. In his article "Grim Reality," he goes on to point out that losses on loans, in and of themselves, are not the real monster lurking in the night for this economy, but rather it's the tightening of credit standards the could have a materially adverse effect. Bill does an excellent job explaining this as he so often does with his usual great style and wit.
I believe that you will find this Outside the Box to be a good read on what the implications behind a decline in the housing market really are.
Alpha/Beta Anemia
November 27, 2006
After a great holiday weekend, I hope that everybody is enjoying the recurring challenge of finding new ways to creatively eat turkey leftovers. For today's "Outside the Box," we turn our attention towards an interesting piece by Bill Gross on the changing investment landscape over the next decade. In his article "Alpha/Beta Anemia," Bill discusses his outlook for several asset classes and explains their implications on risk premiums in the marketplace.
Bill is a Managing Director at PIMCO where he has become regarded as the most prominent figure in the fixed income sector. He serves at the helm of the largest bond fund in the world, the PIMCO Total Return Fund. In the 90's he penned 2 books on investing: Everything You've Heard About Investing Is Wrong! and Bill Gross on Investing.
May you have a pleasant week and find this reading to be valuable to your financial education.
Empty Nesting/Successful Investing
October 2, 2006
Hello, hope everyone had a pleasant and enjoyable weekend. We have officially entered the 4th quarter of 2006 and all eyes seem fixated on the major market averages with the stakes being a new all-time high for the DJI. For this week's "Outside the Box," we turn our attention towards a recent article by PIMCO's Managing Director and widely heralded "Bond King," Bill Gross.
Bill currently manages the largest bond fund in the world, the PIMCO Total Return Fund. PIMCO is one of the largest specialty fixed income managers in the world with its office headquartered in Newport Beach, CA and many offices spanning the globe.
In his article "Empty Nesting/Successful Investing," Bill shares what Texas hold'em and Blackjack can teach us about investing in today's markets. He goes on to further explain the importance of knowing yourself as well as separating volatility from risk. I hope that you enjoy this edition and continue to find value in reading the opinions of others.
No Cuts, No Butts, No Coconuts
September 4, 2006
The markets have been forced to digest a plethora of events over the past several years, ranging from continuous geopolitical turmoil to a new Fed chairman, from blowups like the Refco scandal to an inflated housing market, each of these occurrences has raised considerable coverage from the financial press yet one cannot lose sight of the longer term trends (and threats) that still loom. The most obvious, and potentially most significant, is the coming generational aging of the boomer generation and the subsequent healthcare conundrum.
This week's "Outside the Box" will feature an article by the widely proclaimed "Bond King," Bill Gross, on the impact of boomer retirement and what that means for healthcare, the workforce and social security. Many of you will find some of his comments controversial. I do not agree with his analysis on tax cuts, as an example. But he is right about the issues which will face us as a generation attempts to retire without having saved enough assets to do so, either as individuals or as a country.
My long term readers are familiar with Bill as he is a Managing Director at PIMCO. During his tenure there, he has become regarded as the most prominent figure in the fixed income sector while at the helm of the largest bond fund in the world, the PIMCO Total Return Fund. PIMCO is one of the largest specialty fixed income managers in the world, with more than $617 billion in assets under management and more than 800 employees in offices in Newport Beach, New York, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong.
May you find value in Bill's "outside the box" commentary and enjoy a safe and fun-filled Labor Day.
*@?#»! Bond Trading and the Tyranny of Indexation
April 3, 2006
I religiously read Bill Gross of PIMCO. I particularly enjoyed this month's piece. Gross is talking to his clients about the problems of bond investing. Given that he sits on top of the biggest pile of bonds in the world, I find it always useful to pay attention to him. This month he discusses the problem of valuation, risk and indexing. He comes to some novel conclusions. Let me quote one line deep into the piece:
"What I'm suggesting is essentially this: to be successful in the future a money manager/plan sponsor must in today's market be willing to embrace more risk outside of index space by accepting (remarkably) less risk in absolute space. Ultimately your absolute returns should benefit and the volatility of those returns may in fact be significantly lowered."
This is a piece that is truly Outside the Box. Enjoy.
Secrets
December 5, 2005
Whether short term rates are high today is one of the louder debates among economists. And why are long rates so low? Will an inverted yield curve mean what it has for the past 40 years, i.e., a slowdown and/or a recession?
This week's letter is a recent essay by Bill Gross, the Managing Director of Pimco, also known as the Bond King. Gross sits on top of the largest pile of bonds in the world. He thinks short term rates are high and nearing a peak for this cycle and that the economy will begin to slow down next year. He includes the main points, sent to their investment committee, which Pimco is looking at when viewing the bond market.
Will he be correct in his assessment of rates? When someone as large as Pimco offers their view of the market, we should keep an eye on them and that is why this was picked for Outside the Box.
The Strange Tale of the Bare-Bottomed King
May 23, 2005
This weeks article comes from one of my must read economic analysts, Bill Gross of Pimco. Bill sits on top of the largest pile of bonds in the world and is often referred to as the Bond King. His latest Investment Outlook is called "The Strange Tale of the Bare-Bottomed King." Pimco had a Secular Forum in May and this is Bill Gross's take on some of the issues discussed.
Bill sees our current prosperity built not on productivity and technology but on finance-based consumption fed from asset appreciation based on the [Fed's] Pump. He worries about increased market liquidity, leverage and systematic risk. While he does not predict when and how the imbalances will change, he clearly believes it must (as do I). Let's hope it is an orderly and not a precipitous event.
I have talked a lot about Bretton Woods 2 recently and that is why this was picked for Outside the Box.
Putting the World to Rights Again
October 4, 2004
This week's letter is from Financial News Online. Located in London, they are one of the leading sources of information about Europe's investment banking, fund management and securities industries. Financial News ran a piece last week that was a series of letters over the summer between two of my all time favourite analysts, Bill Gross of Pimco and Stephen Roach of Morgan Stanley.
Gross and Roach exchanged letters over the summer expressing their outlook on many current economic issues and allow us a glimpse into how they perceive the world today. One of the main concerns in their discussion was the U.S. dollar and they wonder if the "Buck is going to Duck?" I hope you enjoy their bantering as much as I did and it helps you think "Outside the Box."