Stocks higher? PIMCO manager says don't bet on it!

Discussion in 'Wall St. News' started by crgarcia, Dec 29, 2009.

  1. Stocks higher? Famed investor says don't bet on it

    Mohamed El-Erian, Co-Chief Executive Officer and Co-Chief Investment Officer of PIMCO, talks about sovereign wealth funds in New York. El-Erian a 51-year-old investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.

    Mohamed El-Erian, Co-Chief Executive Officer and Co-Chief Investment Officer of PIMCO, talks about sovereign wealth funds in New York. El-Erian a 51-year-old investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.
    Mutual fund investors should get a feeling of satisfaction when they read their year-end statements.

    A fourth-quarter blip padded the already huge gains that recovering stocks and funds enjoyed in 2009. Among the year's top performers: Funds that focused on high-tech stocks, materials producers and gold.

    The best performances came from parts of the market that investors will benefit from a recovery in the world's economy.

    Stocks were heading to a narrowly mixed finish Wednesday as rising commodities prices offset losses that followed a disappointing report on housing.

    Gains in commodities drove the shares of energy and materials-producing companies higher, helping to underpin the market. Gold, oil and other commodities rose as the dollar dropped.

    The dollar snapped a four-day winning streak as new data on housing and consumer spending reinforced investors' belief that the recovery will be slow.

    Stocks plunged Friday, erasing all of the previous day's big gains, as a drop in consumer spending fanned worries that the economic recovery won't be sustainable.

    Major stock indexes tumbled, including the Dow Jones industrials, which gave back all of Thursday's 200-point gain. Banks as well as energy and materials companies posted the biggest losses.

    The stock market fell for the first time in five days and Treasurys slipped after a jump in inflation stoked concerns that the Federal Reserve would be forced to raise interest rates.

    Stocks extended their losses late in the day Tuesday after General Electric Co. forecast that revenue and earnings would be largely flat in 2010.

    Major stocks indexes fell 0.5 percent from 14-month highs, including the Dow Jones industrial average, which lost 49 points.

    With interest rates low and lending standards lower, credit became the currency of the decade.

    Exotic mortgage products helped housing prices more than double. Consumer spending shot up more than 48 percent - even while wages stagnated - as shoppers snapped up big-screen TVs, gadgets like iPhones and fashion labels like Gucci and Jimmy Choo.
    AP Business Writer

    NEW YORK -- Homes are selling at their fastest clip in nearly three years, the unemployment rate is falling and stocks are up 66 percent since their March lows - the best performance since the 1930s.

    What's not to like?

    Plenty, according to Mohamed El-Erian, chief executive of giant bond manager Pimco. The investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.

    "We're on a sugar high," El-Erian says. "It feels good for a while but is unsustainable."

    His point: This burst of economic activity fed by government spending and near-zero interest rates will soon peter out.

    As CEO at Newport Beach, Calif.-based Pimco, El-Erian, 51, oversees nearly $1 trillion in assets, more than the gross domestic product of most countries. So when he talks, people listen.

    What he's saying now:

    -Stocks will drop 10 percent in the space of three or four weeks, bringing the Standard & Poor's 500 index below 1,000 - though he's not predicting when.

    -The unemployment rate will be hovering above 8 percent a year from now.

    -U.S. gross domestic product will grow at an average 2 percent or so for years to come - a third slower than we're used to.

    El-Erian and his famous partner, Pimco founder Bill Gross, are watched closely because they've made investors a lot of money over the years. The Pimco Total Return Fund, which at $203 billion is the world's largest mutual fund, has returned an average 7.6 percent annually over 10 years, after fees, versus 6.3 percent for Barclays Capital U.S. Aggregate fixed income index fund.

    The hotshots at Pimco have made money by anticipating big moves in the economy and interest rates way before other investors. In the depths of the financial crisis last year, for instance, Pimco sold some of its Treasury bonds to panicked investors looking for a safe haven and put the proceeds into government-backed mortgages and bank debt - in time to catch the big upswing in prices of those and other riskier securities this year.

    Now Pimco is once again changing tack. El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing. So he's buying Treasurys and selling riskier stuff.

    His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid.

    At Total Return, government-related securities, including Treasurys and corporate debt backed by Washington, comprised 48 percent of the fund's holdings in September. That was up from 9 percent at the beginning of the year. One of Pimco's newest funds, the Global Multi-Asset Fund, a hybrid stock-bond offering, is 35 percent in equities now, down from 60 percent earlier this year.

    Investors betting on stocks or high-yield bonds are likely to be disappointed, El-Erian says.

    Markets for those securities are rallying not because people like them but because they hate the puny yields of safer investments like money markets and feel they have no choice but to buy, he says. He quips that that makes the bull market as likely to last as a forced marriage.

    The danger: If stock and junk bond prices start falling, lots of investors are likely to bail, feeding the drop.

    Of course, there are plenty of true believers in the bull who are not buying the El-Erian line.

    James Paulsen, chief strategist at Wells Capital Management in Minneapolis, with $355 billion under management, has been pounding the table for months to buy stocks. Just like in the early 1980s, the recovery will take the form of a "V," he says. The reason: Companies have cut inventories and payrolls to the bone, so just a little revenue growth could translate into a bumper crop of profits.

    El-Erian says many of the bulls don't appreciate just how much the government props still under the economy are masking its weakness. Instead of focusing on the fundamentals today, he says, they're looking to the past, expecting a quick economic rebound because that's what's happened before.

    We're trained to think the "farther you fall, the higher you'll bounce back," El-Erian says. "We're hostage to the V."

    El-Erian says he learned to be open to many different views on the world (and markets) from his father, an Egyptian diplomat who insisted on reading several newspapers everyday, both on the right and the left. El-Erian had hoped to become a college professor. But when his father died, he took a job at the International Monetary Fund to support the family. He rose through the ranks, eventually becoming deputy director.

    In 1999 he joined Pimco, where he quickly made a name for himself with some prescient bets on emerging markets.

    One of his biggest wins: selling Argentine bonds in 2000 while they were still popular with investors. When the country defaulted the next year, the emerging markets fund that El-Erian managed returned 28 percent versus negative 1 percent for the Emerging Market Bond Index. He eventually left to head the group that manages Harvard University's massive endowment, returning to Pimco in January 2008 in time catch the depths of the financial crisis.

    El-Erian says we've probably seen the worst of the crisis but consumers, and not just Washington, need to start spending again for the recovery to really take hold.

    He doesn't expect that to happen soon. Like in the Great Depression, Americans are saving more and borrowing less - a shift in attitudes toward family finances that Pimco thinks will last a generation.

    That, plus the impact of more regulation and higher taxes, El-Erian says, will crimp growth for years to come.

    Whatever the merits of that view, Pimco is not exactly knocking the lights out right now. So far this year, the Total Return Fund has returned 14 percent, impressive in normal times but no better than average for similar funds during the rally, according to Morningstar. The 19.1 percent return for Global Multi-Asset, which El-Erian co-manages, lags two-thirds of its peers. El-Erian says he sold equities "too early" but is convinced his view on the market will prove correct - even if it strikes many as a tad too pessimistic.

    "I'm calling it as I see it," he says. "I'm not optimistic or pessimistic - I'm realistic."
  2. He's basically in Hugh Hendry's camp.

    Interesting. I wonder how he reconciles the massive funding needs of the US govt over the course of the next few years and being long treasuries (assuming he is buying duration).
  3. A smart guy, now doubt - we know that he's made himself fabulously rich. However, he's been yakking about "sugar highs" and "new normals" for the last 2500 Dow points. He's sure to be right at some point.
  4. The problem here is he is using valuation arguments to try to forecast short-run prices. Anyone who has traded or invested for a while knows that valuation has nothing to do with short-run price movements. It is useful for forecasting returns over the very long-term e.g. 7-10 years, but not for 1-2 year timeframes, and it definitely can't forecast 10% up or down moves over a few months.
  5. Saves us the time. What's the problem with the cut and paste so long as the source is annotated?
  6. You're a moderator, and you're asking _me_ about copyright? Obviously it's wrong to cut/paste copyright material in its entirety (as versus snips that fall under "fair use").
  7. I'm not asking you about copyrights. You said what's the point of copy/pasting when one can click the link? I said it saves us the time of going to a third party news site. And as long as the source is quoted properly, I don't see an issue.

    FYI, this article was not reported on by the Miami Herald. It was picked up by Reuters and the AP and carried on about a hundred or so news sites.
  8. AP, Reuters and other copyright holders sell their content via various delivery channels -- newspapers among them. The revenue from those channels enables them to stay in business. In turn, the channels pay money for AP content so as to be able to display it along with associated ads. That's how they make a living. When someone cut/pastes an entire article onto a chatboard, it does indeed enable readers to read it without looking at the original web page, with its associated ads or other revenue-generating functionalities. That's the point. They're providing worthwhile content in return for some eyeball time on their site. This is why copyright exists -- if I could just print up copies of book or web content and sell them on 14th St, the original content provider would be robbed of the revenue strea
  9. It is legal to copy/paste as long as you state the source, and you are not profiting from it.

    Discussion forums entice freedom of speech.
    #10     Jan 4, 2010