Equity Gains Likely to Continue, But at a Slower Pace (Doll)

Wednesday, February 29th, 2012

by Bob Doll, Chief Equity Strategist, BlackRock

Markets Climb to 12-Month Highs

Stock prices rose again last week, although at a more labored pace than has been the case for most of 2012. For the week, the Dow Jones Industrial Average rose 0.3% to 12,982 (and did move above the psychologically important 13,000 level a few times), the S&P 500 Index advanced 0.3% to 1,365 and the Nasdaq Composite climbed 0.4% to 2,963. With these gains, markets have reached new 12-month highs and have rallied close to 25% from their low point of October 2011.

A Quiet Week for the Economy, But Good News Nonetheless

It was a relatively subdued week in terms of economic data, with the highlight perhaps being the weekly initial unemployment claims, which were unchanged (a stronger-than-expected result). This data helps confirm that improvements in the labor market have been gaining traction. This Friday we will see the February employment report and most economists are calling for a new jobs number of 200,000 or higher with a flat or perhaps slightly lower unemployment rate.

One area of the economy that has long been troubled is the residential housing sector, but this area of the economy is beginning to show some limited signs of improvement. New home sales, mortgage applications and home building levels are all showing some gains and the large inventory of unsold homes is beginning to clear. We believe that the housing market remains in the midst of a multi-year bottoming process that began in 2009 and we expect that residential construction will be a modest positive contributor to growth in 2012, as it was last year.

From a global perspective, the world economy has experienced a decent start to 2012, but the ongoing recovery does have some risks and question marks. Fiscal policy remains tight in some quarters of the globe and there is still room for easing (as we saw with the Bank of Japan’s recent decision to enact some new quantitative easing measures). Additionally, ongoing debt deleveraging remains a concern, as does the recent move higher in oil prices. Of course, we would also add the ongoing European debt crisis to the list of issues that could potentially disrupt the global economy’s positive momentum.

Climbing Oil Prices Spark Concerns

Several of the risks that we have been discussing for some time now have ebbed over the last several months, such as the removal of the uncertainty over the US payroll tax cut extension, some additional clarity over the Greek debt restructuring and China’s policy easing and likely economic soft landing. An additional risk, however, has surfaced in the form of higher oil prices. The oil price spike from early 2011 is fresh in investors’ minds and the recent advance in oil prices has some wondering whether history will repeat itself. Last year’s price spike came as a result of social and political unrest throughout the Middle East and in North Africa and this year escalating geopolitical tensions with Iran has been the primary culprit.

While higher oil prices are unambiguously a negative for global economic growth and have the potential to act as a drag on equity markets, the scale of the recent increase has still been relatively modest. To put it in context, oil prices have advanced by around 20% over the last few months. In contrast, oil jumped 50% between September 2010 and March 2011. While higher oil prices bear watching, we would not consider oil a significant risk unless the price increase grows more severe.

Further Gains for Stocks?

The impressive advance we have seen in stock prices over the past several months has largely come about from a string of positive economic news and the absence of the emergence of additional downside risk. In other words, a few months ago, stocks were priced for a weaker macro environment than the one that has come to pass. So what will it take for stocks to continue to move higher? We believe we would need to see some broader improvements in economic data and/or further political progress in terms of reducing macro uncertainty.

Regarding that second point, last week’s announced Greek debt restructuring deal should help reduce some uncertainty, assuming the measures are successfully implemented. There was little market response to the announced deal as it generally met investors’ expectations and there is still more work to be done on this front. We expect the situation in Greece to worsen from both a fiscal and social perspective, but we also believe that the debt restructuring will move forward.

Equity risk premiums have fallen in recent months as markets have rallied and we do believe that there is room for further advances. At the same time, however, we expect the pace of price appreciation to become slower and more uneven. As we have been saying for the last couple of weeks, we would not be surprised to see some sort of pullback or correction in the near term, but we also believe that stock prices will end the year higher than where they are today.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Sources: BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of February 27, 2012, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Copyright © BlackRock

Tags: Bank Of Japan, Bob Doll, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Employment Report, Fiscal Policy, Global Perspective, Housing Market, Initial Unemployment Claims, Mortgage Applications, Nasdaq Composite, New Jobs, Question Marks, Residential Construction, Stock Prices, Strategist, Unemployment Rate, World Economy
Posted in Markets | Comments Off

LTRO 2: Goldman’s Take

Wednesday, February 29th, 2012

Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a “positive.” We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is “fade”, at least until the next major crisis.

Banks take out ECB “funding insurance”

The ECB has today – through its long-term refinancing operation (LTRO) – fully allotted €529 bn of 3-year funds to 800 banks. Together with the first auction, the ECB has now injected €1 trn of 3-year funds into the system. This is an extremely high amount and equals, for example, 131% of total (249% unsecured) European bank bond maturities in 2012 and 72% (130% unsecured) for 2012 and 2013 combined. European banks are now effectively pre-funded through to 2014.

Funding stabilized, revenues supported

Large take-up is an important positive. Key reasons are: (1) banks are now largely insulated from shocks in the funding market, having prefunded through 2014; (2) consequently, the costs of bank and sovereign funding have now been detached; (3) pressures for forced deleveraging should reduce (first evidence of this is visible in the recent ECB loan data); (4) deposit pricing pressures should fall (this too is already taking place), resulting in a positive revenue effect.

Country aggregates in coming weeks

While the focus is on the aggregate take-up, we see country aggregates as arguably more important. Over the course of the next weeks, we will get disclosure of country aggregates where we expect the Spanish and Italian take-up figures to be high.

ECB’s actions expand the investable group

We derive our group of ‘investable’ banks by: (1) incorporating P&L effects of ECB action; and (2) overlaying these estimates with ‘extreme’ credit losses (as per the EBA stress test). Within this group, our Eurozone top picks are Erste Bank, BBVA, BNP Paribas (all Conviction Buy), and Intesa Sanpaolo (Buy).

We identify banks likely to be “disproportionate beneficiaries” of the ECB LTRO including: Banesto (Buy), Banco Popular Espanol (Not Rated), BancoPopolare, Banca Monte dei Paschi di Siena and UBI Banca (all Neutral).

Tags: Aggregates, Bn, Borrowings, Candy Bar, Cog, Condoms, Debt Problem, ECB, European Banks, Eurusd, Excess Debt, First Evidence, Goldman, Key Reasons, liquidity, Loan Data, Maturities, Shocks, Trillions, Trn
Posted in Markets | Comments Off

Dow Jones – Hi or Lo?

Wednesday, February 29th, 2012

This Week: SPDR DJIA TRUST Ticker: DIA / NYSE

The Dow Jones Industrial Average just touched the 13,000 level this week after nearly four years. Where to from here? Well, the mountain is high. The valley is low. We think it will climb, but not without woe.

The biggest woe is Greece. The indebted nation agreed a $170 billion rescue plan, but will only get the money if its government fires workers, slashes pensions and wages, and raises taxes, all by month’s end. Greeks are rioting and opposition leaders are threatening reversal.

Private holders of Greek bonds are being squeezed too: for every 2 bonds they hold, they’ll be offered a new one that is longer-dated and lower-yielding. If enough holders refuse the offer, Greece could default. There will be more on this by March. Until then, global equity markets will remain nervous.

A European recession would be woe #2. For all their sanctimonious lecturing, France and especially Germany profited from exports to their spendthrift, Euro-neighbors. But two years of fiscal clampdown have hurt economic growth. Now further austerity threatens to push it into recession.

The austerity hurt Chinese exports. And growth within China was dampened by central bank efforts to tame inflation and speculation, especially in housing (nothing we’d know about in Toronto). Slower growth in China will have a knock-on effect, especially on us hewers and diggers, but more broadly too.

Short-term technicals are also bearish. After climbing for five straight months, the Dow is showing signs of fatigue. Our proprietary indicator suggests a pull-back of about 5% in the next few weeks.  Also, since the start of February, the DJ Industrials has been climbing alone. The DJ Transportation Index, more closely tied to economic fundamentals, has lagged by 5.6%. Not a good sign.

This list of woes suggests a short-term correction for markets. Let’s get to the positives. What will take us higher on the Dow after the correction? Three things: stocks are cheap, bond yields are thin and the economy is improving.

Quality stocks are cheap by several measures. The Dow is trading at 13.3 times its earnings, near the bottom of its long-term range, as prices have lagged earnings growth. The Dow’s earnings-per-share is up 134% from the March 2009 lows, while the Dow’s price is up 70%. True, earnings growth has plateaued in the last two quarters, but that still leaves a large gap.

In the same period, corporations have drastically cut debt levels, bringing it to par with equity and the lowest level in over a decade. Little debt, lots of profit…it’s no wonder dividend yields have risen to 2.5% and are expected to rise further. Compare that to a yield of 3.2% on a similar quality 10-year bond.

From the technicals, looking past the next few weeks and out to the next few quarters, the view is positive too. Though not quite there yet, our proprietary indicator is near a Buy levels not seen since March 2009. A correction in the short term would put it firmly in the Buy camp. And while the recent new year rally has been on relatively light volumes, we expect low valuations and good dividend yields will lure investors back in.

Finally, the economy: It’s improving. Manufacturing and services have continued to gain. Unemployment is down, with initial jobless claims falling to the lowest level in four years. Consumption is rising again. Housing prices have bottomed.  The yield spread – the difference between long and short term interest rates – remains healthy at about +1.9 percentage points. Over many decades, this spread has proved an excellent recession forecaster, besting all economists. When it turns negative – that is, when the rate on a 3 month loan is higher than on a 10 year – watch out.

There are a couple of Exchange-Traded Funds to consider for the Dow Jones Industrial Average. The first is the SPDR DJIA ETF (DIA/NYSE), traded in U.S. dollars in New York. The second is the BMO DJIA Hedged to C$ ETF (ZDJ/TSX). Both are plain vanilla and hold all the 30 shares of the Index. For Canadian investors, with ZDJ you avoid a currency trade and you’re returns will mimic those received by a U.S. investor, regardless of how the U.S. dollar does against the Loonie.

The archerETF Global Tactical Portfolio

archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

Please call us at TF 1-866-469-7990 for more information.

Tags: Austerity, Bond Yields, Canadian, Canadian Market, Chinese Exports, Clampdown, Dj Industrials, DJIA, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Fundamentals, Global Equity Markets, Greek Bonds, Nyse, Opposition Leaders, Private Holders, Signs Of Fatigue, Slashes, Spendthrift, Tame Inflation, Technicals, Transportation Index
Posted in Markets | Comments Off

iBubble: Apple’s Market Cap Is Now The Same As The Entire Retail Sector, Bigger Than All The Semis

Wednesday, February 29th, 2012

This is simply stunning: one company, which has two flagship products, has a bigger market cap than the entire Semiconductor space, and is just shy of the entire S&P Retail sector.

The 216 hedge funds in the name as of December 31 is hopelessly stale. We are certain that by now this number is at least 250, if not 300.

Sustainable:

Tags: Amp, Apple, December 31, Flagship Products, Hedge Funds, Market Cap, Retail Sector, S Market, Sector Funds, Semiconductor Space, Semis
Posted in Markets | Comments Off

Silver Surges 4.5% To Over $37/Oz On “Massive Fund Buying”

Wednesday, February 29th, 2012

From GoldCore

Silver Surges 4.5% To Over $37/Oz On “Massive Fund Buying”

Gold’s London AM fix this morning was USD 1,788.00, EUR 1,329.96, and GBP 1,120.79 per ounce..

Yesterday’s AM fix was USD 1,774.75, EUR 1,321.48, and GBP 1,120.42 per ounce.

Cross Currency Table – (Bloomberg)

Gold rose 1% in New York yesterday and closed at $1,783.90/oz. Gold rose in Asia to a high of $1,790.16 it’s highest since mid November then edged down.  Europe this morning saw sideways trading until unusually volatile trading around the London AM fix saw gold rise from $1785.oz to over $1790/oz at 1030 GMT and then fall quickly to $1783/oz.

Spot silver has gained another 0.5% to $37.05 an ounce, after surging 4.5% yesterday once it rose above resistance at $35.50/oz. Silver reached a 5 month high of $37.21 but remains more than 30% below its nominal high in of April last year of $48.44.

Silver Spot $/oz – (Bloomberg)

Over 800 European banks have taken €529.5 billion from the ECB today after taking €489 billion euros at the first tender in December. The ECB’s 3 year lending is now near 1 trillion euros ($1.35 trillion) and the ECB’s balance sheet looks increasingly precarious.

Although the flood of paper has been credited with fuelling a rally on Europe’s distraught bond markets and safeguarding the region’s banks, it is another exercise in kicking the beer keg down the road as it fails to address the fundamental issue which is the insolvency of many European banks and many European nations and the obvious risk of contagion from that.

The continuation of ultra loose monetary policies increases the risk of inflation which will benefit gold which is an excellent inflation hedge. Extremely low yields on deposits and “risk free” sovereign debt means the opportunity cost of carrying non yielding bullion remains very low.

Spot silver gained 0.4% to $37.05 an ounce, after surging 4% and hitting a 5 month high of $37.21 in the previous session.

Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily.

Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors.

This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months.

There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.

Very bullish is the fact that silver also remains more than 30% below its record nominal high 32 years ago in 1980 and more than 75% below its inflation adjusted high of $140/oz in 1980.

The gold-silver ratio dropped to its lowest level in 5 months, after silver rose more than 12% so far this month and an enormous 34% this year, outperforming other precious metals.

Rising holdings of silver-backed ETF’s also indicated growing investor interest in the metal. The overall silver Exchange Traded Funds holdings rose to 491.079 million ounces, the highest since last May.

Spot platinum gained nearly 0.5% to $1,722.24, as investors await the latest in Impala Platinum’s dealing with an illegal strike that has disrupted production at Rustenburg, the world’s largest platinum mine.

For breaking news and commentary on financial markets and gold, follow us on Twitter.

OTHER NEWS
(AP) — Silver Prices Jump, Playing Catch-up to Gold
Silver prices shot up 4.5 percent Tuesday, playing catch-up to gold.

Silver is both a precious and an industrial metal. Traders can buy it to hedge against a volatile stock market, as they do with gold. But it can also be used to make products like computer chips, meaning prices can rise when traders expect demand from manufacturers to go up.

In March contracts, silver rose $1.616 to $37.14 per ounce. It’s up roughly 10 percent from where it was a year ago. Sterling Smith, senior market analyst at Country Hedging in St. Paul, Minn., said part of the reason silver is surging is that traders believe it’s undervalued compared to gold. Gold closed at $1,788.40 an ounce, up $13.50 for the day. It’s up about 26 percent compared to a year ago.

Copper rose 3.15 cents to $3.912 per pound, and platinum rose $9.20 to $1,723.50.

Energy contracts fell, partly because investors were pulling back after price gains last week. Oil prices remain close to nine-month highs because of concerns that Iran could cut shipments of crude to Europe and interfere with supplies elsewhere. The European Union and the U.S. are using sanctions against Iran because they fear the country is developing a nuclear weapon.

Benchmark oil fell $2.01 to finish at $106.55 per barrel on the New York Mercantile Exchange. Natural gas prices fell 8.5 cents to end at $2.627 per 1,000 cubic feet. Heating oil fell 6.28 cents to $3.2201 per gallon.

Smith said grains and other agricultural products have been enjoying a “winning streak” for the past week. Those movements are especially important now as farmers decide what to plant this year.

Soybean prices on Monday topped $13 a bushel for the first time in five months. That’s because traders think there will be greater demand for U.S. exports of the protein-rich beans because smaller harvests from South America are expected.

On Tuesday, soybeans for March delivery rose less than 1 percent, to $13.125 per bushel from $13.025. March wheat rose 15.5 cents to finish at $6.6825 per bushel. Corn ended up 8.75 cents to $6.5725 per bushel.

The price of orange juice also rose. Cocoa and sugar fell.

(Bloomberg) – Gold-Oil Correlation Rises to Eight-Month High
Gold’s strengthening correlation with oil means more gains for the metal as Brent near a nine- month high spurs demand for an inflation hedge, UBS AG said.

The CHART OF THE DAY shows Brent prices reached $125.55 a barrel in London on Feb. 24, the highest since early May, and are up 15 percent this year. Bullion has gained 14 percent in the period and reached $1,787.55 an ounce last week, the highest since Nov. 14. The 30-week correlation coefficient between the commodities rose to 0.61 today, the most since June. A figure of 1 means the two always move in the same direction.

Gold’s “rolling correlation with oil is slowly inching higher and we think this signals that some catching up lies ahead,” Edel Tully, an analyst at UBS in London, wrote today in a report. “To the extent that rising oil prices feed into higher inflation expectations, gold is bound to reap benefits.”

Some investors buy gold to hedge against accelerating consumer prices and as a protection from slowing growth and geopolitical risk. The metal, which generally earns holders returns only through price gains, rallied for an 11th year in 2011 as central banks in Europe and the U.S. kept interest rates near record lows. Oil advanced this year on concern the west’s dispute with Iran over the Islamic republic’s nuclear program may lead to a disruption in exports from the Middle East.

Investors are holding a record 2,398.2 metric tons of gold in exchange-traded products backed by the metal, valued at about $137.1 billion, according to data compiled by Bloomberg. The tonnage exceeds the holdings of all but four central banks, which are expanding reserves for the first time in a generation.

The Islamic republic has threatened to close the Strait of Hormuz, a transit point for about 20 percent of globally traded crude oil, if its exports are banned in sanctions. While UBS forecasts Brent at $110 a barrel in the second quarter, “any Iran-related headlines, military threats or small incidents in the Persian Gulf are likely to push oil prices sharply higher and potentially boost gold in turn,” Tully said.

(Bloomberg) – Oil Set for Best Month Since October on Recovery Signs, Iran
Oil rose, heading for its best month since October in New York, amid signs of economic recovery and concern that tension with Iran threatens global crude supplies.

West Texas Intermediate futures climbed as much as 0.6 percent after sliding yesterday the most in five weeks. Industrial output in Japan and South Korea beat estimates and U.S. consumer confidence rose to the highest level in a year. Oil has advanced 8.8 percent in February, its first monthly gain in three, as sanctions tighten against Iran, OPEC’s second- biggest producer.

(Bloomberg) – Impala Says Strike Halts 2 Billion Rand of Platinum Output
Impala Platinum Holdings Ltd. said 100,000 ounces of output, equivalent to sales of 2 billion rand ($265 million), was halted by a strike at its Rustenburg mine.

The company, based in Johannesburg, is working to resume output at the world’s biggest platinum mine after bringing back 9,800 of 17,200 staff fired during the illegal strike, Impala said today in a statement. About 15,800 didn’t join the strike.

“It is dependent on operational turnout of staff,” Impala said. Fired workers have until tomorrow to return on their prior terms after the walkout, which has entered a sixth week.

SILVER
Silver is trading at $37.14/oz, €27.64/oz and £23.30/oz.

PLATINUM GROUP METALS
Platinum is trading at $1,723.00/oz, palladium at $710.00/oz and rhodium at $1,475/oz.

NEWS

(Reuters)
Gold edges up ahead of ECB loan offer‎

(Reuters)
Silver up 4 percent, gold races toward $1800 on ECB

(Reuters)
Iran to accept payment in gold from trading partners

(The Financial Times)
Tehran considers trade payments in gold

COMMENTARY

(The Globe and Mail)
Don Coxe on Why Buffett Has Gold All Wrong

(MarketWatch)
Buffett rebuffs gold, but inflation says ‘buy’‎

(Chatham House)
Gold and the International Monetary System

(The Washington Post)
UBS’s Hickson Expects Gold Will Rise to $2025 in 2012‎

(Zero Hedge)
Silver Explodes As DJIA Closes Above 13,000

Tags: agricultural, Balance Sheet, Beer Keg, Bloomberg, Bond Markets, Bullion, Contagion, Currency Table, ECB, Eur 1, European Banks, Fundamental Issue, Gbp, Insolvency, Monetary Policies, Opportunity Cost, Ounce, Silver Spot, Sovereign Debt, Spot Silver, Trillion
Posted in Markets | Comments Off

The Outlook for Oil

Wednesday, February 29th, 2012

“Are we headed for another oil shock and if so what are the investment implications?” Many investors are asking these questions given recent developments in the Middle East and Africa.

Tensions have been escalating lately in the Middle East. Western countries have sought to contain Iran’s nuclear program by imposing new sanctions. Meanwhile, there’s a growing perception among market watchers that Israel has a dwindling window of time if it’s going to attempt any military action against Iran’s nuclear research. Elsewhere, the market has also had to contend with growing unrest in Nigeria, a country that produces two million barrels of oil daily.

As such, it’s easy to see why the price of crude is once again climbing and why investors are wondering about prices rising further.

So what could cause even higher prices? Should Israel attack Iran, it’s possible that Iran would at least attempt to prevent the passage of oil through the Strait of Hormuz, a narrow water way through which 20% of the world’s oil passes. If this happens, at least a temporary oil spike would probably occur. While it’s doubtful that Iran has the military capacity to close the Strait for any length of time, even an attempt would likely push oil north of $150 a barrel.

To be sure, it’s difficult to predict the odds of an Israeli strike and a major escalation in oil prices. But even in the absence of an attack, crude prices are likely to remain elevated for three reasons, supporting my view that investors should consider overweighting global energy companies through instruments like the iShares S&P Global Energy Sector Index Fund (NYSEARCA: IXC).

First, it appears that most emerging markets are likely to engineer a soft landing. This is important as virtually all new demand for energy is currently coming from emerging markets.

Second, while Saudi Arabia and OPEC have spare capacity, this capacity will be stretched if Iranian production slows or an oil embargo takes place. It would likely not be able to adequately cover replacing Iranian and Nigerian production, as well as production from other smaller Gulf countries also experiencing unrest.

Finally, even if oil reaches more than $100 a barrel, many of the largest oil producers — including Saudi Arabia and Russia — are unlikely to ramp up production as they might have in the past. This is because the largest oil producers now require much higher oil prices to balance their budgets.

In short, even without a military confrontation in the Gulf, I expect oil prices to remain high for the near term and I continue to advocate an overweight to global energy companies.

Source: Bloomberg

Disclosure: Author is long IXC

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility.

Tags: Crude Prices, Emerging Markets, energy sector, Global Energy Companies, Index Fund, Investment Implications, Ishares, Military Capacity, Narrow Water, Nuclear Program, Nuclear Research, Oil Embargo, Oil Prices, Oil Shock, Opec, Saudi Arabia, Sector Index, Water Way, Western Countries, Window Of Time
Posted in Markets | Comments Off

The Bull Market in Stocks Looks Set to Continue – For Now

Wednesday, February 29th, 2012

Guest contribution by Dominic Frisby, MoneyWeek

There are, as I see it from the vantage point of my South London hide-out, two huge financial forces at work in the global economy.

We have the natural forces of deflation. Debt being paid down, credit tightening, houses being put in order – the inevitable deleveraging after a period of excess.

And we have the artificial forces of inflation. Systematic currency devaluation – the printing of money to buy bonds and supress interest rates in an attempt to re-inflate asset prices and stimulate growth.

The secret of success as far as trading equity and bond markets is concerned has been to correctly identify which force is dominant. In other words, to figure out whether or not we’re in an inflationary or deflationary cycle.

But how can you tell? And which are we in now?

Which way will the market head next?

Although things have slowed over this past week, we do still seem to be in an inflationary phase as far as stock markets are concerned. But are markets topping out before the next inevitable phase of deflation? Or is this a gentle slowing before the next bout of price rises? How does one know?

I suggested a simple method of technical analysis last week that takes the thinking out of the decision-making process – thinking can be a dangerous thing after all.

Nevertheless, we all do it at least some of the time. And I’ve been thinking hard this week about other ways to identify whether we’re in an inflationary or deflationary phase. And I may have come up with something.

Just as gold is a key holding of any hard-core inflationist, so government bonds make up a large portion of any hard-core deflationist’s portfolio. The US government bond market is the biggest market in the world. It can reveal a great deal about where money is flowing.

In the chart below you can see US government bond prices (in black), and the S&P 500 (in green), between 1981 and 2001.

As you can see, US government bonds, which had a rotten time of it during the inflationary 1970s, have been in a bull market since late 1981. And broadly speaking, for much of the time, they traded in the same direction as equities. When the S&P 500 rose, so did 30-year government bonds. When bonds fell, equities were either flat or they eventually fell too.

This was the case until mid-1998. Then they decoupled. Equities fell with the Asian crisis, while government bonds rose. When equities recovered, bonds fell. In other words, during equity routs, investors have flooded to the perceived safety of government bonds and bond prices have risen. When investors get greedy again and decide equities are OK, they move their money from bonds back into the stock market.

Here we see bonds and stocks from 1998 onwards. US bonds fell as equities rose into 2000. Then the bond market rallied to 2003, as equities fell in the dotcom bust. During the mega-run in equities between 2003 and 2007, US bonds traded in a range while equities surged ahead. Then bonds had a huge rally with the 2008 stock-market bust, fell with the subsequent rally from 2009, and then rallied with the bear market in stocks of 2011.

As you can see, US government bonds, which had a rotten time of it during the inflationary 1970s, have been in a bull market since late 1981. And broadly speaking, for much of the time, they traded in the same direction as equities. When the S&P 500 rose, so did 30-year government bonds. When bonds fell, equities were either flat or they eventually fell too.

This was the case until mid-1998. Then they decoupled. Equities fell with the Asian crisis, while government bonds rose. When equities recovered, bonds fell. In other words, during equity routs, investors have flooded to the perceived safety of government bonds and bond prices have risen. When investors get greedy again and decide equities are OK, they move their money from bonds back into the stock market.

Here we see bonds and stocks from 1998 onwards. US bonds fell as equities rose into 2000. Then the bond market rallied to 2003, as equities fell in the dotcom bust. During the mega-run in equities between 2003 and 2007, US bonds traded in a range while equities surged ahead. Then bonds had a huge rally with the 2008 stock-market bust, fell with the subsequent rally from 2009, and then rallied with the bear market in stocks of 2011.

The bond market is signalling that we’re back in inflation mode

But here’s the thing. Since the October 2011 low, the stock market has rallied some 30%. But the bond market has not suffered the corresponding falls you might have expected. It is trading damn near its all-time highs.

There are all sorts of possible reasons for this: money fleeing Europe, or the relative strength of the US dollar, for example – you could come up with any number of things.

But here’s what I’ve noticed. Below is the same chart as the one above, except in this case, I’ve popped in a red arrow to mark each time the US bond market (black line) has moved to the top of its range.

Now look at what’s happened to the S&P 500 (green line) in the subsequent few months. Can you see? Highs in the bond market have frequently anticipated rallies in the stock market. It even worked to a limited extent in the deleveraging fiasco of 2008.

Why am I mentioning this now? I don’t know how much lower interest rates can go – or how much higher US government bond prices can get. However, I wouldn’t have thought that yields can go much lower than this. If they do, and the bond market breaks above say 145, then I’m wrong and we’re probably into another deflationary phase. But for now we are certainly at the upper end of their range. I suggest that equities are not a sell until bonds move to the lower end.

Yes, I know that it goes against the grain to buy into anything after it’s just had a 30% move up. I know valuations are getting a little rich, particularly in tech stocks. I know that sentiment is a little too bullish. I can find a hundred reasons why equities are set to crash. And it may be that bonds and equities have re-coupled again after their 13-year divorce and, just as the Asian crisis separated them, the European crisis has re-united them. The jury is still out on that one.

But for now the bond market is telling me that the inflation trade – or that risk – is back on. That means that cash is not the place to be, but assets – be it gold, equities or commodities – are. I’m still looking for a correction in equities, by the way, but I don’t think it’ll be the big kahuna and so pullbacks could be a buying opportunity. If the bond market heads back to the lower end of its range – in the low 120s – well, that’ll be your cue to start heading back into the deflation bunker.

And just before I go: I’m heading out to Canada next week for the PDAC, which is the biggest mining conference in the world. All the great and the good – not to mention the dastardly and the incompetent – of the digging and drilling world will be there. I’ll let you know what I learn when I get back.

Copyright © MoneyWeek.com

Tags: Asset Prices, Bond Markets, Bond Prices, Currency Devaluation, Dangerous Thing, Dominic, Forces At Work, Frisby, Global Economy, Government Bond Market, Government Bonds, Hard Core, Large Portion, Moneyweek, Natural Forces, Secret Of Success, South London, Stock Markets, Us Government, Vantage Point
Posted in Markets | Comments Off

“Fun, Fun, Fun” (Jeffrey Saut)

Tuesday, February 28th, 2012

“Fun, Fun, Fun”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

February 27, 2012

“… and she’ll have fun fun fun ‘til her daddy takes the t-bird away.”

… The Beach Boys, 1964

Except in this case it should be “fund, fund, fund” because I am in the Washington/Baltimore area speaking at conferences, renewing contacts on Capitol Hill, and seeing mutual fund managers. Some of the folks I will be seeing hang their hats at Friedman, Billings & Ramsey; aka, FBR & Co. I remember when in 1989 Manny Friedman scraped together $1 million and departed the Washington-based brokerage firm of Johnson, Lemon & Co. to formed FBR with his two partners Eric Billings and Russ Ramsey. The firm became a research boutique focusing on financial companies spurred by Manny’s prescient “calls” on the banks and real estate. That focus continues to this day, punctuated by a sagacious portfolio manager named David Ellison, captain of the FBR Small Cap Financial Fund (FBRSX/$18.31). I used to chat with David back in the 1980s when he was at Fidelity managing Fidelity’s Select Financial Fund. Interestingly, David currently owns a number of the smaller banks I have commented on in these missives. Even more interesting is that David is my kind of investor since when he can’t find attractive investment opportunities he is content to hold cash. Case in point, unable to find attractive investments going into the 2008 financial fiasco David held 60% of his fund in cash. Indeed, my kind of investor. Accordingly, participants wanting to fill the financial sleeve of their asset allocation model should consider David’s fund.

I spoke with yet another fund manager last week when I hosted a conference call for our financial advisors with Tom O’Halloran, who manages Lord Abbett’s Developing Growth Fund (LAGWX/$21.85). In its space LAGWX is the number one performing fund on a five-year basis according to Morningstar [replay (855) 859-2056; password 49023178]. While that fund is currently closed to new investors, the good folks at Lord Abbett have started another fund run by Tom using the same investment style. The fund is called The Growth Leaders Fund (LGLAX/$15.67) and is representative of the “smaller more nimble” funds I have championed for more than 12 years. The conference call began with some comments from me about the current state of the economy and the stock market. I concluded by noting that while the economy is not going to slip back into recession, GDP is also not likely to grow by more than 3.5% for awhile. In such an environment companies that can increase their revenues and earnings at a decent rate should produce good investment returns; and with that I turned the call over to Tom.

He began by talking about the four traits necessary for great companies. First, they must have a great business model. Second, the management team has to be competent and credible. Third, they must be operating in a healthy industry. And fourth, the company needs to demonstrate a competitive advantage. Tom believes that growing revenues, and earnings, at an outsized rate leads to stock outperformance and I agree. Interestingly, Tom uses technical analysis as an overlay to support his fundamental views. This is not an unimportant point because in this business price is reality! Ladies and gentlemen, I have seen a plethora of portfolio managers stay with losing positions far too long because they ignored the fact the share price was breaking down rather dramatically in the charts. By the time they saw the fundamentals deteriorate, the shares were off some 50% when if they would have had some kind of technical analysis discipline the loss would have been contained at 15% – 20%, but I digress.

Tom then discussed some themes like the Internet, the cloud, software, servers, social networking, the Internet gone mobile, healthcare, Americanism, the reindustrialization of America, etc. If that sounds a lot like me it should given this paragraph from last week’s letter:

“In addition to the theme that technology is making building more for less a reality, other themes I am encouraged by include: companies making products for American consumption are moving jobs back to the U.S.; the reindustrialization of America; Americanism; a move toward energy self sufficiency that will shrink our trade deficit; and then there are the themes outlined in the book Abundance: Why the Future Will Be Much Better Than You Think written by Peter H. Diamandis and Steven Kotler.”

Tom then proceeded to discuss select companies in the Growth Leaders Fund and why he owns them. Names mentioned included: Apple (AAPL/$522.41); Continental Resources (CLR/$94.75/Strong Buy); Google (GOOG/$609.90/Outperform); EMC (EMC/$27.52/ Strong Buy); Fortinet (FTNT/$26.99/Outperform); and Zynga (ZNGA/$12.93). Almost as if it were a “planted” question, one of our financial advisors stated, “You buy the kind of stocks that my clients should have some exposure to, but I am afraid to buy them because of their volatility.” My response was, “Precisely, and that is why you want to own this fund and let Tom manage the risk.”

Speaking to Tom’s position in Continental Resources, a lot of our energy stocks have gone parabolic over the past few weeks, including CLR. If you had followed our recommendation and made CLR shares a 3% position in a $100,000 portfolio when our fundamental analyst initiated research coverage, holding all the other stocks in said portfolio at a constant price shows that your position in CLR has now grown into a 16% portfolio “bet.” Accordingly, it makes asset allocation sense to rebalance that position back towards a smaller weighting and let some long-term capital gains accrue to the portfolio. The same can be said of other portfolio positions that have grown into too big of a weighting in portfolios. Also of note, our long-standing love affair with Wal-Mart (WMT/$58.79/Market Perform) ended last week with Budd Bugatch’s downgrade of WMT from Strong Buy to Market Perform, which has now become another rebalancing candidate.

As for the stock market, last week the S&P 500 (SPX/1365.74) eclipsed its previous reaction high, recorded on April 29, 2011 of 1363.61, and now stands at its highest level since June 6, 2008. The closing high, however, came on very low volume and with numerous divergences. The two most egregious are the lack of upside confirmation from the D-J Transportation Average (TRAN/5139.14) and the Russell 2000 (RUT/826.92). While there are clearly other divergences like the non-confirmation from the Operating Company Only Advance/Decline Line, the fact that there have been no 90% Upside Days this year, the narrowing leadership, too many three-digit stocks, etc., the Trannies and the Russell are indeed the two most worrisome. That’s because the RUT is more than 5% below its one-year high, while the Transports are ~9% below their one-year high. Historically, when the S&P 500 was at a fresh 52-week high, but the Russell 2000 and the DJ Transports were more than 5% below their respective 52-week highs, stocks have been vulnerable. Therefore, if I am going to err it is going to be by being too cautious (not bearish), consistent with Ben Graham’s mantra – The essence of investment management is the management of risks not the management of returns. Good portfolio management begins (and ends) with this tenant.

The call for this week: There have now been 37 trading sessions in 2012 and so far the S&P 500 has yet to experience a 1% Downside Day. This 37-session, or more, skein has occurred 11 other times in the past 84 years and has on every occasion except one seen the equity markets higher by the end of the year. Still, the rise since the “buying stampede” ended, which stopped on January 26, 2012 at Dow 12841.95, has felt unnatural to me. Surprisingly, the Industrials reside only 141 points above their intraday high of January 26th, causing one market maven to exclaim, “no wonder I feel like we’re in the Trading Twilight Zone.” Maybe there will be a resolution to that “unnatural feeling” this week when we experience Leap Day (February 29th). As our friends at Bespoke write, “There have been 21 leap days in which the market was open since 1900. … The average performance of the Dow on leap days has been -0.05% with a median return of -0.22%. … There have been three leap days that fell on a Wednesday (as it does this year) since 1900, and the index has risen once and fallen twice. The last leap day was February 29, 2008, and that day the Dow had a big fall of 2.51%.” I’ll speak to you next week.

Copyright © Raymond James

Tags: Asset Allocation Model, Attractive Investment Opportunities, Attractive Investments, Baltimore Area, Brokerage Firm, Chief Investment Strategist, David Ellison, Eric Billings, Fbr Small Cap, Fbr Small Cap Financial Fund, Friedman Billings, Fun Fun Fun, Halloran, jeffrey saut, Lord Abbett, Missives, Morningstar, Mutual Fund Managers, Portfolio Manager, Saut, Two Partners, Washington Baltimore
Posted in Markets | Comments Off

Time to Add the VIX to Your Equity Portfolio?

Tuesday, February 28th, 2012

The interim solving of the debt crisis in Greece has restored calm in the markets, with the CBOE S&P 500 Volatility Index (VIX) settling at 17.3 compared to its long-term average of 20.0. The big question now is whether the VIX will return to the low levels of 1991-1996 and 2004-2006.

Sources: CBOE; Plexus Holdings.

But why is it important? The two periods mentioned coincided with sustained strong rising equity markets. Let us take a look at the period 2004 to end 2006. The VIX fell to an average of approximately 13 over that period, while valuation levels as measured by Robert Shiller’s PE10 increased significantly. Please note that in the graph below I used the inverse of the PE10, which is in fact the earnings yield or EY10. The period was marked by strong steady global economic growth on the back of China’s fortunes, strong corporate profit growth and a significant increase in risk appetite.

Sources: Robert Shiller; CBOE; Plexus Holdings.

At this stage the market’s rating reflects the VIX, but where to now? While similar strong economic growth etc. may await us further down the road the same cannot be said for the next two years, let alone this year, as the weak global economic environment (a much weaker Chinese economy, the Eurozone’s continued woes and the relatively weak U.S. economy) is likely to persist. I am therefore of the opinion that a VIX of around 20 and a PE10 of 22 can be seen as fair value. These compare with the current VIX of 17.3 and PE10 of 22.6. Yes, optimism may drive the VIX down to 15 again and the PE10 to 25 but to me that will indicate a significant selling opportunity. Similarly, the more regular occurrence of black swans has led to a significantly changed investment environment. Yes, it has led to the VIX being more volatile than in the past.

So much for volatility, but what about the underlying economic fundamentals? I have often referred to the relationship between consumer confidence and market valuation. Consumer spending is the backbone of the U.S. economy and is therefore the reason why consumer confidence gauges are closely watched by the major market players. At this stage it is evident that the S&P 500 Index (SPX 1367.59 �‘0.00%) at a PE10 of 22.6 is fully reflecting the Conference Board Consumer Confidence Index and therefore the underlying economy as it stands.

Some may argue that the employment situation in the U.S. remains dire and is likely to lead to another fall-off in consumer confidence. Well, my research indicates that consumer confidence in fact leads the U.S. unemployment rate by approximately nine months. With the Conference Board Consumer Confidence Index at 61.1 in January, it points to an unemployment rate of approximately 8% in the third quarter of this year compared to 8.3% in January this year.

Sources: I-Net; FRED; Plexus Holdings.

The valuation levels of the S&P 500, or PE10, lead the unemployment rate by approximately six months and are currently pointing to an unemployment rate of below 8% in the third quarter of this year.

I still hold the view that consumer confidence will improve to approximately 80 through end 2012 and that the valuation of the S&P 500 Index will improve to a PE10 of 25, meaning further upside of approximately 10% from the current levels. The going will be tough, though, as I think volatilities will remain high, resulting in the VIX ranging between 15 and 30 and the PE10 between 20 and 25.

Time to add the VIX to your equity portfolio? I think so.

Tags: Black Swans, Cboe, Chinese Economy, Consumer Confidence, Corporate Profit, Debt Crisis, Earnings Yield, Economic Fundamentals, Eurozone, Global Economic Environment, Global Economic Growth, Investment Environment, Plexus, Profit Growth, Risk Appetite, Robert Shiller, Swans, Valuation Levels, Volatility Index Vix, Woes
Posted in Markets | Comments Off

Bill Gross: Investment Outlook (February 28, 2012)

Tuesday, February 28th, 2012

​

(Defense)

• ​Over the past 30 years, an offensively minded Federal Reserve and their global counterparts were printing money, lowering yields and bringing forward a false sense of monetary wealth.
• Successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills.
• The PIMCO defensive strategy playbook: Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible. Emphasize income we believe to be relatively reliable/safe; seek consistent alpha.

They say defense wins Super Bowls, but the Mannings, Bradys and Montanas of gridiron history are testaments to the opposite. Putting points on the board, especially in the last two minutes, has won more games than goal line stands ever have, even if the scoring has been done by the field goal kickers, the names of whom have been confined to the dustbins of football history as opposed to the Hall of Fame in Canton, Ohio. Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Mike Ditka? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems.

My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy). Aside from the rare examples of Steve Jobs and Bill Gates, however, the secret to getting rich since the early 1980s has been to borrow someone else’s money, throw some Hail Mary passes and spike the ball in the end zone as if you had some particular genius that deserved monetary rewards 2¹⁰ times more than a Doctor, Lawyer or an Indian Chief. Nah, I take that back about the Indian Chief. The Chiefs, at least, have done pretty well with casinos these past few decades.

Still, the primary way to coin money over the past 30 years has been to use money to make money. Although the price of it started in 1981 at a rather exorbitantly high yield of 15% for long-term Treasuries, 20% for the prime, and real interest rates at an almost unbelievable 7-8%, the gradual decline of yields over the past three decades has allowed P/E ratios, real estate prices and bond fund NAVs to expand on a seemingly endless virtuous timeline. Books such as “Stocks for the Long Run” or articles such as “Dow 36,000” captured the public’s imagination much like a Montana to Jerry Rice pass that always seemed to clinch a 49ers victory. Yet an instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion. “Rinse, lather, repeat – Rinse, lather, repeat” was in effect the singular mantra of central bankers ever since the departure of Paul Volcker, but there was no sense that the shampoo bottle filled with money would ever run dry. Well, it has. Interest rates have a mathematical bottom and when they get there, the washing of the financial market’s hair produces a lot less lather when it’s wet, and a lot less body after the blow dry. At the zero bound, not only are yields rendered impotent to elevate P/E ratios and lower real estate cap rates, but they begin to poison the financial well. Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry. The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand. Investment defense is coming of age.

This transition is not commonly observed, although it is relatively easy to prove statistically and even commonsensically. Take for instance the rather quizzical notion that lower yields must produce an equal number of winners and losers since there is a borrower for every lender and the net/net therefore should have no effect on the real economy or its financial markets. Chart 1 shows that since 1981, which marks the beginning of the secular decline of interest rates, personal interest income has rather gradually (and now somewhat suddenly) shrunk relative to household debt service payments.

It is Main Street that has failed to keep up with Wall Street and corporate America in the race to see who can benefit more from lower yields. As the interest component of personal income gradually weakens, the ability of the consumer to keep up its frenetic spending is reduced. Metaphorically, it’s akin to a 4th quarter two minute Super Bowl drill, but one where the receivers haven’t been properly hydrated. They’re a half step slow, their legs are cramping, and it shows. Lower interest rates are having a negative impact on households because their water bottles are filled with 50 basis point CDs instead of Gatorade.

While Wall Street and levered investors have fared better than their Main Street counterparts, it’s not as if they’re in “primetime Deion Sanders” shape either. Conceptualize the historical business model of any financially-oriented firm for the past 30 years and you will see what I mean. Insurance companies, for instance, whether they be life insurance with their long-term liabilities, or property/casualty insurance with more immediate potential payouts, have modeled their long-term profitability on the assumption of standard long-term real returns on investment. AFLAC, GEICO, Prudential or the Met – take your pick – have hired, staffed, advertised, priced and expensed based upon the assumption of using their cash flows to earn a positive real return on their investment. When those returns fall from 7% positive to an approximate 1% negative, then assumptions – and practical realities – begin to change. If these firms can’t cover inflation with historical real returns from their float, then they begin to downsize in order to stay profitable. The downsizing is just another way of describing a transition from offense to defense in a zero bound nominal interest rate world where almost any level of inflation produces negative real yields on investment.
Not only insurance companies but banks suffer from this inability to maintain margins at the zero bound. In the process, they close retail branches that once were assumed to be the golden key to successful banking. Defense! And here’s one of the more interesting anecdotal observations on our current zero-based environment, one to which my investment paragon – Warren Buffett – would probably immediately admit. His business model – and that of Berkshire Hathaway – has long benefitted from what he has described as “free float.” Those annual policy payments, whether for hurricane, life or automobile insurance, have long given him a competitive funding advantage over other business models that couldn’t borrow for “free.” Today, however, almost any large business or wealthy individual can borrow or lever up with minimal interest expense. Buffett’s “Omaha/West Coast” offense is being duplicated around the world thanks to central bank monetary policies, placing an increasing emphasis on stock and investment selection as opposed to business model liability funding. Buffett will succeed based upon his continued strong offensive play calling, but the rules of the game are changing.

The plight of Buffett of course is in some respects the plight of PIMCO or any investment/financially-oriented firm in this new age of the zero bound. And it seems to us at PIMCO that successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills. What does that mean? Well, let’s briefly describe PIMCO’s own historical investment offense for the past 30 years in order to provide a defensive contrast:

PIMCO Offensive Strategy 1981 – 2011
Ready, Set, Hut 1, Hut 2 –

1. Recognize downward trend in interest rates and scale duration accordingly.

   A. Emphasize income and capital gains. PIMCO Total Return Strategy.
   B. Utilize prudent derivative structures that benefit from systemic leveraging – financial futures,
   swaps (but no subprimes!)
   C. Combine A and B along with careful bottom-up security selection to seek consistent alpha.

PIMCO Defensive Strategy 2012 – ?
Ready, Set, Hut, Hut, Hut –

1. Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.
   
   A. Emphasize income we believe to be relatively reliable/safe.
   B. De-emphasize derivative structures that are fully valued and potentially volatile.
   C. Combine A and B along with security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.

So there you have it – the PIMCO playbook. I suppose if I had any common sense I would hold up that clipboard to the front of my mouth like sideline coaches do during big games. Don’t want to chance any of the competition reading our lips to get a heads up on PIMCO’s next offensive play call. But then that’s never been my or Mohamed’s style, given the importance of informing you, our clients, of what we are thinking when it comes to investing your hard-earned capital. Go ahead competitors and read our lips, we’ll just pound that pigskin down the field anyway. Besides, as I’ve pointed out, the emphasis these days should be on the defensive coach. Leveraging has turned into deleveraging. 15% yields have turned into 0% money. The Super Bowls of the future will have their Mannings and Bradys, but the defensive line may record more sacks and make more headlines than ever before.

William H. Gross
Managing Director

Tags: Bill Gross, Bradys, Debt Risk, Defensive Strategy, Deion Sanders, Derivative Structures, Downward Trend, Dustbins, Field Goal Kickers, Financial Repression, Football Hero, Global Financial Markets, Gross Investment, Hail Mary, Handsome Guy, Interest Rate Environment, Investment Outlook, Joe Greene, Lamentation, Mike Ditka, Monetary Wealth, Offensive Skills, Offensive Strategy, Pigskin, Printing Money, Rare Examples, Ready Set, Risk Takers, Ron Paul, Scrimmage Line, Superpac, Whimper, Zirp
Posted in Markets | Comments Off