Archives for March 2014

CNBC’s Squawk Box Monday at 6:30 AM

I am excited to be with Joe, Becky and Andrew on CNBC’s Squawk Box on Monday the 31st at 6:30 AM. We will be discussing the markets, the wrong way Fed and the latest comments from Putin regarding the Ukraine.

There should be a new issue of Street$marts out later on Monday.

Enjoy the rest of your weekend. I am heading to my 6 year old’s very loud and chaotic birthday party. Too bad they don’t serve adult beverages with laser tag.

It’s going to be a very tough battle against the Spartans from Michigan State, but GO HUSKIES!!!

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The Story that Never Ends

Almost two weeks ago, I published this piece about PIMCO and Bill Gross.

Since then, many news outlets continued reporting about the major problems inside PIMCO and the challenges Bill Gross faces. Thanks for the various quotes.

PIMCO’s Got Bigger Problems than the Tabloid Drama We’ve Been Reading about Lately

Some Still Wary on Gross’ Shakeup at PIMCO

More Troubles for PIMCO in Wake of El-Erian Exit

Advisers Ratchet up Scrutiny of PIMCO


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Routine & Healthy Consolidation in Play

Last Friday, we saw the S&P 500 tick at all time highs for a few seconds. That’s anything but unexpected and certainly not newsworthy. What was “different this time” was that it was the only major index to score new highs before they all reversed sharply to the downside. That made calling for an overall market pullback fairly easy.

Over the past few days, the high flying, momentum driven tech stocks, like Google Netflix and Amazon have come under strong pressure, following in the footsteps of the biotech group which has fallen sharply since mid February. This type of action is usually seen near the end of routine bull market pullbacks (3-7%) and not at the onset. The leaders are typically thrown out after selling hits other areas of the market. Impressively, the stock market has been resilient in the face of than overwhelming economic data and some worrisome geopolitical events and news in China, Middle East and Ukraine.

Bullishly, stocks continue to hover around their average price of the past 21 days or one month of trading. At this point it looks like the next 2-3% move can be faded, meaning that whichever direction the market goes in the short-term should be temporary and will then go in the exact opposite direction.

Longer-term, the bull market remains alive and well, albeit old and wrinkly. The ingredients normally seen before a bull becomes a bear remain nonexistent, in spite of what may be said by the pundits. In fact, I don’t even see the usual caution signs for 10%+ correction. Buy the dips and sell the rips is the strategy to continue following until proven otherwise.

Outside the stock market, I remain on breakout watch for long-term treasury bonds, our largest position in our global macro strategy. I have been generally bullish on long dated T bonds since late last year when you couldn’t find anyone who was positive.

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Dr. Copper May Be Terminally Ill, But…

What should be big news isn’t getting that much play and that’s the total collapse in copper prices, mostly due to China’s weakening economy. Copper has long been called Dr. Copper or the commodity with a PhD in economics because it was a good forecasting tool. Since late 2010, that all changed and it’s likely because of China’s influence on that market.

Copper has completely collapsed on a short-term basis, semi-collapsed on an intermediate-term basis and is on the verge of collapse long-term.


copper1No matter how you slice it, whether it be the global economy or just China, the action in copper is not a good sign. And no, I am not a believer in some preposterous conspiracy that JP Morgan has been manipulating this or any commodity, got stuck and had to put their commodities unit on the block.

To me, China’s weakening economy and housing bubble is the primary culprit.

As ugly as copper has been, it now looks like we have a short-term flush out and the bulls should have an opportunity to move the metal higher for a short-term trade. Closing below last week’s low of $2.87 blows up that scenario and means the bears are in total control. Not bad risk/reward ratio.

Long-term, there is much work that needs to be done to repair the severe we have seen of late. Just like copper peaked long before anyone started discussing China’s economic weakness, I expect the metal to bottom before the fundamentals suggest a turnaround.

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Ben Bernanke Cringing

New Fed chair, Janet Yellen, presided over her first FOMC meeting this week with her first press conference yesterday afternoon. In short, as much as I supported her for the position, it’s crystal clear that she is no Ben Bernanke and has much to learn. On the positive side, she was very calm and took time to give thoughtful and detailed answers. I especially liked when she stated that the glide path to tighter monetary policy was going to be shallow, meaning that once the Fed began to raise rates it would not be a straight shot to the historical norms. Rather, it certainly sounded like the path to 1% and then 2% would be very gradual without committing to specific timetables.

On the flip side, Janet Yellen completely and utterly fell on her sword, stuck her foot in her mouth and any other appropriate analogy for making a huge blunder when she put an almost exact time frame of six month after QE ends to begin raising rates. As the words rolled off her lips, I immediately said “rut roh” and then watched the stock market crater. Defining “considerable time” as six months puts the Fed in a box and loss of credibility. I am sure she wishes she could unscramble those eggs, but that one statement is going to follow her for a long time, especially when the written statement doesn’t even hint at a specific time frame rate increases. Ben Bernanke would never, ever have done this.

If stocks don’t immediately right themselves, it looks like we will see new lows for March before stabilizing and heading back to all time highs. The bull market may not be over yet, but Janet Yellen certainly poured some cold water on it and the bears have their sights on 2015.

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Janet Yellen’s First Fed Statement Day

My how time flies! We just said goodbye to Ben Bernanke and hello to Janet Yellen and now it’s time for Fed day again. It is widely expected that the FOMC will taper another $10 billion to $55 billion per month in quantitative easing as it continues down the path to wrapping up QE by the end of the year. There is also an expectation that the Fed changes their interest rate scenario from quantitative to qualitative with Yellen giving an update on the 6.50% unemployment rate threshold.

I am sure the three blind men of Fisher, Plosser and Lacker will argue for a more aggressive scenario, but let’s remember that these are the same ostriches who wanted to raise interest rates during 2008 when the financial markets were on the verge of breaking with a serious threat to what we call capitalism. It must be nice to continue to always be wrong yet enjoy the current compensation and future retirement perks of being a regional Fed president. Only in America!

The model for today is muted action in the markets until the announcement at 2pm and then fireworks into the close. Janet Yellen begins her first press conference at 2:30pm so that should be a lot more than just interesting.

Regarding the stock market, history suggests a 73% chance of an up day.

After the markets get by today, we should see another round of new highs in the major indices, including the Dow which has lagged all year.

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The Fall of the House of PIMCO… The Bill Gross Saga

Overview of PIMCO

Over the years, Pacific Investment Management Company or PIMCO has been the global leader in fixed income or bond management. Their Total Return Bond Fund was the largest mutual fund in the world with roughly a quarter of a trillion dollars until ceding to Vanguard late last year. It was the standard by which competitors were judged and dominated the 401K market. Although now owned by giant insurer Allianz, PIMCO has essentially been an autonomous unit since the sale.

With almost $2 trillion in assets under management (AUM), the firm didn’t grow so big because they were mediocre. While I have never been a big fan of their equity funds with good reason, their fixed income prowess was the envy of Wall Street for years and perhaps even decades.

Bill Gross – Rock Star, Media Darling & King

Along the way, PIMCO’s performance has turned its founder, Bill Gross, into a media darling and rock star in the industry. Whenever there is a Fed meeting, major economic announcement or serious geopolitical event, you can count on the media outlets lining up interviews one after the other. To be fair, Bill Gross has been the superstar driving the firm’s performance so his status had been well deserved and warranted.

There are few valid comparisons to Bill Gross in the investment industry because it’s unusual for a “master of the universe” in the investment world to have also been the firm’s founder and remain in charge of the investment process. Names like Warren Buffett (another article coming later this month); Peter Lynch and Steven Cohen (SAC) come to mind.

Buffett has been at it a long time and was “anointed” king of the stock market along with Peter Lynch decades ago. It’s Warren’s firm and he may very well be the Bill Gross of equities, or is Gross the Warren Buffett of fixed income? Peter Lynch worked for Fidelity and retired near the height of his career under his terms without drama, very different from Gross. Steve Cohen has been the public face of hedge funds for years, first as a hero with his eye popping performance and lavish lifestyle, but recently as villain during a massive insider trading scandal that almost took the firm down.

Getting back to PIMCO and Bill Gross, in investing, size matters. Early on, firms seek to attain critical mass for survival and then move on to the sweet spot of assets under management before succumbing to public rush with swells the firm or fund to unwieldy levels. I am always impressed when I see someone like Seth Klarman from Baupost return billions of investor dollars because he can’t find enough good investing ideas, doesn’t want to dilute performance and doesn’t really care about the additional fees. I guess in the mutual fund space that would be akin to a hard close on new dollars.

Growth of AUM and Bull Market in Bonds are Great… Until They’re Not

It is certainly not new news that PIMCO has grown into a behemoth with $2 trillion under management. But that growth was the first nail in a very long-term coffin unless they could really diversify away from fixed income. Just something to watch rather than take any action.

What helped PIMCO and Gross earn such an incredible long-term track record was a 30+ year bull market in bonds that ended in 2012. With no disrespect intended, anyone who recognized the trend and was a buyer on all dips had to do mighty nicely. But Bill Gross was and is not “anyone”. He had the ability to actively move PIMCO’s fixed income portfolios between sectors of the bond market as well as moving portfolio duration around to best express his views. In short, Gross was a bond timer extraordinaire!

Performance Issues and the Need for Viagra

Besides the bloated AUM and bond bull market ending, there were other, more timely issues as well. Normally a stalwart in the bond mutual fund rankings, PIMCO’s flagship Total Return Fund fell on its sword in 2011, trailing 69% of its peers according to Bloomberg’s research. For a rock star like Bill Gross to only beat 31% of his peer group is like Peyton Manning or Tom Brady failing to make the playoffs.

Something was wrong…

Bill Gross was uncharacteristically blindsided by the European debt crisis that saw a massive flight to quality in US treasury bonds. The outflows and year were so bad that Gross felt the need to let out a cathartic “this year is a stinker” in a letter to shareholders, an action I give him a lot of credit for taking.

After bouncing back okay in 2012, the bond market vigilantes laid the smack down on PIMCO’s bond funds and fixed income in general from mid May to late June. Its flagship fund ended 2013 with only its second yearly loss since its 1987 inception and worst year since the bond debacle of 1994. With 2011 still fresh in investors’ minds, the ATM machine of PIMCO Total Return was over. The fund was in need of some investment Viagra!

Forgetting about swelling AUM and a new bear market in bonds, on performance alone, after 2011 and 2013 PIMCO was no longer king of the jungle. They were reduced to being mere mortals, enough for me to begin the process of removing from my 401K clients’ fund line up.

The Public Soap Opera Begins

And if all that wasn’t enough, 2014 has seen a very public and embarrassing soap opera for the firm, first with the surprising resignation of the very well respected heir apparent, Mohamed El-Erian, and then the Wall Street Journal tell all by Greg Zuckerman based on interviews with current and former employees.

When El-Erian shocked the industry by calling it quits, my first reaction was that he knows the bond market is now in secular decline and although PIMCO has never been a quality equity shop, he doesn’t see a whole of opportunity in the equity space. I figured he was just trying to retire on top. Then Zuckerman’s bombshell hit.

Initially, I thought it was probably just sour grapes with shreds of truth. That was until Bill Gross himself came on CNBC to defend himself and PIMCO. Why not just let it be? The news cycle is so fluid that tomorrow would have brought another story. Why dignify it with a response? Unless, of course, that the majority of the story was true and you are really on the defensive.

I recently spoke with a colleague whose son used to work at PIMCO and he shared stories and opinions that pretty much substantiate what Zuckerman wrote about in the article. From the unusual quiet on the trading desk demanded by Gross to the fear of making eye contact to the ego maniacal behavior, it sends up warning sign after warning sign. From my seat, El-Erian had enough of Gross and the culture at PIMCO and cashed in his chips before the ship began to take on more water.

And if all that drama wasn’t enough, there was a bizarre Reuters article which Gross disavows where Gross is said to comment that El-Erian was “undermining” Gross and that Gross listened to El-Erian’s phone calls. The article goes on to imply that in some paranoid type fashion, Bill Gross was making a list of those were either for him or against him in the El-Erian war of words.

This is not some made for TV reality show on the Jersey shore or Beverly Hills. This is one of the most successful and well respected investment professionals and firms on earth.

Something is very wrong…

Damage Control Does More Damage

This week I was reading the latest edition of Investment News and smack in the middle of the paper, PIMCO bought the two page centerfold to announce its newest “constellation of stars”, their new deputy CIOs. Looking at it closer, it’s not from PIMCO, but rather it’s Bill Gross saying “Let me introduce you to…”

What has become abundantly clear to me is that PIMCO is anything but a collegial, team environment where dissenting opinions are encouraged and respected. This is a glorified, gigantic one man show, primarily in the fixed income space without a well thought out succession plan. Bill Gross is the chief, the king, the dictator in a market climate that has definitely changed for the worse.

Although I will continue to include the PIMCO High Yield Fund in my junk bond fund universe and may employ it every now and then where I can manage the position, the flagship Total Return Fund has either been removed from clients’ 401K line ups or is in the process of being removed. With so many good products in the marketplace, PIMCO’s flagship fund and other Bill Gross managed funds are simply not worth the risk for the potential reward.

I do hope PIMCO and Bill Gross straighten out their internal and external mess and return to their glory days. It’s good for investors as well as the industry.

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Bears Growl as Line in the Sand Breached

As I look back at the titles of the posts this week, I see “Stocks Looking to Rest”, “Bulls Hanging in During Tug O’ War” and “Bears Creeping In”. It was hard not to at least lean to bearish side. Until Thursday although prices were lower, the bulls fought hard. But on Thursday, the flood gates opened with some major league selling in the indices. On the sector front, all were sharply lower with the exception of utilities and precious metals. The surface of Thursday’s action looked pretty nasty.

Lifting the hood, the bulls may take a little solace in the fact that for such a widespread down day, the number of decliners only outpaced advancers by a 2:1 margin. Down volume did not swamp up volume, coming in at 5:1. It was a bad day for the bulls, but by no means disastrous, at least not yet.

Stocks are short-term oversold and if the playbook of the past 18 months remains intact, the bulls are supposed to step up almost immediately. Additional selling from here would open the floodgates to a much larger decline. For Friday,there should be two way action in the morning with any pushes to news lows being buyable. Another afternoon rout will really embolden the bears.

The next few days are key.

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Bears Creeping In

In yesterday’s update, I drew two short-term lines in the sand, looking for the major indices to close below Monday’s low or above last week’s high to signify the next move. Yesterday, we saw the Dow and S&P 500 stay above Monday’s low, but the S&P 400 and Russell 2000 closed below Monday’s low. That leaves us leaning in the bearish direction awaiting full confirmation.

Leadership from biotech, REITs and utilities has started to wane, but the financials are trying to step up here as the market rotates. High yield bonds are underperforming in the short-term and that’s a bit worrisome if it continues.

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Bulls Hanging In During Tug o’ War

All of the ingredients were in place for one of those quick, sharp down days on Monday with a plethora of geopolitical news. From poor economic news out of China to continuing saga in Crimea and the Ukraine to the still missing aircraft, all the excuses were there.

And while stocks sold off early in the day, a similar story over the past few years played out; the bulls slowly and steadily stepped up to trim the losses. After four days of essentially going nowhere, we have some close lines in the sand to watch for clues of the next big short-term move.

On the S&P 500, closing above last week’s high of 1884 will inflict more pain on the bears, while closing below yesterday’s low of 1867 will likely cause the bulls to pull back a bit. Absence those two scenarios, the market looks neutral here.

Sector wise, biotech, utilities and REITs have pulled back enough to take another stab to the long side as long as you have an exit plan close by.

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