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Bill Gross, manager of world-leading bond fund Pacific Investment Management Co. (Pimco), wrote Tuesday on Pimco's website that the days of cheap financing for LBOs are over. "The tide appears to be going out for levered equity financiers," he wrote, "and in for the passive owl money managers of the debt market." Investor doubts about the ratings of subprime-backed securities have essentially shut down the junk-bond offerings that substantially finance LBOs, Gross wrote. At least 35 debt transactions have been canceled or restructured in the past five weeks. In an interview following the commentary's release, Gross said the "recent upward [100 to 150 basis point] movement in yields justifies a 5%-10% correction in stock markets," but noted that market prices don't always move in sync with changing valuations. Gross advised investors to consider the pending sale of Chrysler to Cerberus Capital Management, which "involves a huge $4-6 billion loan package that's apparently having trouble being priced," as "the pricing bellwether for this high-yield market...it pays for bond investors to let them price this deal and sit back and wait."

Sources: Bill Gross's Investment Outlook [Pimco Bonds], Bloomberg, MarketWatch, Dow Jones, Reuters
Commentary: Borrowing Costs Rising in Chrysler, Other Buyout DealsPrivate Equity: Discipline Is Giving Way to Momentum and EuphoriaThe Private Equity Party Might Be Over
Stocks/ETFs to watch: iShares Lehman 1-3 YR Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 YR Treasury Bond (NYSEARCA:IEF), iShares Lehman 20+ YR Treasury Bond (NYSEARCA:TLT)

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Source: Pimco Chief Bill Gross: 5-10% Correction May Be Ahead