Bill Gross Wants A PIMCO Bailout 27 comments
August 27, 2007
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PIMCO's Bill Gross was asking Where’s Waldo? in his investment outlook for September 2007:
After reading Mr. Practical, inquiring minds might be wondering "Who does Bill Gross really want to bail out?"
That's a good question so I started looking for possible clues in Morningstar's snapshot of PIMCO Total Return Fund (PTTRX).
This is what I found:
I see the top bond guru in the world returned a three year average of 3.83% in his "Total Return" Fund. One could have parked money in a money market fund, CDs, a bank, or short term treasuries and done better than that.
Digging deeper I see the top five holdings of the Total Return Fund are as follows.
1) Fannie Mae
2) Fannie Mae
3) Fannie Mae
4) Fannie Mae
5) Fannie Mae
as shown in the following table:
Digging still deeper I see this breakdown:
Of the US Government breakdown I see the Total Return Fund is grossly overweight agencies (Fannie Mae) vs. Treasuries. This is really irritating. Shame on Morningstar for being willing to label Fannie Mae and Fredie Mac as "U.S. Government".
There are scores of so called "Government Bond Funds" out there chasing minuscule returns above treasuries when Fannie Mae (and brother Freddie Mac) are not even government backed. For more on this idea as well as a recommendation that everyone look into just what is in their Money Market and "Government Bond Funds" please see Flight to Safety.
The Total Return Fund does not present itself as a "government bond fund" but everyone by now should be wondering how the so called best bond trader in the world could get himself into this position.
And even worse is the fact that 40.20% of the Total Return Fund is invested in mortgages which from the above tables it would appear that most of that is not even "quasi-government guaranteed".
The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO. Is it any wonder then that he is asking Bush to "Write some checks, bail ‘em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do."
The only thing Gross forgot to mention in his September Outlook was the return address on those checks needs to read "Bill Gross @ PIMCO".
A certain dose of market discipline in the form of lower prices might be healthy, but market forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression.Mr. Practical, whom I seldom disagree with simply because he is too practical, commented on the situation and came to a conclusion that I 100% agree with: More Bailouts Could Bring Disaster Down the Road.
The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue.
If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.
Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?
In my humble opinion Mr. Gross is right about only one thing: that Mr. Bernanke is unable to eventually stop a destructive housing deflation. At least now the pundits are admitting that a housing deflation is at the heart of the economic problems. That is a watershed event.Bailout for Who?
But for the “government”, which I thought was using taxpayer money (except for the $9 trln in debt it has borrowed), to bail out malinvestment is only to increase the problem. If you don’t punish your child for playing with matches, he may one day burn the house down.
After reading Mr. Practical, inquiring minds might be wondering "Who does Bill Gross really want to bail out?"
That's a good question so I started looking for possible clues in Morningstar's snapshot of PIMCO Total Return Fund (PTTRX).
This is what I found:
I see the top bond guru in the world returned a three year average of 3.83% in his "Total Return" Fund. One could have parked money in a money market fund, CDs, a bank, or short term treasuries and done better than that.
Digging deeper I see the top five holdings of the Total Return Fund are as follows.
1) Fannie Mae
2) Fannie Mae
3) Fannie Mae
4) Fannie Mae
5) Fannie Mae
as shown in the following table:
Digging still deeper I see this breakdown:
Of the US Government breakdown I see the Total Return Fund is grossly overweight agencies (Fannie Mae) vs. Treasuries. This is really irritating. Shame on Morningstar for being willing to label Fannie Mae and Fredie Mac as "U.S. Government".
There are scores of so called "Government Bond Funds" out there chasing minuscule returns above treasuries when Fannie Mae (and brother Freddie Mac) are not even government backed. For more on this idea as well as a recommendation that everyone look into just what is in their Money Market and "Government Bond Funds" please see Flight to Safety.
The Total Return Fund does not present itself as a "government bond fund" but everyone by now should be wondering how the so called best bond trader in the world could get himself into this position.
And even worse is the fact that 40.20% of the Total Return Fund is invested in mortgages which from the above tables it would appear that most of that is not even "quasi-government guaranteed".
The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO. Is it any wonder then that he is asking Bush to "Write some checks, bail ‘em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do."
The only thing Gross forgot to mention in his September Outlook was the return address on those checks needs to read "Bill Gross @ PIMCO".
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This article has 27 comments:
The fund's medicore three-year record also bests 82% of all its intermediate-bond fund peers, so I guess all bond funds are worthless, right? I mean, even the best bond funds didn't beat the money market rate over this particular three year period, so they're worthless, eh?
your comment says more and most of all it is accurate 100%, which cannot be said of this really poor article by mr shedlock
So which FNM security is it that's got all the subprime exposure exactly? Oh wait, they don't do that. DUH!!!!!! Little known fact is that those securities - FNM FM you're so upset about, the yields have declined recently because of the flight from crap.
BTW - look at the classification again, M* is not lableing FNM as US Govt Securities - they're lableing them as *Mortgage*.
Maybe Bill just knows that a bunch little of people are about to get totally screwed, because they take the true first risk of loss, aside from piggybacks. You're conjecture is flawed and IMO, appears to just be an emotional reaction towards a policy stance you don't like.
I used to follow Bill Gross avidly. However, I have seen he has been making a series of extremely poor calls (on 10 year Treasury rates for example) that have been way off the mark. His call for a US Government bailout is shockingly irresponsible.
If the US Government does that (a bailout) it will only reward the bad investors (such as PIMCO) and penalize those of us that have been cautious and prudent.
Several days ago I read a pathetic story about all the ex football jocks (NFL) that are suffering in so much pain from their past injuries.
"Then there's Dave Pear , a nose tackle who was the first Pro Bowler for Tampa Bay and who played for Oakland in Super Bowl xv. He's had four disks fused, has four screws in his back that need to be replaced. He takes about 25 pills a day and draws disability through Social Security.
With tears dripping down his cheeks, he described the agony he's putting his family through.
"My wife has to carry a big load," he said. "It's not fair"
Or, the terrible tale of poor Brian DeMarco whose back is held together by a titanium rod screwed into his hips...oh his rebuilt knees...oh his painful shoulder...oh his several times being homeless...and oh his suicidal thoughts...just so his wife and kids could have his death benefit,( someone tell him that a suicide is an exclusion on most policies ).
What am I getting at here: Was the homeowner forced to get an adjustable rate mortgage on that $300K home they had when they only made $50K between them and found a broker to close the deal. Who forced them to by a house that any cognizant adult with a calculator could determine was too costly for them?
Who forced these sports figures to play a very violent and dangerous sport and not have to contend with the concomitant results. Did NIKE force them?
Or, did they just want the money and fame first...and no worries about the consequences.
R E S P O N S I B I L I T Y folks...try it, it works
Can't w all set the right precedents starting now.
Mr shedlock obviously doesn't know a thing about bond markets and bond funds. or maybe, he has done a superb job in hiding it.
All the mention of compare this to that performance is total crap, why? Becoz Billy is holding, according to the rating agencies (can u trust them now that they rate junk as AAA - hahaha). Now, no matter how u swap, option and use exotic derivatives cannot mitigate this exposure becoz we are in a highly non uniform turbulent market. Why do I know this, I use to design derivative instruments for the largest bank in the US. The exotic trading unit folded during time of less stress than it is experiencing now. Go figure.
I like the article becoz everyone has an agenda, so what is Gross's?