Barron's Roundtable member Pimco's Bill Gross says that after economic growth founded on rich stocks in the '90s and housing after that, "there are no large, classic asset categories left to inflate." Economic growth will be flat or negative for a long time.
While banks reserve 15% against deposits, the current credit crunch will have to deal with the collapse of SIVs [structured investment vehicles] and financial conduits that have no reserves. "This isn't going to be a normal cyclical downturn in which inventories are addressed, paving the way for the economy to be rebuilt," he says. "It is a unique situation the world hasn't faced in modern times."
It's unlikely the government will come to the rescue, Gross notes, due to election-year rigidity. "This is a very poor year to have a recession," he remarks wryly.
In contrast to a year ago, high-yield corporate bonds now hold value, with spreads 5.5 points or more above Treasuries. While peak spreads have hit 10 percentage points, Gross doesn't think the spread will widen to that extent. He will be looking at high-yield bonds in the second half of 2008.
Gross's picks for 2008:
- Look for (muni) bond funds that trade at a discount of at least 10% to NAV and yield 5% plus. He likes Van Kampen Select Sector Municipal Trust (VKL). If the Fed lowers rates, yields in bond funds often rise due to their dependence on cheap financing.
- Yields on General Motors (GM) and Ford (F) bonds are attractive, and may benefit from ratings boosts. Gross says the auto industry stands to benefit from a lower dollar and union renegotiations for the next 5-15 years.
- Pimco Corporate Income Fund (PCN) and Pimco Corporate Opportunity Fund (PTY). "I have the advantage of knowing exactly what's in these funds... There are no subprime assets." The funds trade at junk bond levels, yet 75% of their holdings are investment-grade or higher.
Gross notes that readers often bid up his picks immediately after publication. If that happens, he says, wait a few weeks until the price settles before getting in.