The Bond King may be battered and bruised a little bit, but his words still cary some weight, with two of his three Barron's Mid-Year Roundtable picks from this weekend posting big gains on heavier-than-usual volume. The thesis: Own some mildly levered closed-end bond funds which can borrow at 10 or 20 basis points, re-lend the money at 400 to 500 basis points, and produce a yield of 7-8%.
One Bill Gross is buying for his own portfolio is the BlackRock Build America Bond Trust (BBN +2.5%). The feds subsidize 35% of the interest paid, the fund usually owns A- and AA-rated long-term bonds, and currently yields 7.5%.
He's also a buyer of the Pimco Dynamic Income Fund (PDI +1.1%), an owner of non-agency mortgages expected to yield between 8-10%. On sale for some time, the fund now trades at about net asset value.
Gross' third pick is an ETF, the iShares U.S. Preferred Stock Fund (PFF +0.1%). Liquid with an expense ratio below 50 bps, the fund primarily holds bank preferreds. It's a short-term play, says Gross, as many of the preferreds in its portfolio will be refunded within a year or to and the dividend will fall. In the meantime, one can collect a 5.5% yield.
The same, however, isn't true for Pimco Dynamic Credit Income (PCI), though it's also managed by well-regarded Dan Ivascyn. One reason for caution might be the relative newness of the fund, writes Brendan Conway.
In the meantime, two Pimco CEFs which are known for sporting towering premiums to NAV continue to do so, the Pimco Global StockPLUS & Income Fund (PGP) and the Pimco High Income Fund (PHK). Two other Pimco CEFs at discounts: Pimco Income Strategy Fund (PFL) and Pimco Income Strategy Fund II (PFN).
"When times get tough, on Wall Street or in Newport Beach, Calif., the tough turn on each other," writes David Weidner, not seeing anything too unusual in the Pimco saga. These sorts of ugly partings happen all the time amid the massive egos on Wall Street. Consider Citigroup with Sandy Weil and Jamie Dimon, Morgan Stanley with Phil Purcell and John Mack, and Bear Stearns with Jimmy Cayne and Warren Spector.
"In every case, the splits occurred under tremendous pressure. Much like a marriage headed for divorce, long simmering incompatibilities, jealousies and flaws rose to the surface ... When push comes to shove, it is always better to be king. No. 2’s instinctively need to watch their backs. You want normal? That is normal."
It turns out it was three, not two lined up to be deputy CIOs to Bill Gross amid the departure of Mohamed El-Erian. One - Marc Seidner - resigned in January just hours before he was to be publicly announced in his new position. Seidner - who followed El-Erian to Pimco in 2009 - reportedly had found working there increasingly difficult over the last 18 months, with Gross becoming "increasingly illogical and irrational."
In other news Pimco has lost a $1.3B bond fund mandate to TCW.
“There is a heightened level of uncertainty in the post El-Erian era surrounding the questions of whether Pimco’s latest senior staffing transitions will prove beneficial to investors [and] whether recent and future senior-level departures indicate a persistent side effect of the firm’s pressure-cooker culture," says analyst Eric Jacobsen cutting Pimco's "stewardship" rating to C from B and the "parent pillar score" - which examines manager turnover, investment culture, and fee levels - to Neutral from Positive.
It's not automatic, but look for the big-picture rating changes to quickly filter through to the ratings of individual Pimco funds, says Morningstar.
A trio of closed-end funds selling at discounts to NAV get early boosts after Bill Gross recommends them at the Barron's Roundtable over the weekend.
The Pimco Dynamic Income Fund (PDI +2.1%) launched in May 2012 near the low in interest rates, but is still 20% higher today, in addition to making hefty payouts. One of the managers is Daniel Ivascyn who was just elevated to Pimco's deputy CIO after the resignation of Mohamed El-Erian. Magazine cover indicator types will want to know Ivascyn was just named to Morningstar's Fixed Income Managers of the Year.
PDI yields 7.85%, but a special dividend boosted 2013's return to 12%. It is slightly levered and invests in nonagency MBS. "The fund could have a lot of firepower if the housing market holds up."
For those with interest in tax-free income, Gross suggests the Pimco Municipal Income Fund II (PML +1.5%), trading at a slight discount to NAV and holding no debt of Puerto Rico or Detroit.
Selling at an 8% discount to NAV at last check is the Reaves Utility Income Fund (UTG +1.2%).
For high yield debt, Gross suggests an ETF, the Pimco 0-5 Year High-Yield Corporate Bond Index (HYS +0.1%) - the shorter duration should limit risk if spreads widen.
Net speculative longs in gold (GLD +0.6%) last week fell 16% to 26,774 contracts, according to the CFTC, the lowest amount since June 2007. Shorts rose 6.2% to 79,631, about matching a high set in July. The exit continues in gold ETPs, with assets now off 31% YTD to the lowest level since February 2010.
"There's probably another wave of panic selling ahead," says Sage Capital's Bob Smith, one of those who's exited gold, putting the money in stocks instead. "In the absence of calamity, there's not much to go on."
The last 12 years (prior to 2013) were an aberration, says Morningstar's Samuel Lee. True believers should instead look to deep-value assets linked to gold, namely the miners (GDX +1.3%) - they over-expanded and failed to hedge against falling prices, but a play now is a bet executives have learned their lessons.
An even better idea, says Lee? Admit the worst-case scenarios about global crises and currency debasement never panned out and move onto another asset - nonagency MBS. The cheap, illiquid sector creates opportunities for a good fund manager, he says. Lee's pick is the Pimco Dynamic Income Fund (PDI +0.7%) - an "implicit bet on housing prices."
I see no reason for long-term rates to head higher, says Jeff Gundlach, appearing on CNBC. He doesn't see the taper coming soon - incomes are falling, the labor force participation rate is stuck, and inflation is non-existent. Further, why would Janet Yellen take the Fed helm and immediately begin to reverse a policy she's so supportive of?
Without the taper, he notes, QE is actually expanding on a relative basis thanks to a smaller budget deficit and less Treasury issuance needing to be mopped up by the central bank.
The best opportunity in fixed income continues to be closed-end funds trading at discounts to net asset value (his DBL being one of them). You can put together a basket of these, he says, yielding 8-9% and with a discount to NAV of 10%. Others possibilities (though we haven't checked their prices vs. NAV): PDI, PTY, PCI, PHK, PKO, PCN, PCI, PFN, PFL.
Treasurys continue their big rally, the yield on the 10-year now all the way down to 2.60%. TLT +0.8%, TBT -1.6%.
Turning to stocks: I don't like $300B market cap companies trading at 20x forward earnings, he says, suggesting GOOG be "harvested" for gains.
On TSLA: There's something wrong with this picture, he says, noting the company's $23B valuation while GM and Ford are hitting new highs. These massive Tesla sales being priced into the stock have to come from somewhere.
Pimco Dynamic Income Fund (PDI +0.7%) gains after perhaps unexpectedly bumping its monthly payout 7.9% to $0.191 per share. The current price of $29.04 is a 5.2% discount to yesterday's closing NAV.
Worth keeping in an eye on is the saga of Elke Batista's OGX Petroleo, and whether it will default. According to David Schawel, PDI fund manager Daniel Ivascyn owns a decent slug of the failing company's paper.
Pimco and BlackRock (BLK) reportedly scooped up over 25% of Verizon's (VZ) mammoth $49B bond sale on Wednesday, helping the telecom carrier to raise all the money it wanted to at once rather than in chunks, as it had originally intended.
Bill Gross' firm bought $8B in bonds and BlackRock $5B, with the two companies also influential in persuading Verizon to price the debt at an above-market rate.
That bond funds - specifically Pimco bond funds - have tumbled in value as rates flew higher this summer isn't news. Instead, it's the vanishing "Pimco premium" in the firm's closed-end offerings.
The Dynamic Credit Income Fund (PCI +0.9%) is off nearly 18% since its launch earlier this year as an initial premium of 9% is now a 9% discount. Others include PDI now at a 8.2% discount vs. a previous average of -2.4%.
Others still trade at premiums, but of vastly smaller size. PTY is at 6.6% premium vs. a 3-year average of 17.8%. PHK remains at a whopping 50.7% premium, but down from 75% last year.
"Was (it) the epoch that made the man as opposed to the man that made the epoch," wrote Bill Gross (BOND), wondering if his success was the result of being in the right place at the right time (the 30-year bond bull market).
In a major about-face, Jeff Gundlach turns bullish on the mortgage REIT sector (REM +0.7%), telling CNBC he spots value as many are trading at 10% or more discounts to net asset value. He specifically mentions Annaly (NLY +1.3%) as being a buy. Reported book value as of June 30 is $13.03 vs. the current price of $11.50.
"These outflows mark an enormous shift for the bond world," says TrimTabs, which gathered the data. "A vicious circle of losses and redemptions as the bond binge unwinds could get nasty ... Lulled into complacency by a 30-year bull market, many investors probably did not understand the risks ... Now they seem to be reacting very quickly to losses."
The withdrawals this month are the 3rd highest on record - June 2013 and October 2008 are #1 and #2 - and the month isn't even over yet. Bond funds YTD have seen $4B in redemptions, putting them on pace for their worst year since 2004's $7B loss. This comes against $1.2T of inflows from 2009-2012.
It's estimated Pimco saw $7.4B in redemptions in August as Bill Gross' giant Total Return Fund (ETF version: BOND) has lost 3.6% YTD. Some Pimco closed-end funds having a rough run (with a couple now trading at rare discounts to NAV): PHK, PTY, PDI.
DoubleLine is estimated to have lost $631M, but Jeff Gundlach's Total Return Fund has fallen just 1.1% YTD - better than 86% of its rivals. The DBL now trades at a discount to NAV.
Leading mREITs (REM -1.4%) lower are Invesco (IVR -3.3%), Annaly (NLY -2.3%), American Capital (AGNC -2%), and Western Asset (WMC -1.6%).
A number of income CEFs not long ago were so much in favor they commanded large premiums to NAV. They're now at seemingly growing-by-the-day discounts. Among the movers today is the Pimco Dynamic Income Fund (PDI -1.4%) selling for $27.45 against yesterday's closing NAV of $30.23. Others include: PCI, PFN, and PFL.
Still trading at premiums to NAV are the Pimco High Income Fund (PHK -0.9%) and the Pimco Corporate & Income Fund (PTY -1.1%).
The Fund will seek to achieve its investment objectives to produce total return for shareholders by utilizing a dynamic asset allocation strategy among multiple fixed-income sectors to invest in a portfolio of fixed-income securities and related instrument