Archive

Posts Tagged ‘PIMCO’

Is This a New Price Floor at DOW 11,000?

April 13th, 2010 Brian No comments

The DOW punched through 11,000 at the open on Monday, April 12 (after moving through briefly on Friday) and the SP500 will possibly close above 1200 today, on Tuesday. If these two levels hold for the rest of this week, then a new psychological floor will be established.

The round numbers like 1000, 1100 and 1200 are easy for most casual investors to remember and relate to, so they do act as psychological barriers, both up and down. The true technicians can find many in between those levels, by using various moving averages like 21 day or 100 day and stochastics / oscillators. But the round numbers are the stronger. Once four days pass, the duration defined by IBD's William O'Neil as having some , the barriers become difficult to break down.

With 11,000 and 1200 setting up as new floors, then the obvious targets become the next round number up, 12,000 and 1300. Given continued good news on earnings and revenue growth, even at a slow pace, economic strengthening, and digestion of problems like Greece, those targets will become a reality by year end.

Jim Paulsen and Ed Keon, two very thoughtful and accurate forecasters, believe that the economy has turned a corner and that revenue growth will take up where profits growth has already gone. It has been a lack of "top line" growth that has kept the market in check. Paulsen and Keon both believe the indicators show the economy strengthning. A stronger economy in combination with high "operational leverage" from very trim , will be earnings and cash flow rocket fuel if revenue grows significantly the next 12 months.

This throws a big question on the PIMCO "New Normal" thesis. If the economy picks up due to so much government stimulus and a generally strong global backdrop, US GNP could grow above 5% in 2010, which is of the "Old Normal" recovery variety. This would be a big change from where the market currently values the economic prospects and would take the DOW and SP500 up another 10-15% if it proves true.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • NewsVine
  • Reddit
  • StumbleUpon
  • Google Bookmarks
  • Yahoo! Buzz
  • Twitter
  • Technorati
  • Live
  • LinkedIn
  • MySpace
Tags: , , , , , , , , , , , , , , , , , , , , , ,
Categories: Economics, Forecast, Stocks

Mohammed El-Erian versus Robert Barbera

April 2nd, 2010 Brian No comments

The jobs report this morning, April 2, was pleasantly neutral (not too hot and not too cold, but just right) Everyone agreed that the report showed the economy is making progress and the stimulus is working. The markets showed that at the open (bond and futures). There is really nothing to stop the market from moving up another 10%, now. But further out, there is a debate. Today that debate was led between Robert Barbera and El-Erian.

Of course, El-Erian was pumping the "New Normal" paradigm of PIMCO. Barbera was maintaining his "Old Normal" posture, for which he has been an outlier the last year (there are a couple others like Mike Darda and Jim Paulsen, our local MN boy). The New Normal states that we are stuck in a stagnant recovery like in the 1930s with high unemployment and low economic growth. PIMCO has been whoring this idea for the past year. PIMCO led by , really thinks they have ALL the answers and everyone else is just wrong. But we have caught being wrong on interest rates in the past. No reason to think they are right this time.

Meantime, Barbera, like Paulsen, has been calling for 4-5% GNP growth this year (same as my call, by the way), with enough momentum to achieve "escape velocity". This is another way of saying the economy will not stagnate near no-growth, but will get back on to a normal cyclical track.

I agree with Barbera and my investing posture shows that. I believe we will get back on a positive economic track and for a lot of good reasons. I have maintained the only thing that can screw up the economy is the government making the wrong moves. But for demographic reasons, I think the Feds will be forced to make the right moves, even against the will of Obama.

Obama is an ideologue. He doesn't seem to care much what happens to the economy so long as he can socialize the country. He wants to "lift up the poor" on the backs of the rich. Unfortunately for him, that is NOT what most Americans want. They didn't want more of the Bush Jr. regime. They did want "change", whatever that means. Now they have found they are getting way too much change. The Dems will lose power in November and that will allow our economy to get back to the "Old Normal".

This is my take and for this reason, I am staying long.


Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • NewsVine
  • Reddit
  • StumbleUpon
  • Google Bookmarks
  • Yahoo! Buzz
  • Twitter
  • Technorati
  • Live
  • LinkedIn
  • MySpace
Tags: , , , , , , , , , , , , , , , , , , , , ,

Is Reflation Policy Bullish for Gold? Unlikely

November 15th, 2009 Brian 3 comments

There is a simple fact that all Goldbugs miss: and that is the American economy, and most all others in the world, have just experienced a massive asset DEFLATION (still underway in some segments like commercial real estate). This deflation in America was about $15T over the past two years according to New York University's Nouriel Roubini (from $40T to $25T). That asset deflation was completely psychological. One day American assets of all types were worth one value in dollars and just a little bit later, were worth quite a bit less. There was no massive physical destruction of assets as in a war (counter to the weak Weimar argument for hyperinfaltion), only economic.

The basis for my opinions on monetary reflation are derived from Hyman Minsky's work. PIMCO's Paul McCulley has written on "The Minsky Solution" many times the past two years. In early January, I featured one of McCulley's articles in a post: http://wealth-ed.com/2009/01/reflation-economics-or-the-minsky-solution/

To deflate assets requires the value of the currency those assets are denominated in to increase as the quantity decreases (this might be counterintuivitive for most). In essence, $15T of dollars were destroyed or disappeared (not physically, but notionally with debt paper markdowns). Less dollar supply at a given demand = higher price / value. Central bankers everywhere understand this dynamic. So, in a coordinated way to restore stability to global assets, currencies are being expanded to replace those notionally destroyed through markdowns during 2008 (the paper that underpinned all those assets, CDOs, RMBS, etc).

The most intelligent dissertation I have seen on repairing a deflation was printed in Barrons last February. Ray Dalio, a rare Barrons contributor, was interviewed. I reference this interview on this blog: http://wealth-ed.com/2009/02/fixing-a-deflation-a-most-intelligent-analysis/

To recap what Dalio said, then, and most presciently: this CB driven monetary expansion is NOT inflationary to the extent that aggregate asset values are being returned to 2007 levels. "How can this be?", say all the skeptics at this point.  My answer: by definition, the reduction of the value of $40T national assets to $25T assets is DEFLATIONARY. In America, $15T of the global reserve "currency" (almost all of it electronic bookkeeping and not "paper") can be created to replace the "paper" that was lost in 2008, with mostly positive effects. There is no deleterious effect so long as the re-creation of the lost currency is done slowly enough as to not be disruptive to global currency flows (currency destruction in 2008 was disruptive enough, don't we all agree?)

$80 Oil and $3 copper is probably in the area of "fair value" vs. the dollar given a mid 2007 USD reference. But $1100 Gold? Unlikely. Gold is now trading on speculative fear of inflation, not the reality of inflation itself. So far, the dollar has not even been expanded (reflated) sufficiently to move asset values back to mid-2007 (check local house prices). Monetary expansion is definitely not inflationary, in America, at this point in time. For gold to be worth $1100, let alone $1500, then global central banks must be unable to stop the expansion that has started in an effort to stabilize asset values. Maybe that is a reasonable speculation, and maybe not (and I own a prudent number of gold shares as a hedge, just in case it is). But like many others, as a more significant inflation hedge, I would rather take my chances with commodities that have fundamental industrial value, and not merely the psychic value of gold.  As is pointed out, gold is worth nothing unto itself. And worse, gold is not consumed, so supply forever increases. This ever-increasing supply dynamic is NOT the hallmark of a good investment.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • NewsVine
  • Reddit
  • StumbleUpon
  • Google Bookmarks
  • Yahoo! Buzz
  • Twitter
  • Technorati
  • Live
  • LinkedIn
  • MySpace
Tags: , , , , , , , , , , , , ,
Categories: Economics, Forecast

Bill Gross’ “New Normal” is Really the Old Normal After All

October 28th, 2009 Brian No comments

and his PIMCO shop started using a term for our economic future that they term "the New Normal". I hate this term. It is the same thing as saying "this time its different". It is never different. The same old story is played over and over. The costumes might change, but the story's the same. It is a bit arrogant for the PIMCO shop to think they are the first to find this new thing.

Mario Gabelli and were on CNBC this morning at the same time. Mario made the point to Bill that the past 100 years saw a 4-5% annual appreciation in the stock market, so if we average 4-5% per year for the next 100 years, then it really is not so new, but is in fact quite an old average. Bill did not have a good rejoinder to this point. Score one for Gabelli. Gross and Gabelli also agree that a good manager can add a few points of "Alpha" to that average return. So, 7-8% is possible with good portfolio management, in a very low inflation environment.


What is really important, after all, is not the nominal return, but the real, or net of inflation, return. PIMCO is not projecting anything "New" here. In the very long run (hundreds of years), "Real Return" averages 2 to 3 percent. Gross is not saying that will change. What he says will change is nominal return which average 8-10 percent from 1929 to 2005. But this was also a period of higher than historical average inflation due to loose dollar policies in the 1930s and again in the 1970s. If inflation returns to its long run average of 2%, than the "New Normal" of 4 to 5 percent has an embedded 2 to 3% Real Return, which is the old normal. I am not sure why is making such a big deal about it.

"The new normal basically recognizes that we're in an economy that's de-levering and that we'll move to an average level that's lower than before," Gross said. "We're de-levering, loans are going to be less available…homeowners are going to have to put 20 percent down now, as opposed to zero."

The Federal Reserve is likely to keep rates at the same level for a while, because the economy would need to grow by nominal rates of 4 percent or 5 percent to prevent debt from destroying growth, Gross said. "They (the Fed) have to stay low because the embedded cost of debt (interest payments) in the economy is 6 to 7 percent," of GNP, said Gross.

This brings up an interesting quandary for many of the Bears who frequent the investing world today. , who many consider to be the world's leading private sector expert on the future of interest rates and bond prices, says they are staying low and must be kept low in order to achieve his "New Normal", Excess productive capacity and an emerging market with excess and cheap labor also suggest this future reality. Gross implies a long period of low inflation and low return.

This really undermines the Bear argument for high inflation and / or continued crashing of the markets (which is inherently deflationary; never really understood how the Bears expect high inflation and high deflation simultaneously, which underscores how weak is the Bear argument).

As a member of the "baby boom" generation (like Gross) fast approaching retirement, a low inflation environment, with historical 2 to 3 percent Real Return sounds almost ideal to me. I think I will like ' "New (Old) Normal".

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • NewsVine
  • Reddit
  • StumbleUpon
  • Google Bookmarks
  • Yahoo! Buzz
  • Twitter
  • Technorati
  • Live
  • LinkedIn
  • MySpace
Tags: , , , , , ,
Categories: Economics, Forecast

Another Bear Jumps Ship: James Grant

September 20th, 2009 Brian No comments

James Grant penned a commentary in the weekend edition of the Wall Street Journal (September 19, 2009).  James is always worth reading (Grant's Interest Rate Observer).  He has been a moderately bearish commentator for as long as I have been reading his work (10 years), most often in Barron's articles.  He has bemoaned the high consumer and national debt and the very low (even negative) personal savings rate in America.  For this, he has called for a weak dollar and higher interest rates for the past decade.

That he flys in the face of his brethren bears is of no small consequence to me.  Normally James Grant's perspective is closely aligned with so-called other "bond vigilantes" like at PIMCO and perma-bears like Bill Fleckenstein or Peter Schiff.  Those other dollar sellers / interest rate watchers are still looking for a flat to declining economy and dollar and moribund economy.  Grant really is making a departure from his club here, which is good because it is contrary.

He was early to call the stock market decline, as far back as 2005.  But this is news: now he sees it is time to become Bullish, if for the all the wrong reasons in his view.  James Grant is leaving the Bear camp (maybe six months late).   Here is an excerpt from his article.  Click here to read the entire piece from the WSJ.

315877-125348034829241-The-Manual-of-Ideas

Though we can't see into the future, we can observe how people are preparing to meet it. Depleted inventories, bloated jobless rolls and rock-bottom interest rates suggest that people are preparing for to meet it from the inside of a bomb shelter.

The Great Recession destroyed confidence as much as it did jobs and wealth. Here was a slump out of central casting. From the peak, inflation-adjusted gross domestic product has fallen by 3.9%. The meek and mild downturns of 1990-91 and 2001 (each, coincidentally, just eight months long, hardly worth the bother), brought losses to the real GDP of just 1.4% and 0.3%, respectively. The recession that sunk its hooks into the U.S. economy in the fourth quarter of 2007 has set unwanted records in such vital statistical categories as manufacturing and trade inventories (the steepest decline since 1949), capacity utilization (lowest since at least 1967) and industrial production (sharpest fall since 1946)......

.....By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition. By opening their arms wide to such previously unfinanceable businesses as AMR Corp., parent of American Airlines, and Delta Air Lines Inc., the newly confident credit markets are implementing their own stimulus program. "Reflexivity" is the three-dollar word coined by the speculator George Soros to describe the dual effect of market oscillations. Not only does the rise and fall of the averages reflect economic reality, but it also changes it. One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today's bull markets are helping to revive it.

I promised to be bullish , and I am (for once)—bullish on the prospects for unscripted strength in business activity. So, too, is the Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute's long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983. A second nonconformist, the previously cited Mr. Darda, notes that the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 —after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion. Which is not to say, he cautions, that growth this time will match that pace, only that growth is likely to surprise by its strength, not weakness.

And that is my case, too. The world is positioned for disappointment. But, in economic and financial matters, the world rarely gets what it expects. Pigou had humanity's number. The "error of pessimism" is born the size of a full-grown man—the size of the average adult economist, for example.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • NewsVine
  • Reddit
  • StumbleUpon
  • Google Bookmarks
  • Yahoo! Buzz
  • Twitter
  • Technorati
  • Live
  • LinkedIn
  • MySpace
Tags: , , , , , , , , ,
Categories: Economics, Forecast, Investing