Advice On How To Trade Gross' Treasury Dump From A Former PIMCO Employee

Tyler Durden's picture

From Brian Rogers at Fator Securities

The PIMCO call

The commentary today is about the bond fund manager PIMCO and the US Treasury holdings in their flagship $236bn Total Return Fund, the largest bond fund on the planet.  An article today on Zero Hedge discussed how as of 2/28/11, the Total Return Fund had reduced its holdings of US Treasuries down to 0%!  (link here)  This is a very big deal and the only time to my knowledge the fund has ever moved total US Treasury holdings to 0%. 

To give this call some perspective, the PIMCO Total Return Fund is managed vs. the BarCap Aggregrate Total Return Index (this is the former LBAGG or Lehman Brothers Aggregrate).  The BarCap Agg index has a total allocation to US Government securities of around 40% (link here).  This means that PIMCO is underweight its bogey in US Treasuries by about 40 % which in the bond market is a MASSIVE underweight.  PIMCO has also reduced duration in the fund to 3.89 years which is the lowest since December 2008 at the height of the liquidity crisis.

Why is this significant?

Having worked at PIMCO for 4.5 years, I can tell you that this kind of a major allocation decision was not reached overnight nor was it reached without considerable debate by every senior member of the firm.  In other words, the decision to lower total US Treasuries to 0% was discussed by senior portfolio managers, senior account managers and many prominent outside consultants for days and perhaps even weeks before it was finally implemented.  They never do anything over there without vigorous debate and discussion.  For example, Alan Greenspan is a paid consultant to the firm and often participates in their quarterly Secular Outlook meetings.  I don’t know if Mr. Greenspan participated in the debate about this decision but I wouldn’t be surprised if he or others of his stature did.

By this move PIMCO is clearly indicating, almost by putting their reputation on the line because imagine the underperformance they face if they are wrong, that bond yields in the US will be rising soon, US Treasury prices falling and liquidity drying up to some degree.

Does this move make sense?

While it’s impossible to know the future, in my opinion this is something that should NOT be ignored.  The S&P has rallied about 25% on pure QE2 since late-August 2010 which is not organic or sustainable.  Commodity prices have surged and it is becoming well-documented that many companies are having a hard time passing along price increases without facing demand destruction: this leads to margin compression.  If rates do rise as PIMCO suggests, add into the mix a cost of capital that could go up by at least the move in Treasuries which Gross argues should be at least 150bps to compensate Treasury investors for their risk.  Which means that cost of capital could go up by at least 150bps while input costs are rising, margins are compressing and liquidity drying up.  This is a sure recipe for a sell-off so yes, I think this move by PIMCO makes sense.

Another thing to consider is that because of their sheer size in the fixed income market, PIMCO is a market mover no matter what they do.  So simply not being in the US Treasury market means a huge buyer is missing and rates will rise simply due to this supply/demand imbalance so to some extent, PIMCO can make interest rates go up all by themselves by simply not buying.  Very few organizations on the planet can exert this kind of pressure on rates outside of central banks.

How should equity investors play this?

If this call is correct, and of course there is no way to know if the people at PIMCO will ultimately be right, BUT, if this call is correct, I think the way to play this news is as follows:

1.    Sell positions that have done well since Aug 2010 when Bernanke first announced QE2 at Jacksonhole.
2.    Move into an overweight position in large, liquid names.
3.    Buy defensives like utilities and telecoms as dividend plays should outperform growth plays.
4.    Raise cash with the idea of being a liquidity provider at some point in the future after the market has moved lower.
a.    To this end, create a “wish list” of stocks that you like but think are too expensive.  They are likely to get cheaper soon.
5.    Liquid Brazilian names to consider include Petrobras, Itau, AmBev, Copel, and Vivo.



* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

Fator Securities LLC is not affiliated with Zero Hedge or any third party mentioned in this communication; nor is Fator Securities LLC responsible for content on third party websites referred to in this communication.

This material was not prepared by Fator Securities LLC. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.

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Nolsgrad's picture

whoa nellie! PIMCO had 0% gov't related in Jan '09! kinda puts a dent in this argument.

edit:see graph

morph's picture

Yes and bond yields were rock bottom then too. When they rose to 4% again PIMCO started buying, clearly this time they don't plan to start buying till past 4%


Pladizow's picture

What about the obvious - Short Long Bonds?

IQ 145's picture

 This is correct. Spoken of frequently as the trade of the decade and then ignored, due to "information overload"; eg. something buzzy came along. The Long Bond, a contract on the CME topped out in Sept. and Oct. of last year. It can be shorted at any time, provided that you understand not to use huge amounts of margin, and that you wait for a reasonable amount of time; ie. a year.The important thing about this trade is that it is guaranteed; the Long Bond took many many years to get to it;s high; and it will trade down for years.

uhb's picture

Sell the fvcking dip in $bonds, bitchez!

My iq is only 127, but even i figured that one out. But i'm honored we're in the same boat, investment-wise.

Kobe Beef's picture

Played with rolling Put option spreads? Sounds like a good game.

I must confess, I'm somewhat alarmed by this. Is PIMCO foretelling a UST sovereign default (in un-hyperinflated dollars) coming soon?



impending doom's picture

Should you trust a person who spells his own name incorrectly? Brain/Brian? For the life of me I can't recall a single time in my life I've ever spelled my own slave name wrong...

Bear's picture

Impending Doom is pretty easy to spell.

Atomizer's picture

Brian is having a brain fart.

vxpatel's picture

Really? you think he used his real name AND the fact he worked at PIMCO?


VegasBD's picture

Plus Greenspan has been at PimCo's offices once a week for the past two months. Talk about 'expert networks' !!!

StychoKiller's picture

I'm thinking someone knows that QE3 is coming down the pipe, like a huge, rotten lump of filth...SPLASH!! :>(

Judge Judy Scheinlok's picture

Dent in the argument?

Making trades based on advice from a anonymous blog is FOLLY. Did Tyler forget or is this a test? This whole PIMPCO thing stinks like a yeasty vagina.

~Judge Judy, Fagwhor Securities

IQ 145's picture

 of course, it's the worst example of internet wisdom to be attracted to anything because of "insiders"; but look at the price chart; the long bond topped out in sept. Oct. last year. it will go down for years; completely without the "insider", this is a trade that will give you money for years.

carbonmutant's picture

Well if there is no QE3 the Dollar should do well...

DosZap's picture

Here's a stud that will disagree on the QE.

Great Opinion Piece w/data/

Eric Cartman's picture

It might not be named QE3, but whatever program they impliment will function the same way. 

Rainman's picture

Ahah....the Maestro was the mole all along. h/t Brain

Bastiat's picture

Under that scenario, the toilet will flush on the US economy so hard it will make your ears pop.

bull-market_3.0's picture

Does this suggest PM are going down too? 

Bastiat's picture

Years to go is my opinion and I don't believe they will ever "go down" priced in terms of the doomed USD.  Collapse the economy as interest rates rise and compounding UST debt and interest rates spiral up?  How's that look for tax revenues?  Collapsing pension balances?  r/e prices (bank balance sheets)?  Deflationary death or QE to infinity--either destroys the USD one sooner, one later.

gwar5's picture

I'm with you. Interest rate raises will only make us more like Portugal. US deficits worse, debt worse, the USD worser.

And, there's an election coming up and pressure to spend even more.

StychoKiller's picture

The Bernank:  "D@mn it, I KNOW prosperity is under this mountain of FRNs somewhere..." :>(

huntergvl's picture

I think PMs will retreat by maybe 10% during the s&p reset, and Miners will take a bigger hit, maybe 25%. The broader market will be worse with energy and other commodities doing best along with huge Blue Chips with solid dividend streams.

All others will be annihlated.

My view and plan is that if you are nimble, you can catch a hellacious deal in PM Miners and stick with them at least through the years end, then re-evaluate the trade. Of course you can just stay long term and you will do well, but I prefer the trade.

I have a large cash position right now and I'm waiting patiently. QE3 is by no means assured. The sell off will be intense and oversold and there will be much misery and fear, but savvy investors will know where the deals are.

Caviar Emptor's picture

I think they believe that yields will spike without the implied threat of QE3, and now at 3-months out the Fed is being coy. 

But I also think they want to send a clear message to the Fed: without that QE bid being long bonds is like stepping in front of a bus so just call us Charles Bronson (still the ultimate Vigilante)

pauldia's picture

Interesting to see if Pimco traded out of their Treasuries took a position into PM's.

Tucson Tom's picture

Bingo! The question Tyler raised today.And the answer is-----

Rainman's picture

raises hand, all assets classes in a bubble ??

StychoKiller's picture

Get thee into commodities, especially PMs!

gordengeko's picture

I think TD nailed it when he said everything not nailed down goes bubbye.  This is the most leveraged market in the history of ponzi casino-in-the-sky schemes.  So, it shouldn't surprise to see everything take a hit, once it commences.  My skepticism is with the silver price.  There is too much physical gone and if that price fell back to 31-32 let alone <30, I just don't see how it will be possible for the price to stay down for very long.  It would lead to the end game for real.  Which also means gold should stay close to current levels.  Pimco sitting on all that cash waiting for something???  I'm sure they aren't the only big money in town that's waiting for Ben to use up all the dumbass-charlie sheen-snooki-idol watching US tax payer money!  Then swoop in and buy.

Bear's picture

If you buy soap, you can be assured of bubbles ... but that's it

CitizenPete's picture

Wha?  what's with the Brazilian name pump at the end?

william the bastard's picture

Curious yes? Is he too cute by half with that?

However, refernce the obvious as stated by Jeff Gundlach this morning (and I paraphrase): "The best asset in a blown up asset class will still suffer"

Gundlach Sees Munis Dropping Another 15-20%, "By The Time All Muni Shoes Drop It Will Look Like Imelda Marcos' Closet"

william the bastard's picture

Looks like Factor has a Brazilian parent and as such have concerned Brazilian clients. It is after all Ash Wednesday and they may be waking up soon.

random shots's picture

Really ZH?...

We are suppose to take advice from a person who has not worked at PIMCO for nearly nine years?

Sell side whores are cool when they serve the cause?


gringo28's picture

yea, nice catch. amd he worked at Bulltick which is a latam broker dealer. bottom line, is if there is a sell-off here, Brazil will get whacked hard. i can't believe this guy put his real name on this. unfuckingbelievable.

Spalding_Smailes's picture

The Chinese Communist Part Promotes Evil

March 7 2011

( Many Chinese are aware of two significant challenges in seeking medical care in China—the high cost of medication and the abundance of fake medication. Hospital pharmacy managers are in charge of buying medication for hospital patients. Practitioner Mr. Hu Dali is the pharmacy manager at Chinese Medical Hospital in Xiuwen County, Guizhou Province. After he began practicing Falun Dafa in 1996, he strictly followed the principles of Truthfulness-Compassion-Forbearance. As the pharmacy manager, he always put the patients’ health as top priority and was careful in buying only good quality medicine.

Since the Chinese Communist Party (CCP) began its persecution of Falun Gong in 1999, Mr. Hu has been detained and sent to a forced labor camp three times for his belief in Falun Gong. As a result of the tortures he suffered, his legs became disabled in 2003. He was later sentenced to ten years imprisonment at Duyun Prison. There, he was subjected to the most unimaginable torture, the so-called “bacteria treatment”—where prison guards mix tuberculosis patients’ spit into practitioners’ food. Mr. Hu was locked in solitary confinement and his meals were handled by the prison inmates. As a result of eating the contaminated foods, he was infected with tuberculosis. Mr. Hu passed away at age of 39 in January 2011.

Torture of Falun Gong Practitioners in Hebei Province Women's Prison

( Hebei Province Women’s Prison is located southwest of Shijiazhuang City, near Luquan City, and at the base of Taihang Mountain. To the north of the prison is the Hebei Province Women’s Detention Center. The prison is divided into 17 sections, including a Juvenile Detention Center. There are a total of 3,000 prisoners, among which are more than 200 Falun Gong practitioners. Forced labor mainly includes clothing production, and much of it is the production of police and army uniforms. The prison claims a “transformation rate” (of Falun Gong practitioners) of more than 95%. I’d like to provide an account of the persecution here.

I. Section 14′s “Newcomers Group,” otherwise known as the “Lock-down Group”

New arrivals are forced to wear a prison uniform and have their hair cut. If the practitioner refuses to wear the uniform, she is assaulted by several team leaders. In the evening, the section instructor comes to talk to the practitioner. He will act very pleasant, asking the practitioner about where she lives, her family situation, etc. Then he will say things like, “If you follow the rules and behave well, then we will shorten the sentence for a Falun Gong practitioner more than the regular prisoners, and so you can get out sooner.” Meanwhile, the guards arrange prisoners to monitor the practitioner 24 hours a day, and these prisoners have to report back on the situation each day. Practitioners are not allowed to go outside or join any group activities.

From 5:00 a.m. to 9:30 p.m., practitioners are often forced to sit on tiny stools and are not allowed to talk to anyone. If the practitioner refuses to give up her faith, the persecution gets escalated. She will be watched by more prisoners and forced to stand still facing a wall. Other than meals and going to the restroom, she will have to stand the entire time and will be beaten and cursed at if she does not follow orders.

In its literature for outside consumption, the prison states that in Section 14, prisoners do not do labor and only “study and attend classes.” However, the prisoners are made to do forced labor, including putting beads on strings, folding shower curtains and shower caps, folding magazines, etc. If more labor is assigned than what they can finish, they are forced to work overtime. If a Falun Gong practitioner refuse to do the labor, she is made to stand still or sit on a tiny stool for long periods of time. After several days of sitting, the hip area swells up, causing severe pain.

I personally saw the torture of a Falun Gong practitioner who looked about 35 years old. She refused to cooperate with the prison authorities, and was punished with being forced to sit on a tiny stool every day. She was not allowed to speak and sometimes was not allowed to go to bed until midnight. She was constantly cursed at and beaten. Frequently she would have nightmares and scream in the middle of the night. As a result, she suffered even more brutal beatings. Many times she was dragged by guards into a restroom and brutally beaten. She was also dragged into a lobby, where she was forced to stand for a long time. On more than one occasion, her mouth was taped shut and she was dragged along the ground while completely naked.

She resisted the persecution with a hunger strike. In response, the authorities took her to the prison hospital to be force-fed. They force-fed an unknown drug to her, causing her mental condition to deteriorate. When she returned, prison guards continued to torture her behind closed doors. She became expressionless, lost much of her memory, and could only talk very slowly in a weak voice. Her face was swollen and she had trouble walking. The torture caused her to look much older than she was. Later she was sent to Section 11, designated for prisoners with mental illnesses, where the torture continued.

While being held in their individual sections, Falun Gong practitioners are not allowed to contact each other. Even when performing forced labor, practitioners have to be separated by regular prisoners. Practitioners are not allowed to study or recite the Falun Gong teachings or do the Falun Gong exercises. Every week the prison cells are searched and practitioners are the main targets. If Falun Gong books or lectures are found, the practitioners are either fined or punished; usually they are made to stand still. Each practitioner has 1-3 monitoring prisoners who closely watch the practitioner and report to team leaders whenever they see anything not in line with prison rules. Because prisoners are awarded points for their cooperation, which may allow them to get out of prison sooner, they often beat and curse Falun Gong practitioners at will.

In Section 4, there is a practitioner who is about 50 years old, an intellectual likely from the Zhangjiakou area. Because he went on a hunger strike to resist the persecution, every day he was dragged by several monitoring prisoners to the prison hospital to be force-fed. There were carts available for transportation, but they chose not use one, so as to inflict more harm on the practitioner. As a result, the practitioner’s pants were torn and ripped, his hip area was bloody, and she was covered in sand and dirt.

Practitioners are also forced to have their meals outside year-round, and those who are on hunger strikes have to watch the others eat on the side while standing.

Work in the various sections starts at 7:00 a.m. and lasts until 9:00 p.m.– around 13 or 14 hours of hard labor. There is no time off on the weekends and rarely time off on holidays. Even with this kind of work schedule, the prisoners often have to work overtime. On one occasion, sections 4 and 5 did not allow the prisoners to go to bed for an entire week. They fell asleep at their work benches and continued to work after waking up.

IQ 145's picture

 No, you're not supposed to take advice from him. you're supposed to look at the price charts and think. The news item about Pimcos holdings is very cognent. The long bond has had it; it's a short, for a long time; for a lot of money; study the futures market; forget about stocks. The Long Bond is traded on the CME

Sutton's picture

PIMCO rotated all of the money into Coffee futures.

TooBearish's picture

A large west coast account was selling straddles on FI futures today - FWIW

Bastiat's picture

Likely rates will continue to go up and printing press will run faster, not slower.  Commodities won't be stopped by interest rates.  Nor will gold and silver. 

InconvenientCounterParty's picture

"Commodities won't be stopped by interest rates. Nor will gold and silver."

Not everyone hated the 70's