PIMCO

Are we going to have a V-shaped recovery? W-shaped? L-shaped? WWWWW-shaped?

Pimco's flagship Total Return Fund released its November data: the fund continues liquidating its MBS holdings, selling another $7 billion in November (after dumping $10 billion in October), and bringing the total to the lowest it has held of this security, at $23.9 billion. Keep in mind TRF held just under $120 billion of Mortgage Securities in February: a nearly $100 billion reduction. Thank you Ben Bernanke Bid. Mortgages are not the only class getting cleansed by Gross: the world's biggest bond fund also sold $20 billion of Treasuries, bringing its govvy holdings to $101.7 billion, down from $121.3 billion in November. The biggest beneficiary: cash, which increased from a net short position of -$13.5 billion to $14 billion. And in the meantime, the fund still made a boatload: total AUM in TRF increased from $192.6 billion to $199.4 Gross is sticking to his pessimistic view and liquidating. Who is buying?

Bill Gross' PIMCO is selling mortgage securities like there is no tomorrow. In October, the Newport Beach firm's Total Return Fund held the lowest amount of mortgages in recent (or distant) history: at 16% of the total $193 billion in fund total net assets, securities backed by the housing bubble (v1 and/or v2) accounted for a record low $30.8 billion of all holdings. In January the same fund held $113 billion of these securities: the firm has now disposed over $80 billion of mortgage-backed toxic securities. And who is the buyer: you dear taxpayer, courtesy of Ben Bernanke and Wellington Asset Management, which has taught the Fed all it needs to know about conducting secret Bill Gross bailouts away from the public's eye. As to what price these transactions occurred at, well, that is one thing you will never know so long as Barney Frank and other idiots in the Congress and Senate refuse to provide the level of Fed transparency demanded by Ron Paul and Alan Grayson.

Not a good day for PIMCO as Calpers continues scapegoating for its deplorable performance, and today the California Pension manager decided to trim its exposure to PIMCO. In doing so, Calpers slammed the Newport Beach firm for being too risk averse (watch out Bill, you know what happened to John Mack for being too timid): "While PIMCO managed to return 35.06% [from January to September 2009], PIMCO's aversion to risk resulted in underperforming the benchmark return of 47.45% by 1,238 bp." The result: Calpers is pulling $100 million from PIMCO, however it is not firing the manager altogether and instead will consider "allocating more assets to PIMCO in the future when risk aversion is expected to produce alpha in the high yield market."

How can it be that risk assets, notably common stocks, have been roaring ahead, presumably discounting a robust V-shaped economic recovery, while Treasury bonds are holding their own with a bull flattening bias, presumably rejecting the V-shaped hypothesis, instead discounting a U-shaped recovery as the base case, with a W-shaped outcome the dominant risk case?

As everyone else has been cheering the revival of the housing bubble, one person has been busy offloading a significant portion of his exposure to housing: Bill Gross. And the direct sponsor of billions of dollars hitting Mr. Gross' Wells Fargo banking account, why, the US taxpayer of course, courtesy of the Fed's printing press which continues keeping prices artificially high. With the Fed en route to purchase nearly one and a half trillion in Agency and MBS paper (for now), it has found eager sellers in the face of PIMCO. MarketWatch reports that PIMCO sold $30 billion in agency paper in September alone, and has sold over $80 billion year to date.

In a repeat of its actions with the Lehman ad hoc committee, PIMCO has now decided to abdicate its role on the CIT steering committee, and sell off its associated holdings. Several questions emerge: the broad public is already aware of the CDS windfall that Goldman stands to reap if CIT ultimately does experience an "event of default" which at this point is a merely formality. So, in a parallel line of thought, just how much is PIMCO hedged to its CIT exposure? And if the answer is "much to quite much", will the combined interests of Goldman and PIMCO to effectively let the company sink be enough to warrant what may otherwise not have been a foregone conclusion on the viability of the company. Furthermore, while part of the Steering committee, how muchrestricted data was PIMCO privy to? One imagines CIT is a veritable treasure trove full of insights into the lending practices by its millions of customers. Obviously while PIMCO was a committee member, it was unable to trade on this data (right SEC?). Now that it is officially separate from this restriction, an appropriate question would be just what are the limitations in place for preventing it from taking advantage of its huge capital base and all the confidential information it may have gleaned?

PIMCO happy, Bernanke happy, Dollar mauled, Stocks flying. All is good.

"And while we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative. In combination with other factors, that likely means a continuing devaluing of the U.S. dollars versus other currencies, especially the EM currencies. Accordingly investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure."

In an article titled "The dumb money is buying equities" dated August 17, 2009, City Wire's Charlie Parker writes:

Please understand me, if you are a buyer of equities at the moment then I am not calling you stupid.

I am just saying that you are acting with the stupid. In fact, it is not really me that is saying this, but Pimco.

The mammoth US fixed income operation, which is most famous for bringing investor Bill Gross to the world, also offers a prolific blogging service from its fund managers. The service, called 'Zero hedge', comes with the rather unnerving catchphrase 'On a long enough timescale the survival rate for everyone drops to zero'. Anyway.

"Trepp will focus solely on CMBS. PIMCO will perform a broader role which encompasses the entire TALF portfolio, including both mortgage-backed and non-mortgage-backed ABS. The collateral monitors will not establish policies or make decisions for the New York Fed, including decisions whether to reject a CMBS as collateral for a TALF loan or exclude loans from mortgage pools."

"Investment conclusions? A 3% nominal GDP "new normal"means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model."

Bill Gross

In the accompanying presentation, it is easy to see why Bill Gross' PIMCO is highly bullish on credit of any variety. As the table below demonstrates, taken straight out of the biggest bond fund's May 2009 presentation "Investing for the Journey and the Destination: What it means across the Capital Structure" PIMCO doesn't see any overvalued instruments in the credit realm: MBS, IG, EM and HY/Loans all have wonderfully green and positive metrics in the valuation column.

In the accompanying presentation, it is easy to see why Bill Gross' PIMCO is highly bullish on credit of any variety. As the table below demonstrates, taken straight out of the biggest bond fund's May 2009 presentation "Investing for the Journey and the Destination: What it means across the Capital Structure" PIMCO doesn't see any overvalued instruments in the credit realm: MBS, IG, EM and HY/Loans all have wonderfully green and positive metrics in the valuation column.

In the accompanying presentation, it is easy to see why Bill Gross' PIMCO is highly bullish on credit of any variety. As the table below demonstrates, taken straight out of the biggest bond fund's May 2009 presentation "Investing for the Journey and the Destination: What it means across the Capital Structure" PIMCO doesn't see any overvalued instruments in the credit realm: MBS, IG, EM and HY/Loans all have wonderfully green and positive metrics in the valuation column.