"You Could See Panic": PIMCO Joins Gundlach In Loading Up On S&P Puts

In the world of giant bond funds, imitation of trades just may be the sincerest form of flattery.

Just two days after DoubleLine's Jeff Gundlach told Bloomberg and CNBC that he was taking profits in high risk assets, including corporate profits, building a buffer and loading up on VIX as a surge in volatility was his "highest conviction trade" (and correctly so, as just one day later VIX soared from 10 to 17), that "other" bond titan, Pimco said it was doing precisely the same.

Speaking to Reuters, Pimco's chief investment officer, Dan Ivascyn, said on Friday that his firm which which oversees more than $1.6 trillion of assets "has built up an above-average cash position firmwide and has held S&P put options as geopolitical and military risks mount."

The former should not come as a surprise: three weeks ago we reported that according to Bank of America, the cash allocation among the bank's high net worth private clients (i.e. rich retail investors) had fallen to the lowest on record as institutions were liquidating stocks to increasingly more euphoria retail investors, which obviously meant that those on the other side of the trade - in this case selling institutions like Pimco - were building up their cash reserves, because contrary to CNBC's constantly erroneous reporting on the topic for nearly a decade, there is no such thing as "cash on the sidelines" and every time someone buys a stock or any other risk assets, someone else sells it and pockets cash proceeds.

What was a surprise, however, is that PIMCO had been actively hedging for a sharp market drop by loading up on puts. And while it is unclear if its trade profile was as aggressive as that of Gundlach, PIMCO's admission that it was prepared for a drop comes as a surprise at a time when major institutions are leery of providing a glimpse into their investing philosophy.

Ivascyn said that Pimco has been a holder of put options on the Standard & Poor’s 500 "as the VIX remains historically low." The CIO said that, also like Gundlach, Pimco "has been taking profits in high-valued corporate credits and built cash balances for when better opportunities arise."

What was even more surprising is how concerned the investing chief of the world's formerly largest bond fund sounded:

“We’re getting liquidity higher,” Ivascyn told Reuters in a phone interview. “If we see actual military altercation, markets can go a lot lower. And at the same time, volatility has been so low for so long that it doesn’t take much for markets to get worked up."

Echoing yesterday's warning by Ray Dalio, the PIMCO CIO said that although the market has yet to panic, "you will certainly see panic if all of this turns into a sustained military encounter."

And if the "sustained military encounter" turns into an all out nuclear war? Well then nobody knows: as the WSJ humorously writes this morning, "analysts are trying to work out what happens to the markets they cover in the event of an all-out nuclear war."

Here's an idea: BTFAONW?


HopefulCynical BaBaBouy Fri, 08/11/2017 - 17:38 Permalink

The thing that's really set folks off was the report of DPRK having 60 miniaturized nukes to go on their spiffy new ICBMs. But that report is actually from back in 2012.We've seen some Wall Street poobahs out in the past month or so, trying to jawbone the market into breaking down, and it hasn't worked.What are the odds that the moneychangers are directing their media puppets to gin up the fear of a US/NK nuke exchange for a few weeks, just enough for them to clean up on the short side and then presto! Everything works itself out, the algos reverse course and skin all the small fry who've decided it's time to get short?My takeaway, watching all of this: do not get froggy or bet the farm. This has the feel of a giant game of 3-card Monte, to me.

In reply to by BaBaBouy

cougar_w Fri, 08/11/2017 - 13:49 Permalink

There will be no sustained military encounter. Nobody wants that, everyone wants a chance to posture, and they will all play the game as long as they can for individual reasons having everything to do with the optics and domestic consumption.

DrumpfFire Fri, 08/11/2017 - 13:51 Permalink

This advice is a little late. Shepwave advised getting Q and SPY puts on Tuesday. These guys at PIMCO are morons anyway.  The secret is to do the opposite of whatever they say. 

pound the vix Fri, 08/11/2017 - 14:32 Permalink

In the event of a Nuke war.  All shorting will be band and anyone who has an open short will be closed out at a fed determined appropriate price.  All proceeds from closing out the shorts will go to the big banks because they know what is best and how to save the economy.

DaddyPirate Fri, 08/11/2017 - 14:53 Permalink

I wonder if the FED and SNB is waiting to dump all the futures and equities they've bought for when this N Korea thing goes down. They know they've screwed up the markets and economy with QE and low interest rates and they (Deep State including Yellan) hate Trump and can't wait to blame the crash on him. This would be a win win. Unwind part of the balance sheet, get rid of all the equities the PPT can't be caught holding, blame the collapse on Trump, and get rid of Trump via the next election or impeachment. Plus they would get to hit the reset button and not do all the crazy monetary policy the second go round. Just a thought.