From One of the sharpest minds around--for the thinker only:
pimco.com
Todays Barrons:
Forever Bullish
By Jaye Scholl
Congenital optimist.
Time-worn it may be, but that descriptive cliché fits our old friend and former Roundtable stalwart to a T. So it's no surprise these sere days, when our daily routines are suddenly fraught with menace, when the economy seems trapped in the quicksand of recession and the stock market has been stripped of its sheen, that Peter is striving to rally the investment masses.
It's hard to turn the pages of your favorite newspaper or flip the channels without being stared back at by the sober and reassuringly familiar visage of Peter, exhorting one and all to keep the faith in equities. His near-ubiquitous forum of TV and print ads comes via the patronage of Peter's long-time sponsor, Fidelity Investments.
As always, Peter refuses to be distracted by the burning trees and sees only the verdant forest. Others may fret and frown about an economic landscape rendered desolate by rising joblessness, shriveled capital spending, collapsing profits. Peter gazes serenely at that same dreary prospect and conjures up a vision of an economy revitalized by government spending, low interest rates, a solid banking system and buoyant demand for housing.
Historically, the stock market has been the place to be, Peter reminds us. "Which way the next 1,000 to 2,000 points in the market will go is anybody's guess, but I believe strongly that the next 10,000, 20,000 and 40,000 points will be up," he declaims, adding rather proudly that his views haven't changed from those he held two weeks ago, two years ago or 20 years ago.
And they haven''t, we can attest, having known Peter for going on 20 years. In all kinds of market weather, his optimism has been relentless. To judge by the action of the stock market in recent weeks, one can only conclude that lots of folks are responding to Peter's pitch or, at least, are in full sympathy with it.
We have no quarrel with the notion that the next 10,000 points will be up, if only because were the next 10,000 points down, the stock market as we know it would not exist. But we do question the blithe dismissal of the direction of the next 2,000 or even 1,000 points. As painfully demonstrated to investors these past two years, a ton of damage can be inflicted in a speck of time.
In short, we wonder if the trusting souls putting their money where Peter's advice is aren't due for disappointment. And our concerns on this score were mightily reinforced by the kindred skepticism of Bill Gross. For Bill, who's top dog at Pacific Investment Management Company (or Pimco to its familiars), with a cool quarter of a trillion dollars in its portfolios, boasts credentials and credibility in the bond world as impressive as Peter's are in equities. But where Peter sees the glass brimming over, Bill sees it half empty -- at best.
If Peter is the eternal bull, Bill is the perennial realist, employing a much more unsentimental approach to investing. And in his latest monthly commentary, posted on Pimco's website, Bill tees off on the Fidelity ads, accusing Peter of offering investment advice from his heart rather than his head.
To find out more specifically what got his dander up, we checked in with Bill at his Newport, California, office. Peter, after all, had written a cheerful blurb for Bill's book, "Everything You've Heard About Investing Is Wrong," a slender volume, published in 1997, that predicted the end of the long bull markets in both stocks and bonds within three years. (Not a bad call, come to think of it.)
The ads, it emerges, struck Bill as little more than a sales spiel. But more than that, he believes Peter's soothing words obscure how dismal the investment fundamentals truly are. Start with the fact that the stock market has more than made up all the ground lost in the post-September 11 sell-off, while the bond market remains sharply lower. Typically, he stresses, the two move together.
"So are stock investors smarter or more prescient that bond investors?," Bill asks. Maybe, but in part, anyway, he suggests the stock market's bounce is nothing more than a reallocation rally. In the past month, he recounts, big pension funds have withdrawn more than $2 billion from Pimco (poor Pimco, it only has $250 billion left) and put the money in stocks, warmly congratulating Bill on his performance, but explaining they'd somehow discovered their portfolios were underweighted in equities.
But also providing a sizable lift to the stock market, Bill says, is a growing conviction among investors that the recession will be short if not sweet and followed by a brisk, dramatic, V-shaped recovery. Which, in Bill's reckoning, ain't necessarily so.
For one thing, he's disturbed by the remorseless rise in new claims for unemployment insurance, which have reached their highest level since 1983, when the economy was just beginning to poke its head up after suffering the worst postwar recession. The recent volume of claims, Bill calculates, prefigures at least a 7% unemployment rate.
Swelling joblessness is not exactly conducive to a surge in consumer purchases and he's plainly skeptical that further interest rates will get the folks to spend big-time. Especially in the kind of economic environment he foresees, rife with debt downgrades, rising corporate bankruptcies and mounting mortgage and credit-card delinquencies.
And when the economy does finally pull itself free from recession, which he thinks might happen about the middle of next year, it'll enjoy a quite grudging recovery, with GDP growing at a leisurely pace of 2% or so.
If he's right, a lot of investors taking the big plunge into the stock market in anticipation of a quick return to boom times are quite evidently going to be wrong.
Nor is he overly sanguine about the outlook for the bond market. Compared to this year's total return of some 10%, bond investors will have to settle for 6% or thereabouts next year (which might not prove too shabby if the stock market tanks or just disappoints.) The bull market in bonds, he feels, is pretty much over and we can now expect steady but more subdued returns.
Pimco, Bill relates, is buying German and United Kingdom bonds of relatively short maturity -- two to four years -- as a play on the likelihood that the European Central Bank, which has lagged the Fed in cutting rates, will get more aggressive as recessionary pressures build. If you're thinking of taking a flier on high-yielding stuff in emerging markets, his advice is…don't. He wouldn't be surprised if Argentina defaulted in the next few months, with a ripple effect on Brazil and elsewhere.
All in all, Bill Gross is convinced this is a great time for investors to keep their emotions in check and their powder dry. Peter Lynch, please note. |
