Bill Gross has been the best bond manager in the world for the last twenty five years. When he decides to leave his trillion, yes that is with a 't', dollar company for an equity focused firm (Janus Funds, for those of you who wanted specifics), it is big news in the investment world. The source of Mr. Gross's discontentment has been the move by PIMCO's parent, Allianz SE VNA O.N. (XETRA:ALVG), to rely less on one person, the individual being none other than Mr. Gross. Going back even further in time, the second in command at PIMCO about six months ago, was the highly regarded Mohamed El-Erian, who used to run the shop at the lightweight which is the Harvard Endowment. Mr. Gross and El-Erian had a falling out due to management style, and El-Erian became a consultant to Allianz. Allianz requested more input from other managers besides the legendary Mr. Gross, one thing led to another, and Mr. Gross bolted ship Friday.
My take is Allianz made a big mistake because there are few investors in the world who have proven their excellence like Mr. Gross. He was a world class blackjack player before setting records at bond investing, which is clearly no easy task. El-Erian, as Gross famously put it, has no record of performance whatsoever, other than overseeing Harvard's endowment, which is not the same as actually making investment decisions. El-Erian long has been a master media participant and routinely talked PIMCO's book in an effort to maintain interest in bonds while interest rates have nowhere to go but up. PIMCO suffered the brunt of the low interest rate environment, along with management turmoil and poor performance, and assets actually came out of the firm. Who would have thought?
When a guy builds a firm from nothing to a trillion in assets, mainly on the basis of his outstanding investment skills for decades, he is the guy you keep. Yes, he has gotten a little long in the tooth and is cantankerous, even, as the press reported, acting a bit erratically. However, the old saying 'dance with the girl you brought,' seems most appropriate. I suspect the 'New Normal' status El-Erian made famous is going to be investors jumping ship from PIMCO for a good long while. As an additional thought, it will be interesting to see how bond yields react over the next few months as it is not out of the realm of possibilities to see plenty of bond selling, especially from those looking to exit PIMCO funds.
The week proved volatile as two converging forces seemed to take an opposite point of view on where the world may be headed. One side believes the world is slowing and deflation is setting in, as seen by the reduction in commodity prices of all sorts over the last few months. The continued strength of the dollar adds to the thesis, and most notable has been the weakness in oil prices and the entire complex. If you couple these variables with the extra low yields in Europe, it seems that bond incomes in the good ole USA are actually quite high, and so buyers pile in and drive yields down, with the U.S. 10-Year resting right at 2.50%. The end result for these investors is to dump risk assets like high yield bonds and equities of any sort, especially those in emerging markets. Oh, and sell they did with almost all major indexes losing nearly 2% on Thursday.
On the opposite side of the world are those who see the United States as being the safe harbor for the world with growth actually accelerating. Thursday, aside from the big Bill Gross news, the headline was a revised second quarter GDP print of 4.6%, with consumer spending growing at 2.5%. The major push came from business investment, which grew over 12%, and exports rose as well. Inventories remain elevated and it looks as if the economy might actually show above 5% growth for the final two quarters of the year, although we have been down this path before, only to leave disappointed. The market responded with a big day on Friday, recovering about half of what it lost during the prior session.
As the quarter ends next week, all eyes will start gazing towards earnings season during mid-October. The equity market trades at a historically reasonable multiple, somewhere around 17-18x forward estimates. Balance sheets remain flush with cash, and debt levels are in good shape all across the corporate world. Most large companies have issued debt which won't mature for many years, and those which haven't done so already are probably more than welcome by Wall Street. With oil production still at record highs, the consumer feeling better about the world, and housing slowly recovering, the fundamentals seem pretty strong for a good final quarter. If geopolitical events don't get in the way, the market might yet finish 2014 up double digits. We shall see and you can bet I will be watching, and I hope you will be too.