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Making Sense of Pimco, Gross, China and Recent Market News

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bondsquadwebbannerIt has only been a few days since Bill Gross left the firm he founded 43 years ago (with management holding open double doors to make sure he would not get hit on the way out).

To see a list of high yielding CDs go here.

He’s Just a Bill (Bond House Rock)

The Wall Street Journal reports that $10 billion left Pimco last Friday. If this was because investors decided that different strategies were better suited to their goals, objectives and risk tolerances that is fine. However, if investors moved capital away from Pimco because Bill Gross is no longer there, they may have acted hastily. Pimco has as deep a bench (talent pool) as there is in the fixed income world. The departure of any one person (even the venerable Mr. Gross) is not necessarily a game-changer for Pimco.

After the 1951 season, legendary New York Yankees’ center fielder Joe DiMaggio retired. However, he was replaced in centerfield by a guy named Mickey Mantle. In retrospect it is easy to say: “Yeah, but Mickey Mantle was another all-time great. However, few knew that when the 1952 season began. There are many such stories in Yankees lore. The Yankees were able to remain winners because of a deep bench and an excellent scouting system. In bond circles, Pimco has a similar reputation for having a deep talent pool.

Readers have expressed concerns that an exodus out of Pimco could put downward pressure on bond prices. There is validity in these concerns, but investors must consider not only the sell side of the equation, but also the buy side. Money leaving Pimco has to be reinvested somewhere. Our feeling is that capital will be reinvested similarly by new managers. Dips could be buying opportunities for some investors (suitability trumps all other factors).

Fixed income asset prices seem to be the biggest concern among investors and advisors. It appears to us that many portfolios contain instruments which are fixed income in name only. Many investors own junk bonds and loans for the purpose of diversifying into fixed income. These assets will appear on the fixed income side of the ledger on client statements and in portfolio reviews. The truth is: Total return fixed income investments (such as junk bonds and loans) behave more like equities and may do little to diversify portfolios versus equity exposure. I.E. If a portfolio is using equity-like debt to offer diversification versus equity exposure it is a failed strategy as the assets in question are highly correlated. When investing in the fixed income markets, it is not enough to own a “bonds.”. The types of bonds matter greatly. Recent market performance could make investors keenly aware of this fact when they receive their September statements.

Our opinion is: One can invest in bonds and one can trade fixed income, but they are not the same thing.

China is a Rolling Stone

A large boulder sitting on top of a tall steep slope represents what kind of energy? Basic science teaches that this is potential energy. If the boulder begins rolling down the hill, potential energy is transformed to kinetic energy. However, to transform potential energy to kinetic energy, an outside energy source is usually needed.

In the global economy, a parallel can be drawn between our boulder and China. China’s population of more than 1.35 billion people provides a tremendous amount of potential energy. To transform it into economic kinetic energy, China’s leaders have gradually opened its economy. However, China’s government has been careful to not let growth get out of control. As you can imagine, trying to control the speed of a rolling boulder is no easy task. According to Newton’s Second Law: Force = ma. An unbridled Chinese economy can create a lot of force, both internally and externally. Allow growth to get out of hand and the results could be shattering when that economic boulder hits.

The Chinese government has to manage the happiness of its populace while trying to maintain economic order. The success in doing so has proved elusive throughout history. It appears that the Chinese government will allow its economy to slow (somewhat), but it must be careful not to upset the Chinese people. Meanwhile, what is making the Chinese people uncomfortable might be more ideological than economic. Over the weekend, pro-democracy protests broke out in Hong Kong. The response by authorities seems a bit too harsh for our liking. This might not boil over to the mainland, but civil unrest is always on the mind of China’s leaders.

It is our opinion that China is in a long metamorphic process. It could be years, if not decades, before China begins to realize its full economic potential (if political changes occur).

By Thomas Byrne – Director of Fixed Income – Investment Consultant

thomas bryneThomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.

Employment

  • November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
  • December 2011 – November 2012 – Bond Squad, Kunkletown, PA
  • April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
  • June 1986 – March 1988 – E.F. Hutton, New York, NY

Thomas Byrne
Director of Fixed Income
Wealth Strategies & Management LLC
570-424-1555 Office
570-234-6350 Cell

Twitter: @Bond_Squad

 

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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Thomas Byrne

Thomas Byrne serves ad the Director of Fixed Income for Wealth Strategies Management LLC. Thomas brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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