That was a pretty dull day.
On the whole we held up very well in the face of a less than enthusiastic set of Fed minutes and the usual dire predictions by bond-pimp Alan Greenspan, who's boss at Pim(p)co is so worried that: "We come in every day at 3:30 a.m. and leave at 6 p.m. I’m not used to setting my alarm for 2:45 a.m., but these are extraordinary times.” Bill Gross and his credibility-for-hire, Mr. Greenspan, need you to put money into bonds, which aren't paying very well right now. A good stock market and a good economic outlook is not good for a bond pusher – who wants you to be scared enough to put your money in "safer" securities.
Meanwhile Gross and Greenspan are not even putting their money where their mouths are (and, if you've been watching this week, that is pretty much on every show that will have them) as Pim(p)co is sitting on $50Bn in cash "in case trading partners suddenly demanded payment from his firm." Gosh Bill, I'd be demanding my money back too if all you are doing is sitting in cash, I can do that under my mattress without paying you and Alan a huge fee to do nothing with my $50Bn.
Thus we have the connundrum for the Bond King and his once-royal Jester – The evaporation of the subprime market caused a collapse in prices and value for subprime mortgage securities (bonds). The construction (housing-commercial) and closely related commercial paper markets' decline almost immediately began to spill over to the corporate bond markets, in particular the so-called high yield corporate or junk bond market which contracted by 90 percent by January 2008 compared to January 2007, dropping by more than $900 billion.
Like the asset-backed commercial paper market, the junk bond market is where economically shaky corporations go to raise funds by issuing and selling their unsecure bonds. With ABCP and junk bond credit markets collapsing, corporations that previously relied on them are predicted to default in record numbers. Default rates are predicted to surge from one percent to more than ten percent, according to both Moody's and Standard & Poor's.
After years of steady growth, Pim(p)co funds like PHK, PCN, PFL, MAF.. Oh hell, take your pick.. are off substantially from thier own bubble highs so please take what Mr. Gross and Mr. Greenspan say with a huge grain of salt as Daddy certainly needs a new pair of shoes and a recovery in the markets is NOT what Dr. Greenspan has ordered for his boss, Gross.
Always try to keep in mind the motive of the people who tell you everything is great, or everything is terrible, or whatever – they all have an interest in something! Even an analyst, who says "I do not hold this stock nor does anyone in my family…" still wants to be right. You can bet Meridith Whitney has been grinding her teeth for the past two weeks as the financials slowly but surely fail to implode.
Gross still has many, many Billions invested in bonds and a healthy economy and rising interest rates are very, very bad for fixed rate bondholders. I don't think people investing in the PIMCO Municipal Advantage Fund, which lost .18 per $14.53 share last Q1, expected the fund to lose .46 per $13.53 share this Q1 but the bad economy and not-as-bad-as-bill-thought banking crisis, have taken the bloom of of Pim(p)co's rose.
That's why you have Gross and Greenspan on tour, with Gross saying yesterday "What we are seeing is the collapse of the modern day banking system” despite the fact that the modern day banking system seems to be coping with the current crisis, just like it did the last few crises.
What a disaster it will be for the bond pimps if the economy doesn't collapse and their investors do start looking to put their cash to work on more positive endeavors. How terrible for Whitney, Gross, Greenspan and others if the banks don't fall into a black hole and the $60Tn global economy doesn't collapse over what is, so far, about $400Bn in losses (which are paper write-downs) by a financial sector that pulled in $2Tn in profits last year.
I was a bit worried about the markets today but reviewing today's statements and looking at news like CitiGroup getting 90% on the sale of $12Bn worth of leveraged loans (as opposed to the 0% used in Ms. Whitney's calculations) I'm warming up to the markets again. We'll see if we hold our levels this week but I'm not ready to throw in the towel just yet. What we continue to have in this country is a crisis of confidence that has been exacerbated by a crisis in leadership – these are things we can change.
As Barack has been saying: "Yes, we can!"
