Weekly Update
This week's update has a recap of various tidbits of news from the past week.
- Well, what a difference a week (or two) makes. With yesterday's decline in the markets, we have retraced back to the levels from mid-January - in just two weeks time. When volatility increases in the markets (as we expected would happen during the first quarter) owning income producing investments are a great option as one continues to accrue interest and dividend income, regardless of market direction. The good news is that volatility creates opportunities across various asset classes. Patience will be the key in the coming weeks as investor sentiment is still very bullish (negative for markets).
- These days you rarely hear reports of big mutual funds selling anything when stocks are going up and bond yields are low, like today. Most mutual fund managers will tell you what they are buying but don't tell you what they are selling. Considering the average stock is held an average of 6 months, there is more selling occurring then big fund managers are admitting. That being said, when the biggest mutual fund in the world sells out completely of U.S. Treasury securities because the manager believes they're not a good investment, it's a big deal. Bill Gross, manager of the $236 billion PIMCO Total Return Fund, is outspoken in his dislike of quantitative easing. In his latest letter to investors, Gross said – the day the government will end its second round of quantitative easing (QE2) – will be "like D-Day". Gross believes stock and bond prices are artificially inflated by the government stimulus. With the Federal Reserve currently purchasing 70% of government bonds issued since QE2 began, Gross wonders, "Who will buy Treasuries when the Fed doesn't?" Gross concluded his letter saying, "PIMCO's not sticking around" to see the result. Gross proved he's more than just talk. This week news came out that he sold ALL Treasury securities in the Total Return Fund (the fund was 12% in Treasuries in January). He also raised cash levels to 23% from 5% in January. Gross thinks bond yields will rise 1.5% without government intervention.
- In other news, Carl Icahn is giving his investors' money back. Icahn filed a letter informing limited partners in his hedge funds that he'll be returning their capital. Icahn said the losses incurred by investors in 2008 bothered him "a great deal more, in many respects," than his own losses. He says maybe it's because he's used to dealing with large paper losses for himself. He didn't prevent investors from withdrawing funds during the crisis, and many chose to do so. Carl Icahn, for all his ego and swagger, is apparently a bit of a softy when it comes to other people's money. He acknowledged it in the letter, realizing "it may sound 'corny' to some" that he felt bad about his limited partners' losses. The reason for returning investors money he states - "While we are not forecasting renewed market dislocation, this possibility cannot be dismissed. Given the rapid run up over the past 2 years, and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis."
- This is similar to last November when hedge-fund manager Seth Klarman said he'd return 5% of the $23 billion he had under management at the time to investors. Last summer, Klarman said he was more worried than at any time in his career and he's not sure what will happen over the next decade. In December Klarman said his "opportunity list" was smaller now in relation to its growing cash balances.
- According to the Fed, household net worth is now off $8.8 Trillion from the peak in 2007, but up $8.1 trillion from the trough in Q1 2009. Household net worth peaked at $65.7 trillion in Q2 2007. Net worth fell to $48.7 trillion in Q1 2009 (a loss of almost $17 trillion), and net worth was at $56.8 trillion in Q4 2010 (up $8.1 trillion from the trough). The Fed estimated that the value of household real estate fell $260 billion to $16.37 trillion in Q4 2010. The value of household real estate has fallen $6.3 trillion from the peak.
- Possible QE3 by the Fed - recent comments from Atlanta Federal Reserve President Dennis Lockhart this past week, combined with spiking oil prices, have led to speculation regarding future rounds of quantitative easing by the Federal Reserve. Lockhart spoke recently at the National Association of Business Economics conference, commenting on rising oil prices and the potential for spikes to affect the economic recovery. “I would take a position we would respond with more accommodation” Lockhart said, regarding the potential onset of recession as a result of oil price increases. While current – or even slightly elevated – prices are manageable, said Lockhart, “around $150 it becomes a much more serious concern.”
