Chapin Hill Advisors, Inc. Market Comment 9-28-14 Bond King Roils the Markets! Bill Gross joins Janus… The big news this past week was that legendary “bond king”, Bill Gross, left the firm he founded 43 years ago to join Janus Funds. Gross founded PIMCO (Pacific Investment Management Company) in 1971 and sold it in 2000 to the large global financial services firm, Alianz which is based in Germany. He continued in a leadership role but over the past year, there have been more and more rumors of conflicts between Gross and his key team members as well as with Allianz management. This was backed up by comments made by PIMCO’s current CEO, Douglas Hodge on Gross’ exit noting that they had fundamental differences in the future direction for PIMCO. Gross chose to join the much smaller Janus family which is not known for bond funds. In fact, of their $177 billion of assets under management, only $31 billion of these assets are in bonds. Janus made a name for itself in the g0-go days of the dot-com bubble as they were a concentrated growth manager. However, they got hit hard in the 2000-2002 collapse and have never fully recovered. Janus’ stock rose 43% on Friday on news that Gross was joining them. PIMCO’s corporate parent, Allianz had a bad day as the stock dropped 6.2% or about $5 billion in market cap according to Barrons. Over the past year, PIMCO’s flagship fund and former perennial favorite, the Total Return Fund has seen massive liquidations. The fund peaked at $293 billion and has lost $71 billion this year. According to Barrons’ that translates into a loss of about $300 million in revenue for Allianz. On Wall Street, firms will put up with a lot if you are bringing in revenue. But if that tide turns, they are quick to cut to the chase and heads typically roll. PIMCO’s ETF’s (exchange traded funds) had an especially bad day on Friday as many of these vehicles had been trading at premiums to NAV (net asset value). When closed end funds and ETF’s trade at premiums, those are erased quickly in any type of sell-off. The PIMCO High Income ETF (PHK) fell 6% on the day meaning a good portion of its former 46% premium to NAV evaporated. The PIMCO corporate and income opportunity ETF (PTY) also fell 6.6% and volume on both was 20 times normal. This is not an ideal time for Janus to be launching any type of bond fund suite as interest rates are at historic lows and the FOMC is almost finished with their liquidity surge. Friday’s trading hit some very liquid bonds hard as volatility is difficult for bond traders to manage quickly. The big liquid issues saw sell-offs to offset some of the risk in smaller, less liquid issues. Volatility could be a problem going forward for the average fixed income investor. Another bond king… Jeffrey Gundlach is another well-known figure and respected bond trader. Previously he managed a large bond portfolio for TCW. He was fired on December 4, 2009 when he lost a power struggle and lawsuits followed. Gundlach went on to form DoubleLine in 2010 and his flagship fund, The DoubleLine Total Return Bond fund (DBLTX) has grown to $35 billion. DoubleLine has had an ongoing feud with mutual-fund rating service, Morningstar. The bond world has apparently been buzzing about this feud. Morninstar has declared DoubleLine’s Total Return fund as “not ratable” despite the fact that it has out-performed every other bond fund in Morningstar’s trillion-dollar intermediate-term bond fund category since its debut in April 2010. Needless to say, this irks DoubleLine and it’s founder, Gundlach. Morningstar has gone on to criticize the use of Gundlach’s more esoteric mortgage instruments and states that Gundlach cut off communication to their analysts in summer 2012. DoubleLine countered that they cut off communications due to “falsehoods and mischaracterizations” it claimed Morningstar had made about their funds. The feud goes all the way back to 2009 when Gundlach was apparently voted as the #1 Bond Manager of the Year. However, when TCW sent a full court press of their team to the home of Morningstar’s analyst Eric Jacobson, Morningstar did a revote and named Loomis Sayles’ Daniel Fuss as number one. Barrons reported on this much to the chagrin of Morningstar. The bond market is typically not as filled with drama but when the scales seem to be tipped, credibility is at risk. Volatility picks up… . This week was turbulent for the equity markets as we began the week with two down days followed by a triple digit rally on Wednesday. This was followed on Thursday with a 266 point sell-off in the Dow. A strong rally on Friday of 167 points on the Dow could not overcome the week’s losses.The Dow lost 166 points on the week or just shy of 1% to close at 17,113, The S&P tumbled 1.37% to close at 1982. Nasdaq fell 1.5% on the week. The Dow changed three components last year adding Goldman Sachs, Nike and Visa. These three stocks have not done much to help the Dow year-to-date as they have returned 5%, 1% and -5% respectively. The four components booted out of the Dow last year, Alcoa, Bank of America and Hewlett Packard added 47%, 8% and 26% respectively. However, the Dow Jones is a price-weighted index which means the big gorillas “weigh” more in the formula than the smaller stocks (price and volume combined). So 90% of the return of the Dow year-to-date is due to just four stocks: JNJ, United Healthcare, Merck and Disney. Three of these are defensive names – stocks which tend to have products needed even in slower economic times. The Russell 2000 and Nasdaq have both been showing signs of wear and tear as half the stocks in each index are already in “bear” territory. That is defined as falling at least 10%. The Russell is down 4% so far this year. There has been a rotation going on as defensive, large cap names see money flowing in and more speculative names have money flowing out. Volatility has been virtually non-existent for most of the last two years as VIX (which is the liquid option that represents volatility) has fallen to almost single digits. This week, VIX rallied 22%, closing at $14.5. If volatility picks up, investors may begin to get nervous. Bank of America announced this week that the amount of margin debit is quite high and that any sell-off could be exacerbated by this leverage. They note that margin debt stands at $182 billion. Margin calls did accelerate the declines in equities in 2008 and we could see the same type of swift sell-offs if some sort of trigger starts a serious equity decline. A pullback or sell-off…. Currently, optimism still runs high and many money managers have been quoted as hoping that a 10% pullback would provide them the opportunity to buy at better prices. GDP picked up in the U.S. this week as second quarter was revised up from 4.2% to 4.6%. Housing numbers came in with a big upside surprise driving some of the homebuilders up. As tensions continue in both the Middle East and the Ukraine, worries about global productivity are becoming more prominent. Goldman Sachs stated that some European economies are already in a Japanese style stagnation. The PIIGS (Portugal, Italy, Ireland, Greece, Spain) account for 30% of the GDP of the Eurozone. Unemployment remains stubbornly high and economic activity is not picking up in these countries despite Mario Draghi’s efforts to stimulate. This lack of growth could continue to pull down the entire Eurozone fueling concern over slowing global growth. The average investor, as well as most professionals, remains bullish on the U.S. stock market. The dollar entered its eleventh week of a rally as the Euro and British pound continued to fall. The Fed ends its bond buying program in October and the fear is that rate increases could follow. Investors have been forced in to equities as bond yields have fallen to single digits. How long that money stays committed to equities if rates start to rise is one concern for the markets. No one knows how long the markets may rally but valuations are high by any metric. So be cautious and make sure your portfolio is adjusted for risks which may lie ahead. As always, feel free to email or call with questions. kboyle@chapinhill This information is provided for general information only, and is not intended as personalized investment advice. Reading the above is in no way intended to be a substitute for individualized investment advice, and no conclusions should be drawn from this information regarding any potential investment. All readers should contact their professional investment, legal and tax advisors before entering into any investment or investment agreement. Past performance of any index, market, sector, or investment is not necessarily indicative of future returns. Any index referenced herein references historical results. They are also unmanaged and cannot be invested in directly. Some information in the above is gleaned from third party sources, and while believed to be reliable, is not independently verified. Please contact Kathy Boyle for more information at kboyle@chapinhill.
Posted on: Mon, 29 Sep 2014 15:45:29 +0000