Bill Gross’s Investment Outlook

Bill Gross is a legend in the investing industry. He doesn’t work, though, in the more glamorous equity side of investing. Instead, he is a bond market investor, and has one of the best long term records in the business.

Gross also happens to be an outstanding writer. I envy his ability to say a lot with few words, and to explain complex financial concepts with amusing analogies.

For these reasons, his monthly Investment Outlook is a must read for me. As usual, his Investment Outlook for this month didn’t disappoint.

Gross takes to task the mortgage market, how it has performed and will perform in the future. His conclusion is that the fallout is not over, and that we’re just looking at the tip of the mortgage iceberg.

He believes this is the case because many adjustable rate loans made over the last several years have yet to reset, and when they do, many more homeowners will punt their houses back to the market.

He also indicates that these problems will be felt in the Mortgage Backed Security (MBS) and Collaterlized Debt Obligation (CDO) markets. This, along with legislative action, will tighten credit and limit the number of people who can get new loans.

His conclusion is that the housing market will takes years to work through it’s problems (tougher credit, high inventories of homes for sale, anchoring by home sellers), and that the Federal Reserve may soon cut rates in an attempt to limit such problems now that inflation is looking less threatening (according to their narrow metrics).

Am I planning on acting on this advice? I can’t say I am. Unlike a bond market guru with institutional clients who demand short term performance, I don’t need to forecast interest rates or try to guess what the housing market will do. But, I find his thinking very provocative, and it reinforces my desire to stay far away from companies that deal intimately with the housing or mortgage market.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Inflation and Valuations, Foreign Investors, Lead into Gold, The Many Faces of the Housing Market

Several market commentators have been highlighting that low inflation has historically corresponded with high valuations, thus implying current valuations are justified by low inflation. John Hussman, in a recent article, takes this notion to task.

Just because high valuations have corresponded with low inflation in the historical record does not mean it’s a great idea to invest now. You should be focusing on future returns, not data on current conditions. In fact, as Hussman shows, low inflation and high valuations tend to indicate weak future returns. Perhaps we should all drive by looking out the windshield instead of at the rear view mirror.

Most investment commentators are paid to get gullible people to buy stock now…Now!…NOW!!! Don’t be confused into becoming a lemming by such blather.

John Mauldin’s latest weekly letter had some delightful information, too.

First, Mauldin highlights the influence Sovereign Wealth Funds may have on markets going forward. Specifically, China’s recent $3 billion investment in BlackRock may be an indication of things to come. Can you say falling US dollar?

Next, Mauldin does a great job describing how the financial engineers of Wall Street are turning lead into gold. Specifically, he shows how such rocket scientists can turn non-investment-grade subprime loans into 95.8% investment grade securities. Do you think they’ll stay investment grade if the underlying assumptions prove to be based on a too short historical record?

Finally, Mauldin raises some questions about recent positive housing data and how such information may impact the US economy. Are housing statistics really good indicators of what is happening in the housing market? Did new home sales jump based on fundamental demand, or because new home prices are lower than existing home prices? If the economy’s growth over the last 6 years has been due to mortgage equity withdrawals, what will happen if home prices decline? And, how would this be impacted if unemployment were about to rise as forecast by Paul McCulley at PIMCO?

Just some good commentary to consider…

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.