WASHINGTON, September 29, 2014 – As the third quarter’s illegal portfolio window-dressing fun is ready to conclude, the legendary Bill Gross’ Friday exit as PIMCO’s chief bond guru will weigh heavily on Monday’s opening Wall Street trades. Worse yet, however, the potentially cataclysmic outcome of Hong Kong’s ongoing pro-democracy protests could unleash a killer tsunami of sell orders this morning.
The ongoing Hong Kong protests have the potential to be the “black swan” event that bears, perma-bears and market skeptics have been waiting for. The eventual outcome of these protests, which are clearly in opposition to the policies of the relatively new, hardline Chicom regime consolidating power in Beijing, could actually prove to be a major, destabilizing economic event.
Wall Street is set to open down hugely this morning largely as a result of these protests. But as the Maven has indicated, this outsized political and economic event will also be getting an assist from that aforementioned September window-dressing activity and from the (hopefully) temporary but significant disruption in bond markets caused by Bill Gross’ PIMCO exit and Janus switchover.
PIMCO, actually owned by Germany’s Allianz financial conglomerate, has for decades been the go-to place where conservative, retired, and/or income-oriented investors have gone to purchase funds that expose them to debt instruments while diversifying that portion of their portfolios as opposed to investing in individual bonds.
Buying individual bonds is risky, because most investors can’t afford to diversify bond investments in now standard $25,000 face value lots. PIMCO’s consistently rewarding bond funds had (and actually still have) an unparalleled record of giving bond investors what they want and need while limiting risk and generally offering above-average returns in an investment arena where actual returns (as opposed to yields) can be difficult to achieve.
At one point in history, PIMCO—still the largest holder of bonds in the known universe—calculated it bond portfolio in trillions of dollars. That’s “trillions” with a T. Over the past year or so, however, Bill Gross’ portfolios have uncharacteristically underperformed—significantly. This underperformance, combined with the exit of PIMCO’s #2 investment guru, the highly-respected Mohammed El-Erian, and Gross’ increasingly erratic and volatile relationship with his fellow officers and fund managers, led to Friday’s abrupt break with the PIMCO and the Allianz mother ship. It was one of those corporate blowups where the “I quit!” and “You’re fired!” emails crossed en route on the Internet.
Waves of sellers greeted the news eruption Friday, with billions of dollars of PIMCO funds being dumped in a huge blowout, which is likely to continue this morning. By dumping their fund shares, of course, investors are forcing PIMCO to dump metric tons of underlying bonds, putting huge pressure on the bond markets that’s likely to continue for at least two or three more days.
Even so, many will still leave their money with PIMCO, assuming its funds are still a good place to be which indeed they may very well be. While Gross was PIMCO’s founder and media superstar, PIMCO were and are being run by some of the best portfolio managers ever, so why jump ship when all the shouting will die down soon?
Further, as Gross takes over a yet loosely defined quadrant of investments over at Janus, you can bet his fans—the ones who’ve been dumping PIMCO fund shares—will be re-upping with Bill over at PIMCO, giving Gross’ new fund or funds a leg up on purchasing a considerable batch of those recently trashed high quality bonds that just went back on the market.
Nevertheless, this mess couldn’t have been dumped on the market at a worse time. Not only do stocks have the negative bond influence to contend with—something that usually disturbs stock investors greatly. They also have the 3rd quarter window-dressing nonsense to deal with. Plus that exogenous and massive turmoil in Hong Kong, long Asia’s premier financial center.
For more on this, check in with our companion column, The Prudent Man, check out our followup article.
Whether this morning’s battering continues and/or worsens, it’s not going to provide a positive conclusion to a really nasty September 2014.
QE officially ends in October after the Fed’s final bond buying excursion concludes. China likely will remain an inscrutable mess. Russia’s Vladimir Putin will continue to laugh at America’s Duffer-in-Chief and do what he pleases. Europe will continue to dither while drawing the wagon tighter around its oligarchy. The Ebola plague will continue to spread in Africa due largely to that continent’s unresponsive and ineffective kleptocracies even as our own Administration strives to bring cases across the pond, which will ultimately, touch off an infection here.
And individual ISIS nutcases, already massively distributed throughout the U.S. and Europe will endeavor to increase their mound of lopped-off infidel heads even as our own Administration allows them to pour over our Southern borders in its far more important drive to turn the U.S. into a one-party Marxist state. That way, we’ll be fundamentally changed into a more stable democracy.
Like the one that’s being celebrated today in Hong Kong.
Sideline City, once again.
As we’ve been writing this column, the market has indeed cratered at the open. But has begun to bounce back just a bit. The Dow is down 117 points as of 10:00 a.m. EDT Monday. The S&P 500 is off a nasty 13.5, while the tech-heavy NASDAQ is off close to 30, likely influenced by the fact that so much in the way of tech is manufactured in the People’s Republic of China, vaulting the perceived risk of investing in tech into the pole position in a risk-off scenario.
(Apple [AAPL], for example, was off as much as 2% at one point.)
We picked up a couple hundred more shares of the short S&P 500 ETF (SH) on Friday as we’d been indicating we would, and likely will acquire a few more here and there, generally on up-days when SH’s price is depressed.
One of our investment services recommends a pretty big batch of the Direxion Emerging Market Bear ETF (EDZ), which is a massively volatile vehicle, managed to provide a 3x inverse return on the performance of a basket of emerging market stocks. In other words, you’re shorting emerging market stocks times 3. We haven’t followed this recommendation yet, as it’s risky in the extreme. But if things worsen, we might give it a try.
If you have interest in vehicles like this, however, you’d best be trading your own account and sitting at your machine every minute the market is open. You can make and lose a fortune on these leveraged short ETFs.
Such action used to be effectively illegal for smaller investors, as you had to qualify financially to invest in futures to access this market. But today, these volatile leveraged short ETFs can be bought as “longs” by anyone, and we fear that most small investors don’t understand what will likely happen to their investment in these vehicles if they look away from their screens to yell at the dog. Travel at your own risk.
Otherwise, go do something fun today and stay out of the markets. Who knows what will happen on October 1, 2014, once the stupid window dressing is over? Likely, the PIMCO flap will be settling down.
But things could get much uglier in Hong Kong. And who knows how many more heads will get lopped off in America’s heartland between now and Wednesday?
Given its travesty of a border policy and its essential non-comment on the latest beheading action in Moore, OK, the Administration clearly doesn’t care. After all, Oklahoma is only a part of flyover country, a state mostly inhabited by those bitter clingers, the ones the Harvard and Yalie crowds all hate, along with DHS whose current policy regards conservatives and committed Christians as a far greater terrorist threat than the Islamofascists in our midst.
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