Thursday, September 30, 2010

Do you know Bill Gross?

If not you probably should. Mr. Gross is the founder and co-chief investment officer of Pimco. Pimco has grown from just $12 million of assets under management in 1971 to over $1 trillion today - yes, trillion, with a t.

I always have been wary of Mr. Gross' commentary because it typically is very self-serving. If he has a particularly large exposure to a certain sector of the economy or a particular currency then he tends to "talk his book" or have opinions that might lead to a good outcome for his investments. This isn't new, most managers talk their book, but not everyone manages $1 trillion.

Anyway, in his recent letter to investors he seems surprisingly pessimistic.

"In the meantime, investors are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns. And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living.”

I'm not sure what his angle is - perhaps he's trying to tell people that returns everywhere will be terrible but they'll be less terrible at Pimco so why don't you let us manage your money? Nah, even I'm not cynical enough to believe that.

This is the quandary that we all face. The market is still providing excellent returns for the nimble trader and the silicon traders, but the days of buy and hold and retire in 40 years seem to be in our rear view mirror.

I know I sound like a dinosaur when I remember fondly the days when stocks traded based on their individual merit rather than moving in lockstep with Apple. I've assumed for some time that Apple's influence over the market was starting to get a bit out of control but it took someone with some pretty bloomberg charts to really break it down for me.

"When the NASDAQ index was “founded” they put a cap so that no company could be larger than 24% of the index. This was because Microsoft would have been dominating the index if they would not have capped it. Now, it’s Apple approaching the limit because of its rapid growth, currently it is 20% of Nasdaq.

Since September Apple has moved together with the Australian dollar. This is a strange phenomena because their is no particular reason for the Australian dollar to be influenced by Apple.

"I believe the reason Apple and Australian dollar trade the same is because the market is now driven by a single factor – cheap dollars. This goes back to my first point. Everything is moving based on the FED quantitative easing program, the market does not even care about other economic or company specific factors anymore. Is this a healthy market which will translate into a self sustained bull market?"

"So once upon a time the biggest company in the Nasdaq index was Microsoft, and I think it’s pretty easy to argue that Excel and Word did make a lot of things more efficient (real growth) than compared to typewriters and whatever people used before Excel.

Well, I have an iPad and it actually makes some time savings for me. But overall, I think the growth behind Apple is not based on a massive industry spending motivated by increased efficiency, but rather consumers who stopped paying their mortgages and are now buying iPhone 4 with the money instead so they can play Angry Birds."

While I don't think people are avoiding their mortgage to buy and iPad, I get the point. The gain in productivity from the pre-pc era to 2000 when everyone had a PC and internet access was enormous. I don't see those same gains coming from a gloried video game console.


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