Sponsored Link:
Bill Gross
The Smart Profits Report: Issue #201
Monday, April 18, 2005
What Does Bill Gross Know?
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Normally we talk about options or ETFs in this space. But today’s opportunity, while outside of those sectors, is just too good NOT to talk about.
So let’s get right to it…
Bill Gross is the managing director of PIMCO, the huge bond management company based in California.
He makes his money two ways: First, he advises institutions and other clients about bonds, and second, he invests his hard-earned income.
At PIMCO, Gross has an effect on some $40 billion under management - that is more than the GDP of 80% of the countries on earth. And when he speaks, people listen.
I would argue that, second to Alan Greenspan, Gross is the most influential person when it comes to prognosticating about bonds and the future of interest rates.
So far, he has been on the money and PIMCO has been rolling in profits for shareholders, investors AND managing directors.
Right now, Gross sees trouble… but that’s spelling a good opportunity for investors.
With Inflation Looming, Where to Invest?
In fact, Gross and I share a similar opinion about the future of interest rates. We both see interest rates as a limiting factor on economic growth. In simple terms, if rates move too much higher, too quickly, this credit-based economy of ours could plunge into recession.
The market is saying as much, also. If you look at the action in long bonds - 5 years and up - their yields are comparable to where they were four interest rate hikes ago.
Short rates are higher now, but the long rates are lower. This signals that the bond market - which is generally the more sophisticated money - is saying that while there is growth and inflation in the near term, the long-term picture is darker.
Long-term growth of the economy will be moderate at best, and inflation will still be a problem that holds the economy back.
So what does that mean for YOUR money?
A Fearless Interest-Rate Prediction
I think it means that you may see short-term rates reach 4% by the end of this year, and longer-term rates may touch 5%. And that’s it. There may be spikes along the way, but nothing that will sustain higher rates. Higher rates would put too much pressure on the economy… causing rates to fall.
So what should you do with your money?
Well, if you were Bill Gross, you would put hundreds of thousands of dollars into PIMCO’s closed-end municipal-bond funds.
Following Gross’s lead, I have been investing cash into these funds with good success for the past year or so. The current yield is about 7%, free of federal taxes. Some are for states that have income taxes - if you invest in one of the funds that invests in your own state, it’s free of state taxes, too. (If you are in the 33% tax bracket, that 7% is equal to getting over 9.3% on a taxable bond!)
If you live in a state like Florida that has no state income tax, then you may want to consider the funds that are national (they do not have the name of a state in their heading). Of course, it makes no sense to own these in a retirement account either since those accounts are tax deferred anyway.
The only caveat is that these specific closed-end muni-bond funds from PIMCO use leverage. This means they try to earn more income on the assets they have under management by using derivatives, interest rate swaps, and spreads to generate a greater return. This makes their prices volatile and subject to movement on a daily basis.
One Caveat: A Little Volatility
Over the past year, I have seen the prices swing by 2% to 3% in a day based on trading pressures and the outlook for rates in general. So if you don’t have the stomach for some risk or volatility, OR if you think rates are heading to the moon, THESE FUNDS ARE NOT FOR YOU!
As for me, I think that Bill Gross is a very intelligent investor who has his ear to the ground, and if he is putting his money, and LOTS of it, into these PIMCO closed-end muni funds, then I don’t mind taking the risk with him.
There are several of these funds available. They are all pretty similar in yield. And they’re certainly worth a look right now.
Good investing,
Karim Rahemtulla
|
Today’s Smart Profits Cribsheet:
- Of course, there are many companies that provide closed-end funds. I chose PIMCO because it has a level of expertise that has been proven over the years. Here is a link to a site that lists its selection of funds: http://www.allianzinvestors.com/closedEndFunds/
Related Articles:
- Option Market Makers: Beating the Market Makers on Price
- Double Your Money: The Truth About Making 300% Overnight in Options
- Limit Orders: Dodging The Market Maker’s Bullet & Side Stepping The Liquidity Trap
