Pimco’s Gross Boosts Cash to Most Since Lehman Failed

By Wes Goodman and Garfield Reynolds

Dec. 18 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund, cut government debt holdings and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in 2008 amid increasing speculation that interest rates will rise.

Gross, who manages the $199.4 billion Total Return Fund at Pacific Investment Management Co., increased cash to 7 percent in November from negative 7 percent in October, according to Pimco’s Web site. The fund can have a so-called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October.

Futures contracts on the Chicago Board of Trade show investors see a 41 percent chance the Federal Reserve will increase borrowing costs from a record low by June, versus 36 percent odds a month ago. Traders also raised bets on inflation to the most in 16 months after reports on retail sales and industrial production showed the economy picked up.

“Yields will rise next year,” said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $77 billion. “The U.S. economy will recover and there is a possibility of a rate hike.”

Gross also cut holdings of mortgage securities to 12 percent, the lowest since Pimco’s figures started in 2000, from 16 percent, according to the Web site.

Overvalued Treasuries

Gross told CNBC on Dec. 7 that Treasuries are overvalued compared to potential inflation. Mark Porterfield, a spokesman at Pimco’s main office in Newport Beach, California, has said the company doesn’t comment on fund holdings.

The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for inflation, widened to 2.31 percentage points this week, the most in 16 months.

Ten-year Treasury yields were little changed today at 3.49 percent as of 8:50 a.m. in London, according to data compiled by Bloomberg. They have risen from a record low of 2.04 percent set a year ago.

The rate will climb to 4.04 percent at the end of 2010, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.

The Fed will increase its target for overnight loans between banks to 0.75 percent in a year, versus the current range of zero to 0.25 percent, the survey shows.

Treasuries have handed investors a 1.1 percent loss in December, heading for their worst month since April, according to indexes compiled by Bank of America’s Merrill Lynch unit.

Industrial Production

Fed officials on Dec. 16 said the economy is strengthening and left their target rate unchanged at the conclusion of its two-day policy meeting.

The FOMC met after a week of reports suggesting economic growth is quickening. Retail sales climbed 1.3 percent in November, twice as much as anticipated in a Bloomberg News survey of economists. Industrial production climbed for a fourth time in five months.

Gross said last month the central bank is unlikely to raise interest rates until nominal gross domestic product increases by 4 percent to 5 percent for another 12 months.

GDP grew at a 2.8 percent annual pace in the third quarter, the Commerce Department said on Nov. 24. While the U.S. has returned to growth after the deepest recession since the 1930s, most economists surveyed by Bloomberg News predict the unemployment rate will exceed 10 percent through June. Consumer spending is still below its level of two years ago.

Jobless Rate Falls

The unemployment rate fell to 10 percent in November from a 26-year high of 10.2 percent the previous month, the Labor Department said on Dec. 4. The U.S. lost 11,000 jobs, compared with a prediction of 125,000 job cuts in a survey of economists by Bloomberg News.

Pimco’s government-related debt category may include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives and bank debt backed by the Federal Deposit Insurance Corp., according to the Web site.

Cash and equivalent securities can include commercial paper, short-term government and mortgage-backed securities, short- maturity company bonds and money market derivatives, according to the site.

The Total Return Fund gained almost 17 percent in the past year, beating 55 percent of its peers, according to data compiled by Bloomberg. The one-month return is 0.1 percent, outpacing 51 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.

Derivatives are financial obligations whose value is derived from an underlying asset such as debt, stocks or commodities. Futures are agreements to buy or sell assets at a later specific price and date.

Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. Garfield Reynolds at greynolds1@bloomberg.net.

Last Updated: December 18, 2009 04:16 EST



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S&P 500 May Climb 6% on Santa Claus Rally: Technical Analysis Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Shani Raja

Dec. 18 (Bloomberg) -- The Standard & Poor’s 500 Index may end the year as much as 6 percent higher if a typical December rally drives the gauge past a key resistance point, according to technical analysis by Bell Direct’s Julia Lee.

The index, which closed yesterday at 1,096.08, has climbed through December in 16 of the past 20 years, said Lee, an equities analyst in Sydney. Further gains this month in what’s sometimes known as a Santa Claus Rally could push the gauge past 1,121, the 50 percent retracement level that Fibonacci analysts identify as a point of significant resistance.

“The 1,121 level is the 50 percent retracement from the high of the bull market in 2007 to the low of the cycle in 2009,” said Lee. “It will be a challenge to break past that, but if it does, my guess is that the index will drift even higher to 1,160. If it doesn’t, we’ll probably just see a sideways movement.”

The S&P 500 tumbled 57 percent from its high on Oct. 9, 2007 to this year’s March 9 low as the global recession deepened. The gauge, which has rallied 62 percent since then as government stimulus measures helped shore up economic growth, has climbed less than 0.1 percent so far this month.

The S&P 500 had its biggest December gain in 1991, when it rose 11 percent. Its steepest decline was 6 percent in December 2002. The index has posted an annual gain in 14 of the past 20 years.

In technical analysis, a Fibonacci retracement is created by taking two extreme points on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent, according to Investopedia.com.

Once these levels are identified, horizontal lines are drawn and used to identify possible resistance and support levels. If a price breaks through one of the levels, it may signal a move toward the next resistance or support point.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

Last Updated: December 17, 2009 21:20 EST


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Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Kathleen M. Howley and Dan Levy

Dec. 17 (Bloomberg) -- Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7 percent a year earlier.

As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht are turning to short sales to exit loans that now are larger than the market value of the house. In such a transaction, the lender agrees to accept less than a 100 percent payoff on a mortgage to expedite the property’s sale.

Holzknecht, 53, last month cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages. Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

Common Plight

“It’s not uncommon to see this situation on the high end of the market -- homes selling for less than it would cost to build them,” said Holzknecht’s agent, Joe Flick of Roanoke Group in Seattle. The property came on the market eight months ago priced at $1.85 million, he said.

Porter Michael Peterson, a 33-year-old linebacker for the National Football League’s Atlanta Falcons, bought a mansion near Tampa, Florida, four months ago for $1.1 million -- almost half the amount of the mortgage taken out by the sellers three years earlier, according to real estate records. Reggie Roberts, a spokesman for the Falcons, didn’t return a call seeking comment.

Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier, according to data from the Office of Thrift Supervision. The bank regulator doesn’t break out short sales by size of mortgage.

Upside Down Mortgages

“You are just starting to see the tip of the iceberg with luxury short sales,” said Adrian Heyman, owner of Property Advisors, a real estate broker in Scottsdale, Arizona. “A lot of wealthy people are upside down in their mortgages and they just can’t afford the second or third vacation home anymore.”

There are 114,000 home loans of more than $1 million, according to First American. About a quarter of all mortgaged homes in the U.S. have loan balances bigger than their current value, known as being upside down or underwater, the data company said.

The Dow Jones Industrial Average lost more than half its value as it tumbled to a 12-year low in March. The number of U.S. households with a net worth of more than $1 million, not counting primary residences, fell to a five-year low of 6.7 million last year from a record 9.2 million in 2007, according to Spectrem Group, a Chicago-based consulting firm.

The financial-services industry was among the hardest hit by the recession. While Goldman Sachs Group Inc. set aside a record $16.7 billion in the first nine months of the year for employee bonuses, some Wall Street executives will see pay cuts, according to Johnson Associates Inc., a New York-based compensation-consulting firm.

Distress

Year-end bonuses for people at hedge funds, asset- management firms and insurance companies probably will drop an average 20 percent, the firm said.

“There’s a lot of distress,” said Tracy McLaughlin, co- owner of Morgan Lane Real Estate in Ross, California, north of San Francisco. “You have hedge-fund guys whose funds evaporated and a year-and-a-half later they’re still not working.”

The entry-level segment of the housing market was aided this year by an $8,000 first-time buyers tax credit that pushed resales to a 6.1 million annual pace in October, the highest since February 2007, the National Association of Realtors said in a Nov. 23 report.

President Barack Obama signed a bill last month extending the program into next year. The new version keeps the first-time buyer benefit and makes a smaller credit available to some move- up buyers. It can’t be used for homes priced above $800,000.

Luxury Market Left Out

The Federal Reserve set out in January to lower fixed mortgage rates by purchasing $1.25 trillion of bonds backed by home loans. The 30-year fixed rate for so-called conforming loans that can be bought by Fannie Mae and Freddie Mac dropped to an all-time low of 4.71 percent in the week ended Dec. 4, according to McLean, Virginia-based Freddie Mac, the second- largest U.S. mortgage financier. The rate rose to 4.81 percent last week.

The Fed purchases haven’t affected the high end of the market because they exclude so-called jumbo loans. Mortgages above the $729,750 limit set by Congress for the nation’s highest-priced markets cost almost 1 percentage point more than conforming loans, according to Keith Gumbinger, vice president at HSH Associates, a mortgage-data company in Pompton Plains, New Jersey. That’s quadruple the historic spread.

“There is no refinance market for you if you are underwater and outside the Fannie and Freddie framework,” Gumbinger said. “High-end neighborhoods are all suffering from the same problems of diminished income at a time when there is little equity to work with.”

Trapped by Market

Masoud Bokaie, co-founder of engineering firm BORM Associates Inc. in Irvine, California, owes $2.6 million on a 3,664-square-foot house with marble floors and granite counters about 10 miles (16 kilometers) away in Newport Beach. He’s waiting to hear whether lenders Luther Burbank Savings and Wells Fargo & Co. will approve a short sale.

He received an offer last month “close to” the loan balances, said Shirley Cameron, his agent at Coldwell Banker Platinum Properties in Irvine, who declined to specify how much. Bokaie said he doesn’t want to pay $7,000 a month in net costs including the property’s mortgages and taxes when real estate values in the area continue to tumble.

“What’s the point when the market is going in the other direction?” Bokaie said in an interview.

The U.S. median home price was $173,100 in October, 25 percent lower than its July 2006 peak, according to the National Association of Realtors. Prices fell 7.1 percent from a year earlier, the slowest pace of the year.

More Declines Expected

“The reason the low end stopped falling is because the government stepped in with affordable loans,” said Scott Simon, managing director at Pacific Investment Management Co., a Newport Beach-based investment firm that runs the world’s largest bond fund. “There is no political will to bail out a million-dollar house.”

Luxury home prices probably will drop another 5 percent before reaching a bottom in September 2010, according to Sam Khater, senior economist at First American.

Those declines may lead to losses on jumbo mortgages that dwarf the “haircut,” or discount to full value, that banks take on short sales or foreclosures of moderately priced homes, said Rodriguez, the agent with JM Group in Miami.

“When the bank takes a loss on a $3 million property it’s a lot bigger than the loss on a home with a $150,000 mortgage,” Rodriquez said.

To contact the reporters on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net; Dan Levy in San Francisco at dlevy13@bloomberg.net

Last Updated: December 17, 2009 00:00 EST