PIMCO---McCulley, Paul---Managing Director / Partner
>> welcome back, everyone. paul mccully is our featured guest on “open exchange.” paul, you have recently changed your name of your company from fed focus, one we have gotten used to reading, now called the global central bank focus. why did you do that?
>> for the simple reason that monetary policy is not just about the fed, but about central banking around the world, and i have been writing about other central banks for the last several years and finally it dawned on us that maybe it was time to change the name of the publication to reflect the reality that we and i personally follow central banks around the world, as we think in terms of the outlook right now, what the bank of japan is going to do and what the people’s bank of china is going to do is more important, quite frankly, in the global economic outlook than what the fed is going to do. we have a lot more comfort about what the fed is going to do over the next couple of years than we do about what japan is going to do, so it is a natural extension of globalization on the marketplace that our research has to be globalized as well. how does that inform your investment decisions then? i mean, how is this globalization, if you will, affect your portfolio?
>> well, globalization has been a theme that we have addressed here as a firm, for a long, long time. we have been on top of them with a number of years and our economic forums, both our big annual forum which happens in may and cyclical forum which happens quarterly. we have been examining global economic fundamentals, region by region for a long period of time, and our investment committee, which is the key decision making body here at pimco is very much of a global focus, so we look at the cafeteria in which we eat to feed the global cafeteria.
>> does that mean that you are finding more interesting things outside of the united states than in the u.s. bond market ?
>> that could be the case at times. it’s not the case right now, but that could be the case at times. i think probably more importantly from the standpoint of what it means for how we run our portfolios is that global developments can have a profound impact on domestic developments here in the states. a simple example of that would be, mr. bernanke’s thesis of a global surplus of savings being approximately the reason for the conundrum, so we look at the global scene to find opportunities to invest money, but the global scene, in our research of the global scene and in our realtime involvement in the global scene informs what we do in our domestic portfolio.
>> is it necessarily, when you talk about the global scene, it’s obviously not just emerging market . i know and bill has told us that you all are very bullish coming in, and have taken positions in that regard. can you expound on those positions right now?
>> we have, indeed, long the yen, as is public knowledge. the simple reason is a relative growth and relative monetary position. over the last several years --
>> is it as simple as interest rate differentials becoming more attractive for the yen as the japanese raise their rates?
>> it’s not quite that simple. that’s part of the story. the bigger story is that japan is experiencing a pretty robust economic recovery, has emerged from the long period of deflation. there is still some deflation risk there, but there is a fundamental improvement in the economy there, and you’ve got the central bank effectively saying we are going to withdraw our extra oordz necessary anti-deflation monetary policy, and part of that policy was preventing the yen from going up, because if you want to prevent deflation, you don’t want your inflation to go up. now that they have declared victory over inflation, they don’t have a compelling reason to stop the yen from appreciating somewhat. i think there is a limit to it, but part of removing the anti-deflation policy is not just removing the zero interest rate policy but removing the cap, if you will, on the yen, and you will recall going back two years ago, the bank of japan spent over $100 million in one quarter to cap out the yen at 105, so i think that’s probably the next interesting level is 10 a. between here and 10 a, there is no reason for the central bank to broadcast that. we’re trading around 112 today. you have some upside. please stay with us. when we come back, we want to update you on the reports of the coverage of the gunfire at capitol.
>> an update on some of the most active stocks at the ny. is las vegas fairs who won a bid for an l.a. casino bid. goldman sachs’s were upgraded over and sirius is up 20% after they reaffirmed their ‘06 subscriber guidance.
>> as we have been reporting, the u.s. capitol seems to be on lockdown as the police investigate the reports of the sound of gunfire, but there are some developing news. let’s get the latest from the news desk police have just reopened the capitol building. this, as heavily armed capitol police are going room to room in parts of the capitol, advising people to stay in their offices. the outside has been closed. four ambulances have arrived on the scene as a precaution. police say that they are investigating what they call the sound of gunfire in the garage of the rayburn building, which contains the office of members of the house. only house members are allowed to park there. there are intense security checkpoints include a mirror they are checking underneath cars entering the rayburn building. the capitol is on lockdown.
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Listen On the markets---Suzy (fast)
Open exchange --- Ellen (slow)
>> of good morning, everybody from world head im impart head quarters in new york, i’m suzy assaad. police have confirmed that there were shots fired in the rayburn building garage near the capitol. however, police are saying now there are no signs of injuries or of a shooter and the latest headline says that that the shots may have been at a firing range in the rayburn cellar so the staff is advised to stay in their offices. there is a lockdown until police investigate this further. meantime, stocks have slowly fallen on the news. they have regained a little bit of ground at this morning, but the top stories at this hour are all about the consumer, which is reported that they’re―their spending went up for the eight straight month in april. this was more because prices went up. incomes went up as well and it was met by the sharpest jump in a week since july. spend-related inflation gauge moved higher, up 2.1% from april of last year. that is the highest rating since march of last year. it’s also above the 1-2% range that is preferred by ben bernanke.
>> consumer confidence shas slipped to the lowest since october. the university of michigan’s read something down over eight points and in houston, enron jurors are c citing one witness as to the finding ken lay and jeff skilling guilty. he testified about the accused going along with office partnerships to manipulate earnings. jurors say they found his testimony the most cred ill. meantime, let’s take you over to california where we have our featured guest, paul mccully. we started off talking about the p.c. deflater coming in at one in the last month. the fed really likes to say that that number should be between one to two percent. what happens here and what did you think of the impact of tham number?
>> it’s slightly above the one to two percent range. i don’t think the fed is religious about ten basis points. i think the fed recognizes that inflation is a variable. when they say they are data dependent, it is not just the variable of inflation, but the front end of economy, particularly at the housing market , which is rolling overment the fed has a difficult communications problem in here. in and of itself, why consider a 2.1 versus a 1.9 to be a monumental sort of issue.
>> is it the trend, though, paul, is it the trend that this number is creeping up that is of more of a concern?
>> i think that’s what the feds would be concerned about. they would like to have it not drift up anymore. they would like not to have inflationary expectations drift up as displayed in the defense market , so i think they are on watchful vengeance on this thing, but again, they will be looking at the economy, not just at the inflation numbers.
>> paul, hold on. we just want to get our viewers updated on the market . it moved a little bit since the shots were reported in a washington, d.c. building. the dow jones industrials have pulled back and are reading more at their levels. the dow is up 28 points. s&p is up by 2 ½. the ten-year note is giving a yield of 5.05 while the two-year note is up 4.5% yield. in the foreign exchange markets , we see dollars stretched across the board, up almost ¾ of a percent against the japanese yen. the euro is down 6/10 of a percent. british pound is down to $1.85 and change. the crude oil markets are also moving higher today, up another half of a percent. we are back up to $71.70 a barrel. and ford is back in the news this morning. we’ve got ellen braitman to tell us why.
>> well, suzy, ford is paying its highest borrowing costser er, pricing $2.5 million in bonds that will pay as much as 10.6%. what is happening is ford is going to exchange the bonds plus $1.3 billion in cash for maturities that start maturing in october, so this rate that it is going to pay yields 5.7% over the treasuries and the exchange is going to increase ford’s interest costs by $90 million a year. why is ford doing this? the move will allow it to hang on to more cash it can use to redesign cars an regain market share from toyota and other japanese rivals. meantime, we’re looking at general motors today. those shares also on the rise. the biggest percentage gainer in the dow this morning. g.m.’s shared raised to overweight by prudential analyst michael bernstein. he sees the stock headed to $31 a share. those shares have been surging up now up 46% so far this year, gaining 14% in the past two days alone. first up, in the past few days, reports of u.s. union workers are taking the company up on its buyout and early retirement offer. a few days ago, you had a separate analyst upgrade. also, another gainer is las vegas sands really surging today. this company is a big casino company by market value beat out three rival bids to build singapore’s first casino resort t made an offer valued at $3.2 billion and was chosen over several other companies. keep in mind, it is the biggest gain you have seen since the first day of trading in these shares. the company owns m.g.m. mirage, harrah’s entertainment and the long an less resort is slated to open in 2009.
>> ellen, thank you very much.
>> paul, we were wondering actually about our thoughts on the ford bonds. what do you think of this 10.6% yield?
>> i think what ford is doing is logical to them in that they are trien to lengthen their maturities. they have to pay up to do so, but it provides more stability to their balance sheet, so i think from a longer-term perspective, it’s consistent with them doing the right thing to buy themselves additional time, even though they have to pay, as you say, a bit more to buy themselves additional time to get through the restructuring that’s critical. they need to do it.
>> is that an interesting bond for pimco? is that something you all would buy?
>> we have been involved in ford as well as g.m. for the last year. i wouldn’t comment specifically on what we will be doing with respect to that bond, but we have been involved in credit, yes.
>> is ford―are you involved on a shorter side or longer-term maturitys?
>> we are involved in both, although our involvement tends to be concentrated in the very front end of the curve.
>> what else are you buying? what is attractive to you right now in the fixed-income market ?
>> quite frankly, there is not a lot that is at tractive. we have anticipated the widenings throughout the global markets , including the global fixed-income markets , so we have had the hatches battened down pretty well waiting for risk premiums to widen back out and then we will put on our buying shoes, but we don’t want to be early in that. we have certainly seen a widening in the emerging market spreads along with the emerging market equities, of course, and we are seeing a bit in the investment grade and the high yield market . we are letting the marketplace find a new equilibrium level, if you will, before we get particularly risky.
>> at that point, are you looking to increase your risk levels? what terms are you in right now where you’re looking to buy right now? how far out? how much risk are you willing to take? could you give us a little more information on that?
>> sure. we’re in the business of taking a risk at the right price, and over the last year, risk premiums have contracted on all risk assets including the risk premium imbedded in the yield what is known as the term premium. there is a bit of conundrum not only in the slope of the risk nature but in the nature of the risks around the world. we have anticipated the risk premiums would revert back to something more normal just like the fed had taken the short-term interest rate back up to something more normal. we have been in a risk a averse mode and a particular catalyst for this most recent widening in risk premiums was the announcement a couple months ago that the bank of japan would be ending the quantitative easing, ending their zero interest rate policy, which has been in place for over five years, so we have looked at that as a catalyst for re-pricing of risk, and risk is being repriced, and we will be buying at some juncture, but we want to buy when risk premiums are wider, and when the world is afraid of risk. the logic of what we do is when the world wants risk, and is in love with risk premiums are very skinny, sell it to them. when they don’t want it and risk premiums are wide, then we put on our buying shoes.
>> paul, we will take a quick break. we will come back and talk more about. that we will talk a little more about paul’s ideas on central banks around the world, and why he should stay short the u.s. dollar and what they are doing in the foreign exchange market . we will be right back.
