Interview: PIMCO, world's largest bond fund manager
>> fed policymakers raised interest rates for the 11th time, already traders talking about the next meeting that comes our way november 1. let’s get perspective from bill gross, chief investment officer at pimco, world’s largest bond fund manager. he’s joining us right now from his office in newport beach, california. good to see you.
>> thank you. nice to be here.
>> traders already boosting their bets for additional rate hikes. do you think that’s the right call?
>> i think as additional evidence on the economy, it probably is. the fed kept the key words “measured” and “accommodative” within the text of their statement and to that extent, took us back to pre-katrina types of levels in which the market was assuming the fed marched upwards until something happened. i still think it’s important and i think the fed will continue to think it’s important that what happens over the next few weeks and months in terms of economic growth is critical to whether or not they continue to march upwards and it’s there, i guess, that i differ from many market participants and suggest that the fed stops at 4 as opposed to moving higher.
>> you’ve been at that forecast, i believe, since july. what would it take for you to change that forecast that the fed will end the year at 4%?
>> well, it would take―a pretty decent snap-back in terms of confidence, economic growth, slightly higher inflation numbers from the standpoint of the core and obviously recognition through statements and speeches on the part of fed governors and perhaps greenspan himself that this was the expectation into 2006. i think the fed is really searching for this neutral interest rate. they’re not searching for a rate that’s restrictive. they don’t want to shut the economy down. they recognize it’s highly levered and dependent to a considerable extent on the housing wealth so they’re searching for the magic bean like jack and the beanstalk and that’s why they’ve moved in 25-point steps the last 11 times. that’s the critical determinant, is 4% enough or do we have to go to 4.25 to slow things down magically? i think it’s 4%.
>> tell us what you did today?
>> not much today. as a matter of fact, anticipating the statement and the hike, you know, i myself portfolio sold five-year’s but it ended the day where i sold them. i would expect over the next few days and weeks, dependent, of course, upon where the economy shakes out and confidence numbers and how quickly consumers can adapt to this $3-a-gallon level, that the curve in terms of the short rate relative to longer dated treasuries, 5’s and 10’s, would continue to steepen slightly and so that’s where my bet continues to be on the front end as opposed to the back end of the curve.
>> digging in a little bit more, you had been buying the two-year to five-year treasuries and today you said you sold that billion of the five-year so where specifically is the best place to be if the fed will raise to 4%?
>> i think, strangely enough, that’s where it is. sometimes we―portfolio managers have this sense that we can do a quick trade. that’s typically not pimco’s style. but it was an important day and in a sense that this is probably what would transpire so there was a sale of some five-year’s but i expect to be back into those five-year’s and in a billion, five-year’s, short of a billion five-year’s, not to sound egotistical, it’s a drop in the bucket so it was a minor glitch in terms of our overall strategy which continues to recommend two’s, three’s and five’s.
>> what’s the effect for your strategy of the katrina stimulus coming down the pike?
>> we’ll have to wait and see. i’d be the first to admit that not everything falls neatly in line with “your strategy” or “my strategy” and to the extent that katrina promotes $200 billion in additional spending, that promotes inflation higher than it would have been otherwise so we’re mindful of that. we want to see some measured spending, admitting that that area needs lots of money but we don’t want the federal golf simply write a blank check. having said that, it’s important to monitor its progress and to i guess most of all monitor its impact in terms of inflation going forward.
>> and very briefly, we just have 30 seconds here, you have said you want ben bernanke to be alan greenspan’s replacement. why is that?
>> well, i think he’s a highly respected, in some ways politically savvy individual that has proved during the periods of time such as our deflationary scare of a few years ago, that he can respond both with intellect and with deed. if the response is required. it’s not that i don’t like any other candidates it’s just that this one provides some very visible evidence that he can do the job going forward.
>> bill, thanks so much. bill gross of pimco. after the break, we’ll return.
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3.75%, signaling they may continue to raise rates. the fed says the u.s. economy faces a near-term setback in employment, spending and production after hurricane katrina. allan dodds frank will join us in a moment for details. first, let’s check market reaction today. stocks down across the board -- there was concern among investors that higher rates and near record energy prices will restrain consumer spending. the 10-year treasury ending little changed, sending yields up. on the shorter end of the yield curve, that’s where the focus will be and yields moving up on the shorter end of the curve as the fed reiterated rates will likely continue to move up at a measured pace because of the threat of inflation. you had yields on futures contracts surging in a sign traders expect more increases than previously anticipated. as for currencies, not changed right now but in trading today, the dollar up against the yen and euro after that fed announcement. as for gold today -- we’ll get reaction to the fed rate decision from bill gross, chief investment officer at pimco. david seiders is chief economist with the national association of homebuilders of the. tom keene as “chart of the day” and bloomberg contributor gene sperling, speaking with them about what to expect from the fed in coming months. stocks and treasuries falling after the fed raised rates that quarter point. it was the first meeting since katrina. the fed’s action comes even though there is little hard data about that hurricane’s effect on the economy. let’s get more, now, from allan dodds frank.
>> raising the fed funds rate a quarter point, the federal reserve said it can stay on the measured path to keep inflation in check. fed chairman alan greenspan and colleagues said that while hurricane katrina hurt the economy in the short term, the impact does not pose a long-term threat.
>> i think what’s significant is that the fed felt the u.s. economy was in good enough shape that it could tolerate yet another increase in short-term interest rates and i would go beyond that. this is a federal reserve that has also been paying keen attention not just to the u.s. domestic economy but to the global economy and what we’ve seen over the last few months has been an improvement.
>> cohen predicts the fed will continue to raise interest rates. the fed called the widespread devastation in the gulf region and boost in energy prices unfortunate developments which it says has increased uncertainty about near-term economic performance. the committee continued it is their view they do not pose a more persistent threat. the 9-1 vote to raise rates comforted some.
>> treasury markets feared the fed would do nothing. inflation continues to be the demon that affects the bond market . as long as the fed is active fighting inflation, there is calm there.
>> i think we’ve all been saying for the last week or two that this is probably the first meeting in a year where there’s been this much room for dissent and it would actually be surprising if that many highly opinionated and inform people did all agree and come out in the same place.
>> the fed, acknowledging trouble spots, tried to add comfort to the longer range forecast. higher energy and other costs have the potential, the committee said, to add inflation pressures, however, core inflation has been relatively low in recent months and longer term expectations are contained. abby joseph cohen says as the fed continues to raise interest rates, stocks will do better than bonds since the outlook for corporate profits is so good.
>> speaking of corporate profits, let’s talk about a record number reported today, that was goldman sachs. profit up 84% from the same period last year. again, it was a record. bob bowden joins us now with all the details. bob?
>> thank you. goldman sachs managed to deliver blowout numbers, the headline figure powered the stock to a five-year high intraday before know finishing lower. the headline earnings were nearly double the $1.74 from last year’s fiscal third quarter and the $3.25 easily beat analysts’ estimates. for comparisons, goldman’s 84% increase in fiscal third-quarter profits larger than lehman’s 74% profit increase and bear stearns’s 34%. breaking down revenue by unit, financial advisory revenue up 24%, underwriting up 4% led by investment grade debt issuance, equity trading revenue up 75% because of “strong customer driven activity and generally higher equity prices.” fixed income currency and commodities trading up 41% and asset management revenue rose 23%. steve rukous of mate rick asset advisers says the fixed income market is heavy.
>> the fixed income market continues to stay booming for everyone. the market has doubled within the last six years and that is one of the things people feared, as interest rates went up, they couldn’t make money but the size of the market has gone to $24 trillion.
>> you see the intraday chart, goldman sachs shares hit the five-year intraday high. before falling lower, down 23% by the close of trading, down .2%. other investment bank stocks, mixed picture with merrill lynch up 1% and bear stearns down .8%. merrill lynch reports october 11. morgan stanley reports earnings tomorrow. and one other note, the 12-member amex broker/dealer index hit an all-time high, you see there, there’s the index there, up 34% in the last five years but intraday, 12-member index hitting an all-time high.
>> and as bob mentioned, goldman sachs up much of the day, ending lower. really echoing what we saw in the broader market with indexes higher after the fed meetings, the index turned around and closed near the lows of the day. we’ll get details from deborah kostroun.
>> stocks saw a major turnaround after the fed raising interest rates once again. some of the things the fed said that many traders are talking about, that, that higher energy and other costs have potential to add to inflation pressures and also the fact that the fed signaling that more interest rate increases are down the road. what we did see for the dow, biggest two-day slide since june 24. and consumer discretionary stocks hit the hardest. if you look at the bloomberg home building index over the past week, we have seen this index lower. what we saw even after that decision today, homebuilders, once again, sharply lower, erasing earlier gains that we did see. also, retail stocks. they actually saw some pretty big declines as a lot of concern about what near-record energy prices will do and could restrain consumer spending. federated, a different story there. they said they will sell their david’s bridal stores and convert 62 marshall field’s locations into macy’s and cut as many as 6,200 jobs after buying may department stores. oil-related stocks, exxon-mobil hit a record high and retreating. some of the energy stocks lower, some higher on the day even though crude oil actually lower. delphi falling to a record low amid concerns the company will not receive financial aid from former parent, general motors. that company may have to file for bankruptcy. delphi stock has been climbing in recent months as investors speculated g.m. would bailout the company in the same way ford agreed to help its former parts unit, visteon. steel stocks, they were sharply lower for the most part. that after u.s. steel saying their third-quarter profit will be less than average analyst estimates. maybe because of increasing natural gas costs which surged after hurricane katrina. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> david radler, former chief operating officer of hollinger international pleaded guilty to a federal fraud charge today, agreeing to cooperate with a probe of conrad black. prosecutors will recommend radler serve 29 months in jail and pay a fine of $250,000 for his role in the $32 million fraud. he will be free on bond until all proceedings in the case are concluded. in the meantime, glaxosmithkline paid more than $150 million to settle u.s. allegations it overcharged government health programs. the company had been accused of inflating prices for two cancer drugs. the case was the first brought at the whistleblower suit by a florida pharmacy. when we return, we’ll focus on the meeting of the federal reserve, what it means for the bond market and speak with bill gross, chief investment officer at pimco. keep it here.
