Interview: Chief investment officer at Pimco
>> fed policymakers raised interest rates the 12th straight time and traders are talking about the next meeting that comes our way in december. for a closer look at the bond market ‘s reaction to today’s rate decision, miment is standing by―michael mckee is standing by with bill gross, chief investment officer at pimco.
>> thank you very much. thank you, bill, for joining us. anything in today’s decision or in the statement afterwards that surprised you or causes you to change your forecast in any way?
>> no, nothing in today’s statement, mike. i expect, however, in december, or perhaps in january, but probably in december, you know, some words to come out indicating that the fed is approaching neutral. a lot of this gets into game theory in terms of how close to the vest the fed wants to play it. it’s all associated to some extent with greenspan’s retirement, but i would point out that the bank of england, in terms of their hikes and their attempts to thwart housing price increases, have played it very close to the vest and only within two weeks of their eventual pause did they announce to the contrary that they were seeing signs of a slowing economy.
>> are you thinking, then, that we might see a pause in the two meetings before mr. greenspan leaves the fed board?
>> no, i don’t think that of the i think today’s indication that monetary policy remains accommodative means that next time, december, they certainly go to 4.25. it would be at that point that the game opens up in terms of parsing economic data between december and late january and determining whether or not that 4.25% rate had enough bite so that the economy and inflation began to slow down.
>> you forecasting a pause, then, or the end of this rate cycle?
>> i think the end of the rate cycle. it’s instructive to me to have gone over bernanke’s old speeches. and there were four or five years of them, the most important of which i think was the global savings glut speech of six months ago in which he spoke to the global savings glut in terms of producing lower real interest rates in the united states and indeed around the world. to the extent that continues and the conditions of which they are probably too lengthy to discuss here, but to the extent that the global savings glut continues that, means basically that when bernanke takes over, that he senses interest rates are high enough to slow an economy down. that’s my interpretation but i think a reasonable one reading that speech of six months ago.
>> have you been surprised by the economy over the past year in september of 2004, you predicted the fed might pause at 2%. in may, you said 3.25 to 3.5% and in june you predicted they might lower rates.
>> i have been surprised and it’s fair to say those forecasts incorrectly predicted a lower real short-term interest rate and did not take into consideration the use of housing as an a.t.m. machine. obviously, the economy has been kept going, at least in our opinion and my opinion, on the basis of consumption predicated upon equity withdrawal from the housing sector and to the extent that housing has gone up in double digits and allowed consumers to ecitize their homes, that’s kept the game going. i didn’t see that coming. but even as greenspan has pointed out in the past month or so in a presentation he has worked on with a fellow fed researcher over the past five years, he suggests that mortgage equityization may be coming to an end and the economy itself may be about to slow down.
>> what do you do from here? what did you do today, buying or selling and what should investors look do getting ready for the next two meetings?
>> not a ticket today, mike, which is unusual for pimco. however, in the past week or two and as i’ve spoken to you in the past over the last three or four weeks, we’re increasingly confident that the front end of the curve will be the attractive portion of the curve. you’ll come mid to late 2006 in which the fed may in fact have to turn tail and start to lower interest rates because the economy has slowed down too much. so those that would invest in one and two- and three-year securities, taking advantage of what are now higher rates than what we might see 12 months from now are the eventual winners in this particular portfolio strategy game.
>> european and japanese central banks talking about raising rates. will there be a disconnect as the fed gets closer to finishing its rate cycle and would that hurt the u.s. dollar or bonds?
>> i think it might. that bears watching, that if japan and euroland move interest rates up, that, to a certain extent, becomes competitive on a global basis and keeps domestic dollars, if only domestic dollars, in those countries and out of the united states so we need to watch that. if the e.c.b. moves up 50 or 100 basis points or if japanese central bank moves theirs up, our interest rates are threatened, as well.
>> got to leave it there. bill gross, thank you very much. throwing it back quickly to lori rothman.
>> thank you very much. mother nature may be helping the energy markets with milder weather. we’ll look at oil prices.
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Listen Market briefing --- Lori (slow)
Fed --- June (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
After hours' earnings --- Ellen (slow)
stands at 4%. policymakers suggested they’re not done yet. more on the fed in a moment, first, let’s bring you the closing numbers. all three benchmark averages closed lower after the fed did the expected. the dow lost 33 points to close at 10,406. the s&p lost 4.25 points and nasdaq closed down 6.25 points. the fed raised rates for the 12th straight time, again, a quarter-point increase, taking the overnight bank lending rate to 4%, the highest since june 2001. policymakers kept the words “measured pace” in the statement, suggesting the fed is not finishing, the reason boiling down to inflation. the fed doesn’t want. soaring energy prices to filter into other parts of the economy. looking at the fed’s decision, june grasso has the story for us.
>> lori, the federal reserve did just as expected, down to repeating language and keeping its “measured” plan, saying in the statement, with underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace likely to be measured. as for inflation, the fed’s statement was basically unchanged from its last meeting on september 20. the cumulative rise in energy and other costs had the potential to add to inflation pressures, however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained. the fed again spoke about hurricanes katrina and rita, saying higher energy prices and hurricane-related disruptions and economic activity have temporarily depressed output and employment. there was little sustained reaction in the market to the 12th straight rate hike.
>> this is great reaction, if i were a fed governor, i’d be very happy because they told the market what they were going to do and they it and the market didn’t react at all.
>> fed chairman alan greenspan will have two more opportunities to raise rates before his 18-year run ends. his successor, ben bernanke, will take over on february 1, if confirmed by the u.s. senate. 10-year notes had the biggest drop since march last week because of concern bernanke will be less vigilant on inflation in favor of strong growth policies but citigroup market strategist scott pang says treasuries may recoup last week’s drop because of that concern being overdone. drew matus agrees about bernanke.
>> people tend to mistake him for a dove because when deflation threatened, he wanted to cut rates quickly. the flip side is also true. he doesn’t care about anything else, he just wants inflation in his boundary, 1% to 2% on core p.c.e.
>> today’s decision was unanimous, unlike the meeting on september september 20 when mark olson voted to hold rates steady.
>> for more on the federal reserve’s decision and impact on the stock market , we’ll check in with deborah kostroun with details on the day’s trading session from the new york stock exchange.
>> stocks snapped their two-day rally as the fed signals it will continue to raise interest rates. interest rate-sensitive stocks lower on the day with stocks like utility and real estate stocks weighing on the 24 industry groups in the s&p 500. let’s not forget the earnings of the 353 companies in the s&p 500 that have reported results, almost 2/3 beating analysts’ estimates. one company that beat estimates on the day, viacom, up after earnings exceeded estimates after increased advertising sales at the mtv cable channel and a surge in box office revenue for movies like “war of the worlds.” interest-rate-sensitive stocks weighing on the s&p 500. real estate stocks, the worst performers, semiconductors and utilities. looking at the real estate and utility stocks with increasing interest rates, pushing bond yields higher and that tends to make dividend-paying stocks less attractive so those stocks were lower. t.x.u., one of the utilities there, also said third-quarter earnings were below estimates as higher natural gas costs cut into earnings. chief economist with barclays capital in new york said that the fed statement had very little changed and the message remains we should continue to expect steady rate hikes at the next few meetings. their call is that we have three more rate hikes to go, up to 4.75% in march. it was a double whammy for general motors on the day. their october u.s. vehicle sales fell 26% and the company’s debt rating, which was already two levels below investment grade, was cut another two levels by moods investors services, saying g.m. may not be able to rebuild profit and sales. ford said october sales fell 26% in october but toyota reported higher sales after ford and g.m. posted those declines. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> thank you. the nasdaq didn’t fare much better, falling .3% today. dell had its worst day in more than four years. robert gray has details from the nasdaq marketsite in times square.
>> the nasdaq composite falling for the first day in three. there was a brief rally after the fed’s decision to raise rates for the 12th consecutive time but that rally did not hold and the nasdaq closed lower by almost .33% in today’s session. dell was a driver in the decline. dell, after the close last night, saying it would miss its own sales forecast for the second quarter. the shares falling today with their biggest drop in four years on heavy volume, above 100 million shares, the most active in five years, at 105 million shares of dell changing hands today. dell said preliminary earnings would be 39 cents a share, the low end of the previous forecast of 39 to 41 cents, blaming it on demand from u.s. consumers and u.k. businesses trailing expectations. shares of intel fell along with dell. of course, dell uses intel chips exclusively in their p.c.’s. we did see microsoft shares rise as they unveiled their new live versions of windows and office software, designed to create realtime links to data over the internet, countering competition from google. google’s shares rising to another record in today’s session. and also, within the broader industry groups, we saw biotechs, the weakest industry group on the nasdaq. also, tech stocks weaker, of course, led lower by dell. bank statistics lower as the fed continues to increase rates and shows no signs of stopping any time soon. transports led the rally yesterday and were higher again in today’s session. expediters international the best performer in the nasdaq 100. the freight and customs broker beating the average by four cents and sirius boosting their forecast for year-end subscribers. nabi biopharmaceutical shares cut by more than 2/3 after a drug failed a phase iii clinical trial.
>> after-hours’ earnings to tell you about. sun microsystems, symantec and electronics arts have released their latest quarterly earnings. ellen braitman has more.
>> lori, let’s begin with sun microsystems. first-quarter results for the company, a penny a share loss, two cents excluding items, which is more than analysts were looking for. they were looking for a loss of a penny a share. the shares currently down 1.3% in extended trade. sales coming in shy of estimates at 2.7 billion. analysts were expecting 2.9 billion when it comes to sun. talking about e.d.s., the second biggest computer services company. e.d.s. reported 15 cents a share excluding profit, three times the amount analysts were expecting. analysts were looking for five cents a share. e.d.s. shares up 2.9% in extended trade. i’m sorry, that was the electronic arts number. e.d.s., 19 cents a share, excluding items, does beat estimates as analysts were expecting 14 cents a share. e.d.s. saying 2005 profit will be 55 to 60 cents a share. on average, analysts were expecting 55 cents a share. it says sales adjusted sales will be 19.9 to 20.1 billion o.average, analysts expecting 20.3 billion so shy on the sales forecast but these are adjusted numbers. the company tuesday agreed to sell the consultsy to the unit’s managers. profit coming in at 19 cents a share excluding items, higher than the 14 cents analysts were expecting. with that in mind, now let’s talk about electronic arts. that is at 15 cents, excluding items. analysts were looking for five cents a share. keep in mind, with electronic arts, it is beating lowered forecasts but again, beating by much more than had been expected. the sales also coming in stronger than expected. $675 million. analysts were looking for sales of $632 million. lori, with all of that, sending it back to you.
>> thank you so much for that. they stuck to the script. greenspan and fellow policymakers raised rates again. the word “measured” still there. bill gross runs the world’s biggest bond fund at pimco. he’ll tell us what it means for the economy, housing and the bond market . keep it here.
