Friday, August 27, 2010

PIMCO: The recovery is falling apart

U.S. economic data are "alarming," signaling the recovery is losing momentum, Mohamed A. El-Erian, Pacific Investment Management Co.'s chief executive officer, wrote in an opinion piece in the Washington Post.

Unemployment is high, consumer credit is shrinking and small companies are having trouble obtaining bank lines of credit, wrote El-Erian, who is also co-chief investment officer at Pimco, which runs the world's largest bond fund. Increased government spending and additional debt purchases from the Federal Reserve are unlikely to spur a rebound, he wrote.

"Throughout the summer, data signals have become more alarming," wrote El-Erian, who is based in Newport Beach, California. "Current policy approaches here and abroad are unlikely to deliver a durable and robust U.S. recovery."

A U.S. report today will show gross domestic product grew at an annual pace of 1.4 percent in the second quarter, versus the 2.4 percent pace the government estimated last month, according to a Bloomberg News survey before the Commerce Department issues the figure. Fed Chairman Ben S. Bernanke is scheduled to speak today, raising speculation he will say the central bank is considering increasing its debt purchases to help keep borrowing costs low.

Home Values

Housing is waning and home values are set to fall further as foreclosures increase, El-Erian wrote in the article.

There is a need for tax reform, housing-finance reform, infrastructure investment, support for education, job retraining, removal of barriers to interstate competition and stronger social safety nets, he wrote.

Sovereign bonds are rallying globally as economists trim their growth forecasts and stocks tumble.

"The equity markets are again under pressure while yields on Treasury bonds have collapsed, reflecting that market's growing concerns about the weak economic outlook," El-Erian wrote.

Treasuries have returned 1.9 percent this month, and an index of sovereign bonds around the world gained 1.8 percent, according to Bank of America Merrill Lynch data. MSCI's World Index of shares handed investors a 4.2 percent loss, after accounting for reinvested dividends.

Weekly Gain

U.S. 10-year notes headed for a fifth weekly gain, the longest run since February, pushing the yield down about half a percentage point during the period.

The notes fell today, pushing their yields up three basis points to 2.51 percent as of 10 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 fell8/32, or $2.50 per $1,000 face amount, to 101.

U.S. stocks fell yesterday, sending the Dow Jones Industrial Average to its first close below 10,000 in seven weeks, on concern manufacturing is slowing. The Standard & Poor's 500 Index fell 0.8 percent and has now tumbled 14 percent from its 2010 high on April 23.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, cut his estimate for growth this quarter to a 2 percent annual pace. As recently as two weeks ago, he projected 4.6 percent.

Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, estimates a 2.3 percent rate of expansion, down from a June forecast of 4.1 percent.

Fed Purchases

The Fed plans to purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage-backed securities. Bernanke is scheduled to speak at a conference in Jackson Hole, Wyoming.

The central bank said following its Aug. 10 meeting that it would reinvest principal payments on mortgage assets it holds into long-term Treasuries after judging "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

The record $239 billion Pimco Total Return Fund managed by Bill Gross returned 12.3 percent in the past year, beating 66 percent of its peers, according to data compiled by Bloomberg.

Pimco, which managed more than $1.1 trillion of assets as of June 30, according to its website, is a unit of Munich-based insurer Allianz SE.