Gross: Zero-Bound Rates Will Cause Big Trouble

PIMCO bond guru Bill Gross is reiterating his belief that zero-bound interest rates will become a major problem for the economy, and markets.

“Books such as ‘Stocks for the Long Run’ or articles such as ‘Dow 36,000′ captured the public’s imagination much like a Montana to Jerry Rice pass that always seemed to clinch a 49ers victory,” Gross writes in a football-analogy-heavy issue of his investment commentary, discussing the climate of falling interest rates and rising asset prices that has dominated the past few decades. “Yet an instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion.”

Gross says near-zero interest rates decrease household incomes and lower profit margins — and the yield spreads that drive credit expansion. That means deleveraging and slower growth, he says, which means investors should switch from offense to defense.

What is PIMCO’s defensive strategy? “Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible,” Gross says. And that means emphasizing “income we believe to be relatively reliable/safe”; de-emphasizing “derivative structures that are fully valued and potentially volatile”; and combining those two plans with “security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.”

Paulsen Still Likes Financials and Cyclicals

Wells Capital Management’s James Paulsen thinks cyclical stocks will continue to outperform the broader market for some time. Paulsen tells Yahoo! Finance’s Breakout that cyclicals tend to outperform as long as unemployment claims are trending downward, and thinks it won’t be time to get more defensive until new claims for unemployment get down below the 300,000 per week range. He likes the financial sector, and he also discusses why he thinks dividend stocks may be overhyped right now.

Guru Strategy Ratings: UPS, AmEx On The Rise

Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.

Ritholtz: Markets “Don’t Give A Flying Fig” About Election Polls

As the 2012 Presidential election draws closer and closer, the usual rhetoric about one candidate being better than another for the stock market is, as always, a big issue in the press. But in a recent Washington Post column, Barry Ritholtz of FusionIQ and The Big Picture blog says it’s a lot of nonsense.

“Markets do not rally or sell off because one candidate or the other is more likely to win,” Ritholtz wrote. “This might strike some as a bit radical, but here it is: Markets don’t give a flying fig about any of this nonsense.”

One commonly cited but off-base contention, according to Ritholtz: that the fact that a particular candidate is polling well is the reason that the market is rising or falling. “Let’s consider what is driving day-to-day stock prices: It’s not expectations about changing capital gains taxes or broad shifts in health-care spending — issues that arguably can be game-changers in elections,” Ritholtz says. “Rather, large hedge funds and high-frequency traders are the biggest participants short-term. The machine-driven mathematical traders have no interest in politics; their stock purchases are held for milliseconds, and their buying is driven by quantitative formulas that have nothing to do with any candidate. Hedge-fund managers certainly are not making bets dependent on the outcome of elections 10 months hence. They are more concerned with monthly, weekly and even daily performance. The technical factors driving what they do are far removed from whatever is happening on the campaign trail.”

Ritholtz also says presidents get more credit and blame than they deserve for the economy and market. “Consider how the markets did under George W. Bush, the most recent ‘pro-business president,'” he says, wryly adding. “Then imagine how markets probably reacted to the anti-business socialist from Kenya.” He notes that stocks fell nearly 40% in Bush’s tenure, while they’ve risen about 50% during Obama’s, despite perceptions about their market-friendliness.

Achuthan, ECRI Stand Pat On Recession Call

Lakshman Achuthan of the Economic Cycle Research Institute says that, despite all the positive economic reports we’ve seen recently, several key indicators show the economy is actually on the decline and headed into recession. Achuthan says GDP numbers, personal income growth, sales data, and industrial production have all been on the decline and paint a picture very similar to those that preceded past recessions.

Gross vs. Cooperman on Treasurys

Are Treasury bonds a good place to be, or quite dangerous? Two top strategists — Bill Gross and Leon Cooperman — have very different takes.

Hedge fund guru Cooperman tells Bloomberg that Treasurys will be the worst place to put their money for the next three years. He says the Federal Reserve is trying to bolster asset prices, and he thinks they’ll be successful, creating significant inflation in the next couple years. With yields so low, Treasury investors face a major erosion of their purchasing power if inflation rises. He likes equities and gold over Treasurys.

“Bond King” Gross, however, has 38% of the PIMCO Total Return Fund in Treasurys and other U.S. debt, Bloomberg reports. “If you have an environment in which interest rates aren’t going to change, and that’s the key, is Ben Bernanke good to his promise?” Gross said. “Yields are not going anywhere for the next two or three years.” He says investors who are substituting high-dividend stocks for Treasurys are taking on substantial amounts of additional risk.

Getting Contrarian With A Market Guru

Most of history’s best investors have made their hay by going against the crowd. And in his latest column for Forbes.com, Validea CEO John Reese takes a look at some intriguing new research that contrarian guru David Dreman has published, and a Dreman-inspired strategy that has a strong track record of beating the market.

“After more than a dozen years of studying history’s most successful investment strategies, one of the most important pieces of advice I can give you is this: Don’t follow the crowd,” Reese writes. “[And] when it comes to the field of contrarian investing, perhaps no one has provided as much insightful research as Forbes’ own David Dreman.” Reese notes that in Dreman’s new book, Contrarian Investment Strategies: The Psychological Edge, Dreman updates data he had previously published, showing that contrarian strategies continued to beat the market and post solid returns in the 2000s, despite the talk of new normals and new investment paradigms.

“But some of the most intriguing parts of Dreman’s new book involve new research and analysis, particular as pertaining to investor psychology, as he gives powerful evidence as to why contrarian investing works,” Reese adds. “A big part of the explanation involves the concept of ‘Affect’ — essentially, the way that our minds automatically tag representations of objects or events with positive or negative feelings — and how numerous studies show how Affect often overrides the rational-analytic part of our brains (which should be making our investment decisions).”

Reese also discusses the “Guru Strategy” that he bases on Dreman’s earlier work, which has handily beaten the market since its 2003 inception. And he offers a handful of current picks from the model, including much-maligned oil and gas giant BP. “The London-based oil and gas giant’s name evokes a variety of negative emotions — disappointment, anger, and much worse — thanks to its role in the massive Gulf of Mexico oil spill in 2010,” Reese says. “But from an investor’s point of view, all of the negative feeling toward the company has driven its share price down well below where it should be given its fundamentals–and that’s just the sort of opportunity Dreman looks for.” To read the full article and see all the picks, click here.