On Friday the bond market was rocked by the news that the original bond King himself, Bill Gross, was leaving PIMCO to join Janus.
Over the last couple of years, the “Beach”, which is the broker nickname for Newport Beach based PIMCO, has been going through its fair share of problems. The famous infighting between Gross and Mohamed El-Erian was fodder for many scandalous articles. Last winter the conflict between the two co-CIOs finally became so bad that El-Erian stepped down from PIMCO’s CEO position.
As the world began to learn more about the so called “Bond King,” the picture became more disturbing. Instead of the kindly old grandfather that he played on CNBC and Bloomberg, Bill Gross was revealed to be an ill tempered tyrant. Sensing that the media tide was rising against him, the savvy Gross tried to fight back with his own campaign, but all that resulted were articles like this cover story from BusinessWeek:
Even with El-Erian swept to the sidelines, Gross was unable to soothe things over internally at PIMCO. According to his superiors his behaviour was becoming increasingly erratic. It has been reported that he would not allow traders to look at him. Last year I wrote about a strange Bill Gross article where he seemed to gush all over the “brilliant” Michael Jackson. Who knew that not only did he admire Jackson’s music but might also have “mirrored” some of the strange behaviour as well. Although I am being facetious, there seems to be no doubt that Bill Gross suffered from a “God” complex that befalls too many rock stars like Michael Jackson. In a reported interchange between Gross and El-Elrian, Bill showed his true colours:
“I have a 41-year track record of investing excellence,” Mr. Gross told Mr. El-Erian, according to the two witnesses. “What do you have?”
“I’m tired of cleaning up your s—,” Mr. El-Erian responded, referring to conduct by Mr. Gross that he felt was hurting Pimco, these two people recall.
And herein lies the crux of the problem. Although maybe Gross has outperformed over the last four decades, during the last four years he has been sucking wind. He has missed most of the big moves in the bond market.
He is like an aging rock star who only remembers the crowds from last decade and refuses to accept that people no longer want to hear him play. When the reality of the half-empty stadiums hit, instead of quietly riding off into the sunset, he gets increasingly bitter and angry.
Gross thinks he should get a free pass on his last stumble due to his previous accomplishments. Although his reputation has allowed him to stay the course way longer than almost anyone else, even the Bond King has to eventually deliver the returns. The market will allow him to under perform for a while, but not forever.
Which brings me to the real point of this post. PIMCO’s parent company Allianz got crushed on Friday’s news.
And Janus Capital, the company where Bill Gross is going to hang his hat, rocketed higher.
Allianz lost almost $5 billion USD of market capitalization and Janus gained almost one billion on the news. These market reactions are just stupid. If this were a 45 year old hot bond manager like Jeff Gundlach, then maybe (and I stress maybe), this would be justified.
However, let’s step back and think about this. Gross is a 70 year old bond manager who has badly under performed lately. Maybe it is just a blip and we should be patient. But regardless, his glory days are well behind him.
Bill Gross reminds me of Michael Jordan.
After sinking the game winning basket during the 1998 playoff season, Jordan retired at the top of his game. It was a perfect time to hang up the sneakers. It would have been difficult for Jordan to eclipse the accomplishments of his past seasons. He retired a true legend. But instead of being content with everyone remembering him like that, Jordan eventually hungered for the limelight. He returned a few years later to the Washington Wizards. By this time though, he was older and slower. No longer could he dominate as before. His seasons with the Wizards only faded the glory of his previous seasons. Instead of everyone solely remembering him as the legendary Chicago Bull, the image of a dull Washington Wizard too often competed in people’s minds.
If basketball teams traded like stocks, then I am sure that on Jordan’s announcement that he was returning to play basketball with the Washington Wizards, the market would have reacted by taking the Wizards limit up. There would have been an euphoria as Jordan’s past successes were discounted into future successes with the new team. But that euphoria would have been misplaced.
Just like there is a euphoria today with Bill Gross’ joining of Janus Capital. There is an optimism that Gross can repeat his success of building PIMCO into one of the greatest bond firms in history. But just like Washington fans were disappointed to find that Jordan was not the saviour they had hoped, Janus owners will be dismayed to find that the Gross move is not nearly as earth shattering as they anticipated.
I certainly don’t think that Bill Gross’ move is worth an almost $6 billion dollar market cap spread between the two companies. In fact, I would argue that given the recent problems with Bill’s behaviour (and performance), it might actually be a positive development for PIMCO. The downward move in Allianz was an over reaction.
As for Janus, yes Bill will bring in some new business. But his glory days are behind him. He will be no more successful than Michael Jordan was with the Washington Wizards.
I am going to buy some Allianz and short an equal dollar value of Janus this morning. My suspicion is that the market will start to figure this out sooner rather than later.
Fisher goes out on a limb
I am trying to keep an open mind about where the US economy is headed. There are some really big headwinds (the global economic slowdown, the tapering, the rising of short term rates), but at the same time there are an equal amount of positive forces that suggest we might be able to continue chugging higher (low interest rates, an improving labour market, low energy and commodity prices). Right now, I am not sure about whether the negatives are going to weigh down the positives enough to slow down the momentum.
However in a strange development, Fed President Richard Fisher has tipped his hand on which side of the coin he thinks it will fall:
Richard Fisher, president of the Federal Reserve Bank of Dallas, said today that two soon-to-be-released economic reports from his Fed district would “knock your socks off.”
Fisher has traditionally been a big hawk, so the fact that he is goes on to express some worry about being behind the curve is no surprise.
The Federal Reserve mustn’t “fall behind the curve” as it weighs when to start raising interest rates, Dallas Fed President Richard Fisher said, citing strengthening U.S. growth and building wage-price pressures.
“I don’t want to fall behind the curve here,” Fisher said in a Fox News interview. “I think we could suddenly get a patch of high growth, see some wage-price inflation, and that is when you start to worry.”
But why bother citing two specific economic reports that would “knock your socks off?”
It seems to me that Fisher wouldn’t be so blunt unless he was 100% sure that these reports were going to come in hotter than expected.
Could the wage inflation that we have been waiting so long for finally be upon us? And if so, is that going to cause the US dollar to rally even harder? And what does that mean for stocks?
I am not sure, but it is interesting that Fisher would venture so far out on a limb. I think he is smart enough not to do that unless he is confident that he is right…
Flattening my Hong Kong Dollar position immediately
Over the week-end the situation in Hong Kong took a dramatic turn for the worse.
I had a small long HKD position that I put on because of the Russia inflows into Hong Kong last month. Given the sudden unrest over the week-end, I quickly covered that position first thing this morning. I might be panicking, but the whole reason for my trade was that the Russian inflows might overwhelm the Hong Kong peg and it was a low risk long. The new developments make Hong Kong anything but stable, and I doubt that the new Russian flows are going to continue.
One of the traders on my desk at my old firm used to say, “Slay your dragons while they are small.” That is good advice and I am going to take it!
Shifting my long Yen into options
I have two different positions in the Yen. I am both long volatility, and also outright long the Yen for a trade.
My long volatility trade was established when the Yen was around 100. With the big move away from the strike, my gamma has fallen down to almost nothing. I haven’t been bothering to roll up to stay long gamma.
At the same time, last week I put on a long Yen position for a counter trend US dollar trade.
I am getting increasingly nervous that I am pushing my luck fading the big US dollar rally. Although I still think that given the massively bullish sentiment towards the US dollar that it wouldn’t take much for a sharp correction, I also acknowledge that the steamrolling effect might cause the US dollar bull run to accelerate.
I am therefore going to combine both positions by simply getting long Yen calls. I am still hoping for more volatility, but I now have a directional bet on. I just want to limit my downside in case the US dollar run gets dumb.