Gross Backs Off New Normal After Missing Bond Rally

January 04, 2012, 10:17 PM EST By Susanne Walker

(Adds comments from consultant in the sixth paragraph.)

Jan. 4 (Bloomberg) -- Bill Gross is backing away from Pacific Investment Management Co.’s outlook for a “new normal” after lagging behind the majority of his peers during the biggest bond-market rally in nine years.

The period of muted growth in developed economies, high unemployment and “relatively orderly” deleveraging that Mohamed El-Erian, who shares the title of chief investment officer with Gross, coined in the aftermath of the 2008 financial crisis appears to be morphing into a world of credit and zero-bound interest-rate risk, said Gross, the founder of Pimco and manager of the world’s biggest bond fund.

“It’s as if the earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century,” Gross wrote in a monthly investment outlook posted on the Newport Beach, California-based company’s website today. “Welcome to 2012.”

Most developed economies have not, in fact, deleveraged since 2008 and credit remains resilient because of the multitude of monetary stimulus packages being made available through central banks in the U.S. and Europe, Gross wrote. This risks leading to unraveling of financial markets if policy makers are unable to foster growth and inflation accelerates, he said.

Hedging Bets

Until the outcome is clear, Pimco is advising investors to consider ways to hedge their bets, including U.S. Treasuries, long-term inflation-indexed U.S. debt, high-quality corporates, senior bank debt and municipal securities.

“He’s obviously needing to address his mis-steps last year on Treasuries and suggesting that for a period of time, he’s wanting to hide from the rest of the fixed-income marketplace,” said Geoffrey Bobroff, a mutual-fund consultant based in East Greenwich, Rhode Island. “It’s quite a negative piece.”

The recommendations mark a departure from Gross’s call last year, when he advised buying higher-yielding emerging market debt as part of the “new normal” and cautioned investors to stay away from the U.S., noting that growth would be higher in developing economies, while excessive borrowing here, the U.K. and Japan would lead to inflation. To that end, Gross eliminated his holdings of Treasuries in February and had a net bet against the securities in the $244 billion Total Return Fund, missing the biggest rally in Treasuries since 2008. Gross issued a “Mea Culpa” to investors in October and boosted the debt to 23 percent of the portfolio by the end of November.

Investor Withdrawals

Pimco Total Return Fund had $5 billion in client redemptions last year, its first year of withdrawals in records going back to 1993, according to Morningstar Inc. Clients pulled $1.35 billion from the fund in December, according to the Chicago-based research firm.

Pimco Total Return in December 2009 became the biggest mutual fund in the history of the industry after beating most rivals and attracting a record $50 billion in deposits that year. In the five years through Dec. 30, the fund advanced at an annual rate of 8.1 percent, outperforming 97 percent of competitors.

“The bulk of sovereign bond holdings should be in the U.S.,” Gross wrote in today’s investment outlook. “As long as Euroland credit implosion is possible investors should gravitate to the ‘cleanest dirty shirt’ sovereigns with the least encumbered balance sheets. Focus on five- to nine-year Treasury maturities to guard against inflation which create opportunities to take advantage of roll-down capital gains.”

Bond Markets Rally

Treasuries returned 9.8 percent in 2011, while Gross’s Total Return Fund gained 4.2 percent, underperforming about 70 percent of its rivals, according to data compiled by Bloomberg.

“He’s very frustrated by the lack of delevering and he’s right,” said Bobroff. “His thesis is the same as it has been, but he’s very negative more-so on the next six to 12 months.”

Bonds worldwide returned 5.9 percent last year, according to Bank of America Merrill Lynch’s Global Broad Market Index. That was the biggest increase since the index gained 8.9 percent in 2002. Meanwhile, securities firms are predicting the smallest return on U.S. stocks than any time in seven years, forecasting the Standard & Poor’s 500 Index will rise 6.4 percent in 2012 as budget deficits around the world limit gains. The index was unchanged in 2011.

“Investors must lower return expectations,” Gross wrote. “The financial markets and global economies are at great risk. Two to five percent for stocks, bonds and commodities are expected long-term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable.”

‘Cost of Money’

Minutes released yesterday of the Federal Reserve’s Dec. 13 policy meeting said policy makers for the first time will make public their own forecasts for the federal funds rate beginning at the Jan. 24-25 meeting. Fed officials will show investors their forecast for the benchmark interest rate in the fourth quarter of 2012 and the next few calendar years, the minutes said.

“I expect the January Fed meeting to mirror in some ways what we have first witnessed from the ECB,” Gross wrote. “It won’t take the form of three-year financing by a central bank, but will give assurances via language that the cost of money will remain constant at 25 basis points for three years or more -- until inflation or unemployment reach specific target levels. If and when that doesn’t work, then a specific QE3 may be announced, probably by mid-year.”

“The financial markets are slowly imploding -- delevering -- because there’s too much paper and too little trust,” Gross wrote. “Goodbye ‘old normal,’ standby to redefine ‘new normal’ and welcome to 2012’s ‘paranormal.’”

--With assistance from Sree Vidya Bhaktavatsalam in Boston. Editors: Dave Liedtka, Dennis Fitzgerald

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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CFTC Backs MF Global Trustee’s $2.1 Billion Customer Payout

December 09, 2011, 12:25 PM EST By Linda Sandler and Tiffany Kary

(Updates with Freeh filing in eighth paragraph.)

Dec. 9 (Bloomberg) -- The Commodity Futures Trading Commission defended a planned $2.2 billion payout to U.S. commodity customers by the trustee liquidating the MF Global Inc. brokerage, saying customer claims take priority over all other claims.

The third transfer by trustee James Giddens, which a judge is considering in Manhattan bankruptcy court today, would give commodity customers about 72 percent of their assets, a lawyer for Giddens told the judge. Judge Martin Glenn received at least 18 formal objections and 43 letters questioning the move, including one from creditors of the parent company and one from the parent’s trustee, who said they also have claims on the brokerage.

“The claims of commodity customers must be satisfied in full before any portion of the MFGI estate may be used to satisfy the claims of general creditors,” the CFTC said in a court filing yesterday.

CME Group Inc., owner of the world’s largest futures exchange, will guarantee $550 million of the payment in case any customer gets more than a fair share of the brokerage’s assets, which by law must be split equally among customers, the CFTC said.

In the transfer, Giddens would pay out from 80 percent to 85 percent of all assets remaining in his control, keeping $800 million in reserve, according to court papers. Two previous payouts to commodity customers totaled about $2 billion.

CFTC Restrictions

CFTC regulators approved restrictions on how brokers can invest customer funds, after as much as $1.2 billion went missing before MF Global Holdings Ltd. filed for bankruptcy on Oct. 31. Jon Corzine, the defunct parent company’s former chief executive officer, said he “would never have intended” transfers from segregated accounts and had no knowledge of any such movements of funds until a day before the bankruptcy.

Giddens has transferred about 38,000 commodity accounts to other firms, and struck a deal to sell 330 securities accounts. Three transfers of collateral made and pending will give commodity customers about $4 billion of their assets, while the sale of securities accounts would give most smaller customers access to all their funds, according to court filings.

The trustee for the bankrupt parent faulted Giddens’s plan for the securities customers, saying they shouldn’t get the total net equity in their accounts. Because the brokerage is 100 percent-owned by the holding company, the equity in MF Global units is an asset of the bankrupt estate, wrote lawyers for the trustee, former Federal Bureau of Investigation director Louis Freeh.

‘Language Changes’

To deal with objections by commodity customers who haven’t yet received any money, Giddens said he “made some language changes” in a proposed order he will ask the judge to sign approving the transfer.

To satisfy administrators of MF Global’s U.K. and other foreign affiliates, who objected that the transfer might deplete funds available to pay them, Giddens would make future transfers based on available assets and not ask the judge to let him use his own discretion, he said in a filing this week.

“The trustee believes it would be more prudent, relieve uncertainty, and better inform the expectations of customers to make further bulk transfers, if any, only upon further motion and order of the court based on facts and circumstances and availability of property,” he said.

British Unit

MF Global UK Ltd. said Dec. 6 it has $250 million remaining in accounts at the MF Global brokerage, of which $230 million is in segregated commodity accounts for customers. The U.K. company hasn’t received any money from the trustee of the U.S. brokerage and isn’t in line to get any in the planned payout of $2.2 billion, the administrators of the bankrupt company said in a court filing.

The judge handling the MF Global brokerage liquidation in New York “must adequately protect” all former customers in any order he signs approving Giddens’s next transfer, they said.

Some customers faulted the transfer because it covered only U.S. customers. The brokerage trustee treats foreign futures customers “differently,” favoring U.S. clients, said RWA Raiffeisen Ware Austria AG, a cooperative agricultural group.

In the filing, Giddens said he excluded customers whose assets are held in foreign accounts “because virtually all of it is not under the trustee’s control, but rather under the control of MFGI’s foreign former affiliates,” which are being liquidated in their home countries.

What and When

RWA has asked Giddens what he is doing to recover the funds from administrators of the U.K. affiliate, and when he might return assets to these customers.

“We are urgently working on responses to all our objectors,” Kent Jarrell, a Giddens spokesman, said in an e- mail.

Creditors of the MF Global parent said Giddens is planning the distribution without explaining why he thinks the funds are customer property or verifying that the customers are entitled to receive the funds.

Paying the wrong people or paying out too much will hurt the bankrupt parent company’s estate, which has claims against the brokerage and owns its equity, MF Global Holdings creditors’ lawyer Martin Bienenstock said in a Dec. 5 court filing.

Segregated Funds

Including funds already distributed, Giddens controlled $4.9 billion in U.S. segregated commodity customer funds, CME said. It calculated that an additional $900 million in customer funds were traded on foreign exchanges, putting the total at about $5.8 billion. Previous estimates put the segregated accounts at about $5.4 billion.

A $1.2 billion shortfall would mean more than 20 percent of commodity customers’ segregated assets are missing.

CME said the creditors committee in the holding company’s bankruptcy doesn’t have the legal right to object to the trustee’s distributions.

The parent company’s Oct. 31 bankruptcy filing, the eighth- largest in U.S. history, listed assets of $41 billion. Corzine, the former co-chief executive officer of Goldman Sachs Group Inc., quit as MF Global’s CEO on Nov. 4.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Tiffany Kary in New York. Editors: Stephen Farr, Andrew Dunn

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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