Pimco Piles On; Taper Tuesday; Bizarro World
Recapping the day's news and newsmakers through the lens of CNBC.
Back Away Slowly: Pimco
Another day, another warning related to the Fed's bond-buying program. This time, Pimco CEO and co-CIO Mohamed El-Erian said economic growth isn't happening fast enough to justify the high asset prices that are a result of the $85 billion-a-month quantitative easing strategy and advises that investors back away slowly.
May saw interest rate, credit, foreign-exchange and volatility risk all come under attack, El-Erian said, adding that there will be some cascading down to equities.
There's a huge disconnect between asset prices and fundamentals, he added, which is OK as long as the fundamentals validate the prices. But if they don't, the Fed is going to have to do even more or prices are going to have to come down.
El-Erian's co-CIO Bill Gross piled on in his monthly letter to investors, saying that Fed Chairman Ben Bernanke and his ultraeasy monetary approach was part of the problem. He believes that the Fed's zero interest rate policy has made life miserable for fixed-income investors and savers, depressing yields and inhibiting businesses from innovating or expanding.
Pimco's double-team wasn't received with enthusiasm by some, but it's clear some are becoming worried that QE is causing risk in the search for yield.
"Reduce your equity risk, your liquidity risk, your credit risk. Those are the three to reduce. Pull back from surfing this wave of central bank liquidity. Walk away from risk, don't sprint away. QE is a medication that comes with a warning, which says: 'Do not use it for a long time because you'll get side effects.'"
"Western corporations seem focused more on returning capital as opposed to investing it. Low [returns on investment] fostered by central bank policies in financial markets seem to have increasingly negative influences on investment and real growth."
A Gain Again? Nope
It has become almost as certain as death, taxes and tides: a Tuesday stock market gain. Today, we shot for 21 straight. But stronger-than-expected headwinds—from Japan and the energy sector—intervened.
Investors are likely to hold off big bets until the monthly government employment report on Friday (see below), a key factor for the Fed's decision on monetary policy. Economists surveyed by Reuters expect to see a gain of 170,000 jobs, slightly higher than the 165,000 jobs added in April.
"Yesterday was the first day that the Pavlovian interconnection between the after-markets in Japan and here got a bit more muted, and we're seeing a muted influence again today. [Japanese Prime Minister] Mr. Abe tomorrow is due to drop a couple of shoes, and people are waiting to see what that may bring so there's slight anxiety. So we have an uphill road here in trying to make the 21st terrific [Dow] Tuesday in a row."
—Art Cashin, director of floor operations at UBS Financial Services
Friday's Jobs Report: A Taper Bellwether
Friday's pivotal jobs report could mean the markets stay in bizarro world for a while longer. Bad or inconclusive numbers could again clear the way for a stock market rally under the assumption that the Fed won't taper anytime soon.
One believer, Dr. Doom, economist Nouriel Roubini, thinks growth is too tenuous and the market is too dependent on quantitative easing. Accordingly, (using bizarro logic) the habitual bear is bullish, expecting the bond-buying program to remain in place well into 2014. The tipping point could be when the wealth gap between Wall and Main streets gets too deep and reality sets in.
Some strategists believe the economy will be ready to the ditch training wheels when the next three or four jobs reports average well above 175,000 new nonfarm payrolls. That'll be a signal that we're getting close to escape velocity and the handoff from assisted growth to genuine growth can be made, said Pimco CEO Mohamed El-Erian.
"I think the markets are a little bit confused by this. There are a lot of people who think we wouldn't be where we are without the fed and once they start to scale back, that we're going to give a lot of this rally back. I don't necessarily agree with that, but I would like to see stronger earnings to feel more confident about that point of view."
—David Joy, Ameriprise Financial
"Growth is not going to pick up and inflation actually is falling. So the markets are worried about tapering off sooner, but I think tapering off is going to occur later and therefore the market is going to rally."
—Nouriel Roubini, head of Roubini Global Economics
Bid on Lunch With Warren Buffett
Two days into an auction for a lunch with Warren Buffett, someone has bid above $700,000, blowing past the $610,000 someone paid in a charity auction last month for coffee with Apple CEO Tim Cook. It's not too late to reserve one of the two seats at the annual "Power Lunch With Warren Buffett." Executives who would like to discuss investing with Warren have until Friday night at 10:30 p.m. ET to get bids in.
The annual auction has raised $15 million since 2000 for the Glide Foundation, which describes its mission as creating a "radically inclusive, just and loving community mobilized to alleviate suffering and break the cycles of poverty and marginalization." Last year's auction was won by an anonymous bidder who paid a record $3,456,789 to share a meal with Buffett. It's also been a good recruiting vehicle for the new investment guard at Berkshire Hathaway: Ted Weschler was hired as a BH portfolio manager after he paid $5.3 million for two meals with Buffett in the 2010 and 2011 auctions.
"Maybe the most effective organization I've seen for people down on their luck."
—Warren Buffett, on the Glide Foundation