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"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

By Angela Monaghan and Edmund Conway for
Published: 5:30AM GMT 05 Jan 2010

Pimco's decision to sell UK gilts this year will be seen as a financial vote of no-confidence in the Government's handling of the economy.
The American investment group said it will be a net seller of UK Government bonds this year, at the very point when the Bank of England brings its £200bn programme of purchases to and end and the Treasury attempts to raise unprecedented sums through the capital markets.

The move is doubly embarrassing for the Government because the head of Pimco's European investment team is Andrew Balls, brother of Schools Secretary Ed Balls, who is mastering the Government's re-election strategy. The move will be seen as a financial vote of no-confidence in the Government's handling of the economy.

Paul McCulley, a managing director at Pimco, said: "We are currently cutting back in the US and UK because... supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines."

The yield on the benchmark 10-year gilt has leapt from below 3pc to above 4pc in the past year amid concerns about the Government's capacity to bring its budget back under control, and worries about the coming end of quantitative easing (QE), under which the Bank has been buying massive numbers of gilts. However, UK equities staged a strong start to the year, with the FTSE 100 up 87.46 points to a 16-month high of 5500.34.

The Pimco switch was described by Mike Amey, its portfolio manager in London, as "a significant policy statement".

"Those areas of the bond market that have had greatest support from central banks will be most vulnerable as that support comes to an end," he added. Few economists expect the Bank, whose monthly meeting begins tomorrow, to extend the QE scheme beyond February, meaning the private sector will soon be solely responsible for demand for government debt. The gilts market has also been supported by new liquidity rules, which have seen banks buy large gilt holdings to bolster their balance sheets. These purchases, too, are seen as one-off, again implying a sudden drop in demand in the coming months.

Although the QE scheme has had its detractors, it has kept gilt yields down and helped prevent the flow of money in the economy from dropping into "depression territory", according to economists. Figures from the Bank yesterday showed a welcome 0.3pc rise in the holdings of broad money, M4, by non-financial companies, in November, indicating that the radical policy of pumping cash directly into banks' balance sheets may now be yielding effects.

Some accuse the Government of failing to lay out extensive enough plans on how to bring the budget deficit back under control, with the major ratings agencies threatening to downgrade the UK's credit rating unless the next Government provides more ambitious plans for budget reduction. In what was seen as the starting gun for the pre-election battle, Labour yesterday published a document accusing the Conservatives of hiding the full details of its tax and spending plans from the public, sparking a war of words between the parties. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Well now this "situation" has my attention...at least momentarily.

Quantitative easing programs both in the US and across the pond were met with extreme scrutiny initially.  And why not?  Trillions of dollars and billions of pounds would be used unabashedly to stimulate both economies and keep us from the throes of a recession-turned-depression.  In a phrase, it simply wasn't very logical to stave off the effects of debt by accruing more debt.

And while the effects of the stimulus plans initiated by the global financial world will be debated, the success of such programs as the U.S.'s can't be denied...at least not publicly.  The equity markets and the bond markets both somehow managed to sustain quite a reversal of fortune in 2009, much to the bemoaning of bearish analysts and naysayers...including me.  Even into this new year, the Dow Jones Industrial Average pushes to 10,600 with the S&P 500 over 1135 and the Nasdaq moving in on 2320.  For all the major equity indices, they've cut the crash roughly in half since March 2009.

All the while, the US Federal Reserve continues to extend its fiscal stimulus and the Bank of England moves its quantitative easing schedule farther to the right with no formative end to the government stimulus in sight.  Indeed, it may be able to go on for several more quarters--maybe even years.  But investors are an antsy bunch--it comes with the territory--and many are itching to get the jump on the next move, which undoubtedly will be in the opposite direction.

However, for the past few quarters at least it seems to be a matter of not if, but when.

I am, for one, at least 4 months past due a meaningful correction to the moves in equities and am equally baffled by the resilience seen in the bond markets and commodities.  It just does not seem plausible at all for equities and bonds to move in the same direction.  And now PIMCO, the world's largest bond company, publicly comes out in saying that it plans to be a net seller of U.S. and UK debt objects.  On one hand, it seems convenient for someone of my bearish bend on the market, but on the other hand I do feel as if we have seen it all before.


Mr. McCulley is right in his prudence to step aside once the central banks call their programs to close.  I doubt the foreign demand for U.S. or UK bonds would be great even as the global recovery seems to be in place simply due to the infancy of it all.  Even without being net short in equities, I don't foresee a global recovery this quickly.  It all seems so very "flash-in-the-pan" and very political on all fronts (not that it wouldn't normally involve politics).

As far as the implications for a sovereign meltdown in the U.K...I'm out to lunch.  That's not to say that I doubt it would happen, I simply don't have enough information to hold an opinion on the subject matter at this point.  In lieu of other PIMCO-related events, I think the announcement made here may indeed be a signal that all is not well after all.

Sidebar: Into 2010, I'm still battle-worn from taking the initiative to capitalize on the forthcoming downturn in the equities market that has yet to materialize.
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"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

By Nathaniel Williams for
Thu, 08 Apr 2010 15:00:00 ET 

Greece has been a mainstay in the news recently as its sovereign debt crisis became Europe's economic albatross. In response to Greece's burgeoning debt, the European Union designed a plan to establish a "safety net" of bilateral and International Monetary Fund support. The idea was to allow Greece to raise its own funds and reduce the necessity of a Greek bailout.

The EU believed that the announcement of their plan would cause borrowing costs to fall in the open marketplace. Their plan needed low bond yields to succeed.

Did bond yields rise or fall? Before I tell you what happened, let me show you what Chris Carolan, the editor of Elliott Wave International's European Short Term Update, predicted by using the Wave Principle.


In his March 22 European Short Term Update -- days before the EU's plan was announced -- Chris spotted an Elliott wave pattern called "contracting triangle" in the daily chart of Greece's 10-year government bond yields. He labeled the two months of choppy trading a-b-c-d-e (see chart above) and told subscribers that this pattern suggested that yields would advance from their current level of 6.68%:

"It looks like the six-week period that saw complacency return on the topic of the Greek debt crisis is over with the completion of this triangle. Look for a thrust higher in Greek yields now, along with a concurrent re-emergence of the Greek debt crisis in the financial media."

The EU was predicting yields to fall, but Chris forecasted them to rise. What actually happened? The April 7 issue of The European Short Term Update provides the answer.


Greek government bond yields soared to 7.16%, just as Chris's wave analysis suggested. This move occurred despite the EU's predictions to the contrary, dashing hopes that Greece could escape its crisis on its own. One major economist said it best:

"Europe's gamble has failed spectacularly…The surge in yields makes it even less likely that Greece will be able to get out of its fiscal black hole without a real helping hand." (Bloomberg)

The beauty of the Wave Principle is that it provides objective guidelines for predicting where a market is headed. It's not a crystal ball since it deals with probabilities, not certainties, but this example shows you just how useful wave analysis can be. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

By Laura Mandaro for
April 28, 2010, 3:25 p.m. EDT

SAN FRANCISCO (MarketWatch) -- Credit-default swaps spreads for southern European countries fell Wednesday, as better prospects for a bailout of Greece overshadowed Standard & Poor's downgrade of Spain, a move that knocked equities on both sides of the Atlantic. Five-year CDS spreads for Greek debt fell 72.9 basis points to 750.9, according to CMA DataVision, meaning it would cost about $750,900 a year to buy default protection on $10 million in Greek sovereign debt. That's still far higher than most developed countries. Portuguese, Italian, Irish and Spanish CDS spreads also fell. The tightening stemmed in part from "players getting long ahead of an expectation of an imminent concrete bail-out by the end of the weekend," said Abdullah Karatash, a vice president in trading for Natixis in North America and Europe. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

By Barbara Kollmeyer, for
April 27, 2010, 12:35 p.m. EDT

MADRID (MarketWatch) -- With a one-two punch, Standard & Poor's gave investors plenty of reason to sell southern Europe stocks on Tuesday, coloring stock-market screens red across Europe -- and in the U.S., as well.

In a double-whammy, they cut Greek sovereign debt to junk and downgraded the sovereign ratings of Portugal by two notches.

Fund managers and analysts have expressed alarm at what they saw in the markets Tuesday, as the value of bonds in Portugal tumbled.

Portugal has "a demanding refinancing schedule, and, for now at least, the markets and rating agencies appear to have put it at the top of the list entitled 'The Next Greece,' " said Ben May, European economist at Capital Economics.

Portugal's PSI 20 (XX:PSI20 ) sank more than 5% in Tuesday trading, dragging year-to-date losses past the 15% mark.

Spain, Italy and Ireland have not escaped big losses this year vis-a-vis core Europe, driven by worries over Greece that are triggering fears these other countries will follow.

Spain, whose officials have been perhaps shouting the loudest that "no somos Grecia," has suffered a 12% year-to-date fall in the IBEX 35 /quotes/comstock/20r!iib (XX:IBEX ) .

Greece's ASE Composite has lost 22.7% in 2010, stumbling anew this week as debt markets have cast aspersions on the country's ability to repay debt. That's even as the European Union and International Monetary Fund have worked to cement a $45 billion rescue package. See Greek central banker calls for deeper deficit cuts.


Chalk it up to just one more hard sell for stocks across the peripheral regions of Europe.

Christoph Riniker, head of strategy research at Bank Julius Baer & Co. in Zurich, said he's overweight the euro zone -- favoring Germany, the Netherlands and Belgium -- but underweight southern Europe.

"The risk that you still have is of these other countries being affected and the solutions to the problems in regards to market performance. ... I don't think we'll have that in the near term," said Riniker. "We'd rather recommend being more cautious."

He said this puts an even greater emphasis on stock picking. For example, while Spanish telecom giant Telefonica (TEF ) (ES:TEF ) offers great Latin America exposure, plus listings in other countries, the risk from its home country can't be ignored. See Michael Molinski's weekly Latin America column.

He is also uncomfortable, he said, with credit-default spreads of the other southern European countries, where he sees "no trough or consistency," adding that "as long as it stays like that, it doesn't make sense to take the additional risk."

"The reason we like Germany, Netherlands and Belgium is because they have market exposure to the Asian region and we still think this in terms of economic growth is the leading place to be," he said. "The additional point is Germany unit labor costs [are] quite low."
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"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand