The first thing I look at when I read Barron’s round table is the results of the panelists picks from last year.  On that accord, one would do well by skipping most of it.  There are though, two investment gurus, Bill Gross and Felix Zulauf that tend to make me money. None the less read the whole article and make up your own mind..  It can be found here.

Gross: Next, in a world of financial repression where 10-year Treasury bonds yield 2% and 30-years, 3%, certain state bonds and utilities yielding 5% and 6% are decent relative values. It doesn’t mean that they are without risk, and certain states have huge liabilities. I might even live in one. But a number of levered funds own relatively safe A-rated and double-A-rated municipal bonds and yield 7%, plus or minus. One is the Pimco Municipal Income Fund II [PML]. It is a $700 million fund and trades at a 5% premium to net asset value. It provides a 7% tax-free yield by investing in 5% municipal bonds and borrowing at 25 basis points.

Invesco Van Kampen Municipal Opportunity Trust [VMO] also is 40% levered. It buys A-rated and double-A-rated municipal bonds and levers a 4% to 5% return up to 6% or 7%. Munis have done well in the past few months. But 7% tax-free sounds pretty good, and I’ll take it for 2012.


Bill Gross’ Picks

Fund/Ticker 1/6/2012
Reaves Utility Income/UTG $25.18 / 7.0%
Pimco Muni Income II/PML 11.58 / 6.6
Invesco Van Kampen Municipal
Opportunity Trust/VMO 14.61 / 7.1
Sources: Bloomberg; Pimco


In past years you recommended mortgage REITs such as Annaly Capital Management [NLY]. Do you still like them?

Gross: Annaly levers six to seven times, which doesn’t sound too risky relative to an investment bank that levers 10 to 15 times. Annaly buys almost exclusively government-agency-backed mortgages, so we’ll call it credit-risk free. The real risk is the cost of money, and prepayments on their holdings. Annaly and companies like it are sort of modern-day banks without any infrastructure. Like banks, they aggregate deposits and make a spread. Annaly isn’t on my list this year, but conceptually, a 14% yield from a six-times-levered agency-backed investment portfolio is better than a 2% yield from a bank stock when the bank has borrowed 10 to 15 times its assets and has a cumbersome infrastructure.

Zulauf: I assume the world economy is decelerating. China’s economy will slow more than expected, but the Chinese government won’t do anything dramatic to stimulate it. China will ease somewhat, but in piecemeal fashion. That is why those looking for China to get us out of the doldrums are wrong.

Cohen: What growth rate do you assume for China’s economy?

Zulauf: Last year China’s GDP grew by 9.1%. This year they will publish something like 7.2%, but the slowdown in reality will be more pronounced, and it will affect those who depend on China. The U.S. economy could grow by 1% or 1.5%. In Europe, I expect the next stage of the crisis — the ratification of a fiscal agreement — to be critical. I can’t believe all the countries in the euro will ratify it, because it would lock them into a depression for five years. There will be exceptions, and that will trigger the next crisis.

Felix Zulauf’s Picks


LONG Yield 1/6/12
10-Year U.S. Treasury* 1.96%
Australian 3-Year Bond Future** 3.16
Price 1/6/12
Gold (spot price, per ounce)*** $1,617.95
Australian Dollar v. U.S. Dollar 1AUD=$1.02
Turkish Lira v. U.S. Dollar $1=1.88 lira
iShares MSCI Emerging Markets Index FD / EEM $38.23
* Sell when yield falls to 1.20%. ** March 2012 contract. *** Buy when prices fall below $1,520 probably some time this summer.
Source: Bloomberg

We remain in a deleveraging world, and the deflationary process is intensifying. In the stock market, valuation compression has been at work since 2000. Occasionally we have had bull-market rallies when stimulus has been applied in major quantities. The last fiscal stimulus was in 2009, because all governments have realized they have too much debt. Fiscal stimulus is the only thing that works in this economy, and that will come later. We have to fall into a crisis that triggers a policy response. Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.

And when will that end?

Zulauf: It could end in the second half of 2012 or in early 2013. The market could drop 20% from the first quarter’s high. Therefore we will need ammunition later this year or early next year to buy. My first recommendation is capital preservation, or cash. It doesn’t return anything but you’ll need it to buy when asset prices become cheap.

Schafer: What’s the symbol? [Laughter around the room.]

Zulauf: You figure it out. The U.S. dollar will strengthen against other currencies temporarily, until the policy response comes. We are at the very end of the secular decline in bond yields. Yields on less-safe bonds, such as those issued by Greece and Italy, have already bottomed. Bonds perceived as top-quality will see a low in yields later this year. Ten-year U.S. Treasury yields will hit 1% to 1.20% before ticking up to 2.10% or 2.20%. There will be a horrendous move down triggered by intensifying deflationary pressures as money looks for so-called safe havens. I recommend 10-year Treasuries as a trade. When the yield reaches 1.20%, sell.

Investors should own some gold. But gold also will be subject to deflationary pressure and have a cyclical correction. The first part of the correction was the $400 drop to $1,520 an ounce from $1,920. Gold is now bottoming and could retrace half its losses. Then it could decline again in the second quarter, and you could buy it again in the summer. The low will be lower than $1,520. Then gold will rally in the next two years to a new high.

In what form would you buy gold?

Zulauf: I own physical gold, although you can buy the GLD [ SPDR Gold Trust] exchange-traded fund. I hedge my position by selling futures contracts against it, but I closed my hedges recently because a temporary retracement is coming.

Gross: You have more of an emphasis on deflation and I have more of an emphasis on inflation two or three years out. If the 10-year bond yield fell to 1.25% and headline inflation was 2% to 3%, wouldn’t that be bullish for gold?

Zulauf: Yes, but some aggressive players are overinvested in gold. If some other assets go wrong for them, they will be forced to create liquidity and sell their gold positions.

Hickey: That’s what happened in 2008.

Jennifer Altman for Barron’sFelix Zulauf: “I would short the Australian dollar against the U.S. dollar.”

Zulauf: My next idea is how to play the slowdown in China. It will dampen prices for commodities, natural resources and Australian exports. China’s boom was the main driver for the Australian economy in the past 10 years. Australia’s last recession was in 1991. Despite rising exports to China, Australia runs a current-account deficit of more than 2% of GDP. GDP was up almost 2% last year. There is a budget deficit of around 3%. The current-account deficit was easy to balance because there was tremendous investment in the Aussie dollar. It was the so-called high yielder among currencies. Carry traders [who borrow in cheap currencies to buy higher-yielding ones] have bought it, along with individuals and even central banks. Holdings of Australian dollars are widespread, but now the Aussie dollar will suffer.

Why is that?

Zulauf: The strong investment inflow led to credit growth when interest rates already were too low. That led to a tremendous real-estate boom, with prices tripling. If China slows as dramatically, Australia will be hurt. The Australian central bank started raising interest rates in the fall of 2009. They went from 3% to 4.75% in November 2010. Last November they cut them to 4.5%. Now Australia is tightening fiscal policy because it has a growing deficit. The government cut spending, and as we have discussed, fiscal policy works much better in this environment than monetary policy. Short-term interest rates have declined to 3.2% and could fall another percentage point.

There are Australian government-bond futures with a three-year maturity. The yield is the difference between 100 Australian dollars and the futures price, which is currently A$96.84. That means the yield in the futures market is 3.16%, and it could rise by another percentage point in the next 12 months. This is a conservative play and you can lever it. It is a liquid market. The Reserve Bank of Australia will have to cut rates a lot more. Therefore, I would short the Aussie dollar against the U.S. dollar. The Aussie dollar has nearly doubled in the past three years against the U.S. dollar, from 60 cents to $1.02. It could correct by 20%.