PIMCO’s Bill Gross Favors Buying Utilities, (XLU)

Will Rogers’s commentary of the Great Depression continues to be relevant to our financial climate, Pimco's Bill Gross noted today. While it has been over seventy years since he had been famously quoted during the Great Depression, “I'm not so much concerned about the return on my money as the return of my money,” it continues to make sense today.

Only a year ago, many of us adopted that philosophy when Americans withdrew our money from the markets following the news that financial services giant Lehman Brothers went bust.

There is a saying, it is said that during depression periods, a dollar under the mattress will do you a lot more good than a dollar in the bank. However, our history has taken a different path. No longer do we need to seek out places to protect our money in our homes as The Fed has stepped in, much like a parent bailing out their child and is providing for the nation’s financial interest by providing security by means of lowering interest rates and returning the economy to financial stability. Interest rates which were lowered to almost zero percent, or to be precise 0.01%. There was safety of capital, and the Fed ensured that.

But if we look at the situation now, says PIMCO’s MD, Bill Gross, gold is at $1,130 an ounce, global equity markets are up 60-70% from their 2009 lows, a cascading dollar is now 15% lower against a basket of global currencies from what it was just 12 months ago, oil is at $80, and mortgage rates are low again. Gross says the Fed is trying to reflate the U.S. economy. "The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until," according to Gross.

So the all that said, the enticing question arises, what should the individual investor do now? History tells us that zero percent interest rates will not doing any good, and all asset prices seem to be in a bubble zone. Investment grade bonds also seem to return an average 0.75% when you consider all expenses. Equities on the other hand have already appreciated 65% from the recent bottom.

Gross says that the “New Normal” is likely to be a significantly lower-returning world. Diminished growth, deleveraging, and increased government involvement will temper profits and their eventual distribution to investors in the form of dividends and interest.

Now if companies are going to move toward a utility model, why suffer the transformational revaluation risk of equities with such a low 2% dividend return? If that’s the case, Gross argues, why not just buy utilities if that’s what the future American capitalistic model is likely to resemble. Price wise, they’re only halfway between their 2007 peaks and 2008 lows – 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly, they yield 5-6% not .01% that the bank offers. Take a look at the Utilities SPDR (ETF) (NYSE: XLU).