Bill Gross's gloomy outlook for the economy

This story from Bloomberg news this morning caught my eye not only because of who is quoted here, Bill Gross, Co CEO of Pimco, but more importantly for what this well respected individual is saying. Of particular interest was not where he said to invest, but his prognosis for the economy going forward and if true will be extremely painful for us all. Here is the article in its entirety:

Gross Prefers Bonds, Dividend-Paying Stocks in ‘New Normal’

By Bryan Keogh

July 1 (Bloomberg) -- Investors should favor bonds and dividend-paying equities as the U.S. heads into a “new normal” of higher savings and lower consumption, said Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co.

Higher savings, lower consumption and annual economic growth of about 2 percent, as opposed to 3.5 percent, may last a generation or more, meaning investors should “stress secure income,” Gross, who helps oversee about $756 billion as co- chief investment officer at Newport Beach, California-based Pimco, said today in his July note to clients.

“‘Non Appétit,’ not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S,” he wrote. “It promises to persist for a generation at a minimum.”

Investment-grade corporate bonds returned 9.2 percent this year through June, beating Treasuries by a record 13.7 percentage points, according to Merrill Lynch & Co. indexes. The U.S. government and the Federal Reserve have pledged more than $12.8 trillion to thaw frozen credit markets in hopes of pulling the economy out of the worst recession since the 1930s.

Consumer spending rose 0.3 percent in May, the first gain in three months, while higher incomes drove the savings rate to a 15-year high.

Market outlook for June 25, 2009

Well, the markets are headed lower again today. Several news items contributing to this. First Weekly Jobless Claims were up 15,000 to 627,000. The significance of this was that most expected a decrease in the number of claims and for the overall number to dip below 600,000. Secondly, Continuing Claims also rose an unexpected 29,000 to a total of 6.74 Million jobs.

El Erian, Co CEO of Pimco said this morning that he agreed with Warren Buffet, he was not seeing Green Shoots. He also said "it is too early to relax and it is pretty tricky out there right now."

Art Cashin on CNBC said this morning it looked like we are almost confirming a Dow Theory Sell signal and he expected several corrections each going lower over the next few months.

It looks like finally many are coming around to what I have been saying for over 2 months now. After the close yesterday on CNBC, a man from Lowry Research said we have had two Mondays where 90% of the trade for the day were all on the sell side. He said he expected us to return to the lows of 6,440 and may go below it. He based his reasoning on the fact that Volume has ben light on the rally up compared to the volume coming down to the lows in March and that not many bought into the rally as there is much cash on the sidelines. Most of these viewpoints I have posted here and is why I told many to stay with their ETF Ultra shorts, TZA and SDS and others they had and to buy more and average down the purchase price. It is why I said to sell Apple a week ago when it was near $140 and take the profits. We are headed lower and lower for a while now. Don't get sucked back in on a correction because while the market will go up some days, we are headed for a staircase pattern down for while to come.

Time to sit back and wait now to see when we go significantly lower and how much. But the signs are clearly negative now for the markets. It is not too late to buy some of these ETF Ultra shorts like DXD, SDS, TZA and others as the prices have been low for a while. TZA, for example is now about $25-$26/share but was $20/share recently.

Don't forget if you have not voted this month on my Mini poll to do so. It is on the right margin. Thanks!

UPDATE 9:10am PST

Well the market has thrown the analysts a curve ball, as the market now is up with the Dow up 150 points. Will it hold today? I have no clue!

Summary comments on market: Has anything really changed in my outlook?

The market closed the week today with what apparently looked like indecision. But to the contrary, today's market confirmed a reversal in all Indexes, the S&P 500 Index, the Nasdaq composite Index and finally the Dow. The Nasdaq closed down only 1 point but the Candlestick pattern was a Hammer. The S&P closed at 940, down only 2 points, but it confirmed the Hammer candlestick pattern of Wednesday's close. The Dow closed at 8,763, up about 13 points.

The Unemployment rate rose more than expected and closed up 9.4% for the month of May. Employers eliminated the fewest jobs in eight months in May, strengthening signs that the recession is easing, while a drop in wage growth offered a warning the recovery may be muted. The job losses were lower than expected but more people were added to the ranks as eligible workers, so the rate rose higher than expected. The country needs to create about 200,000 jobs a month just to be at break-even. When you add in the losses the rate goes higher quickly. Many commentators on CNBC and Bloomberg today said that there the real Unemployment rate is about 16% because many are working part-time and can't get a full time job. Also a number of the unemployed have given up filing for Government Unemployment Insurance Benefits, as either their benefits have run out or they have given up looking for work.

Nonetheless, the media and commentators are continually hyping we have turned a corner and that we should be out of the recession by the end of the year. This does not make any sense at all as it appears we are headed for another poor Christmas season with so many unemployed. Since the Consumer represents 70% of the economy, it seems delusional to think that we are going to be out of this mess anytime soon, let alone by year end. I wish it were true but the facts do not support the optimism.

Several other measures give pause regarding the Consumer's ability or willingness to stimulate or drive the economy. First that there are going to be new rules governing Credit Card issuance for younger people of college age. Secondly, this was not that widely reported but Consumer Borrowing plunged $15.7 Billion in April. That is both good and bad news. It is good because maybe people are only paying now for what they can afford and have stopped borrowing beyond their means. On the other hand, maybe they can't borrow because they can't pay the debt back easily. The category in Friday's report that includes credit card debt dropped at an annual rate of 11 percent in April, following an 11.2 percent plunge in March. And a complimentary story I reported earlier in the week, Consumers saving rate jumped to 5.7% in April.

The banks also made news today. From Bloomberg news: Bank of America Corp. and nine U.S. lenders, facing a June 8 deadline to explain their capital- raising plans to regulators, are relying on preferred-stock conversions for 22 percent of their fundraising. Collectively, the 10 banks told by regulators to raise $74.6 billion have announced plans covering $70.6 billion of the gap, with some including Bank of America expecting to “comfortably” beat its target. They’ll get about $15.4 billion from preferred stock conversions, a tactic that improves the gauges of financial health that the government is focusing on without bringing additional cash into the company. “Conversions from preferred to common don’t do anything; you can just ignore them,” said Christopher Whalen, managing director of Institutional Risk Analytics, in an interview this week. “It makes the ratios look better, but it doesn’t increase the capital in the house.”

And another related Bloomberg story about the banks: Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

So while we hear things are getting better and that they see more "Green Chutes" there does not seem to be fact based data to support the market hype. Bill Gross, of Pimco, has started to raise the alarm as has Fed Chairman Bernanke in his recent testimony before Congress. I would listen to Bernanke and Gross as they have a front seat to what is happening here. I don't see a "V" shaped recovery but that is what the stock market movement is implying. I see more of an L shaped recovery. If that does prove to be the chart outlook, then we will retest the lows and stay in a tight range for the next 6 months to a year. This a a longer outlook than I have stated here in the past but the good news in this scenario is that we aren't going to go below the lows and are going to eventually recover. I think it is a good thing that many are saving now. It took many a lifetime to learn this lesson. But we have been affected permanently and spending patterns have changed for the foreseeable future. It may bring families closer together as well and learning new ways of being present with loved ones, without the distraction of material things. When i grew up my family would play games at home almost every Friday and Saturday evening. Looking back, those were some of the best times I spent in my youth with my family.