PIMCO's Bill Gross was asking Where’s Waldo? in his investment outlook for September 2007.

If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.

Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?

Mr. Practical, whom I seldom disagree with simply because he is too practical, commented on the situation and came to a conclusion that I 100% agree with: More Bailouts Could Bring Disaster Down the Road.

In my humble opinion Mr. Gross is right about only one thing: that Mr. Bernanke is unable to eventually stop a destructive housing deflation. At least now the pundits are admitting that a housing deflation is at the heart of the economic problems. That is a watershed event.

But for the “government”, which I thought was using taxpayer money (except for the $9 trln in debt it has borrowed), to bail out malinvestment is only to increase the problem. If you don’t punish your child for playing with matches, he may one day burn the house down.


Bailout for Who?

After reading Mr. Practical, inquiring minds might be wondering "Who does Bill Gross really want to bail out?"

That's a good question so I started looking for possible clues in Morningstar's snapshot of PIMCO Total Return Fund (PTTRX).

This is what I found:



I see the top bond guru in the world returned a three year average of 3.83% in his "Total Return" Fund. One could have parked money in a money market fund, CDs, a bank, or short term treasuries and done better than that.

Digging deeper I see the top five holdings of the Total Return Fund are as follows.

1) Fannie Mae (FNM)
2) Fannie Mae
3) Fannie Mae
4) Fannie Mae
5) Fannie Mae

As shown in the following table:



Digging still deeper I see this breakdown:



Of the U.S. Government breakdown I see the Total Return Fund is grossly overweight agencies (Fannie Mae) versus Treasuries. This is really irritating. Shame on Morningstar for being willing to label Fannie Mae and Freddie Mac as "U.S. Government".

There are scores of so called "Government Bond Funds" out there chasing minuscule returns above treasuries when Fannie Mae (and brother Freddie Mac (FRE)) are not even government backed. For more on this idea as well as a recommendation that everyone look into just what is in their Money Market and "Government Bond Funds" please see Flight to Safety.

The Total Return Fund does not present itself as a "government bond fund" but everyone by now should be wondering how the so called best bond trader in the world could get himself into this position.

And even worse is the fact that 40.20% of the Total Return Fund is invested in mortgages which, from the above tables, it would appear that most of that is not even "quasi-government guaranteed".

The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO. Is it any wonder then that he is asking President Bush to "write some checks, bail ‘em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do"?

The only thing Gross forgot to mention in his September Outlook was the return address on those checks needs to read "Bill Gross @ PIMCO".