Bill Gross Shorts Treasury Bonds: Why This Will Affect You

Ian Wyatt — Mon, 11 Apr 2011 20:05:00 GMT

Libyan dictator Qaddafi has reportedly accepted an offer to join cease-fire negotiations with Libyan rebels. This is a smart move, perhaps the first from Qaddafi in some time. With the no-fly zone over Libya, and the escalation of strategic strikes, the international community has clearly sent the message that it wants Qaddafi out of office.

And Qaddafi got the hint. As I like to say, he might be dumb, but he’s not stupid. I would suspect that the cease-fire will lead to Qaddafi’s exit from Libya. He should have had enough time to move assets out of the country and shred documents by now.

But the bigger story here is oil. We should find out just how much of the current price is fear premium based on Libyan instability. At $112 a barrel, the premium could be as much as 20%-25%. The fact that oil stocks didn’t respond as strongly as we might have expected to oil’s ramp job supports the idea that the move was based in fear rather than fundamentals.

*****It’s something of a rule of thumb that once an asset beats the $100 price level, it will move quickly to $110. And if $110 fails, the asset will move quickly back to $100. Something about that tripe-digit threshold…

So, at the very least, I expect we’ll see oil prices at $100 a barrel over the next few days. And this move will tell us a couple things. First, as I said, we’ll see just how big the fear premium is for oil. And second, we’ll see how much oil prices have been affecting economic growth expectations.

Many economist and strategist-types believe that $4 a gallon gas prices are the point where consumer spending habits start to change. Assuming that the stock market’s recent hesitation to take out S&P 500 resistance at 1,335 is related to oil prices, lower oil prices should serve as a catalyst to rally stocks.

*****PIMCO’s Bill Gross is back in the headlines. We’ve discussed how Gross, the biggest bond investor in the world, has sold all of Treasury bond holdings. Now, it’s been revealed that Gross is betting on further declines for Treasuries.

That’s right – he’s now short around $7 billion worth of Treasury bonds. That sounds like a lot, but it represents just 3% of PIMCO’s $236 billion Total Return Fund.

I’ve said it before, but if you need income from your investments, then you can’t depend on Treasury bonds. You can find my top income ideas (good for 8% and 10% a year) HERE.

*****1Q earnings season starts today, after the bell, with Alcoa (NYSE:AA). For the last 8 quarters, stocks on the S&P 500 have beaten estimates by an average of 7%. Credit Suisse is out with a research report saying that earnings will be 3% better than current estimates.

JP Morgan is out with research showing that stocks react to earnings much better during the first two weeks of any earnings season.

So, if you want to trade for some earnings pops, do it early, rather than later.

On Wednesday, the banks begin to report and start off with JPMorgan (NYSE: JPM) followed by Bank of America (NYSE: BAC) and Citigroup (NYSE: C) on Friday. On Thursday, Google (Nasdaq: GOOG) leads off technology earnings, which is followed next week by IBM (NYSE: IBM), Apple (Nasdaq: AAPL) and Intel (Nasdaq: INTC).

The Nasdaq and the S&P 500 trade with forward P/Es of 14 and 16 respectively. Strong earnings should give these indices some upside.

Daily Profit : GOOG, Treasury Bills, PIMCO

Bill Gross Shorts Treasury Bonds: Why This Will Affect You