I am retired and take educated guesses on all things financial.

January 09, 2009

January 10, 2009: M. El-Erian's Latest Advice

Mohammed El-Erian, PIMCO's man about the media and their Chief Executive recently penned an opinion piece for the Financial Times. He states three positions based upon the premise that "every official action must trigger investor reaction".

Here are his points:

1. The perception of a level playing field for markets is giving way to "the more random influence of discretionary decisions".

2. Governments and others in financial prominence do "not have the luxury of a master plan". They must respond, often with unconventional vigor, to severe market failures.

3. When governments intervene, they are compelled to have as a goal protecting the taxpayer, at least in the U.S. As such, "they will subordinate somebody in the capital structure - the equity holders for sure." In some instances, El-Erian also suspects that holders of preferred and senior securities will also be vulnerable.

Mohammed's advice is that investors should position their portfolios predominantly under the umbrella of government support This game plan is something I have advocated for a while, although not to El-Erian's extent. Follow the government's money trail and you will find securities in sectors that will not be allowed to collapse.

As an old war-horse, Marty Zweig, stated countless times, "Don't fight the Fed". Somewhere, his buddy, Lou Rukeyser, is winking.

Eventually, this period of economic distress will end and governments will return to being referees and not the starting lineup of the sport we know as investing. In the meantime, they are both. PIMCO's star strongly encourages investors to adjust their portfolios accordingly. Now.

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