By Michael J. Moore
Dec. 2 (Bloomberg) -- Bill Gross, manager of the world’s biggest bond fund, said stocks aren’t as cheap as they appear given that the era of deregulation, low borrowing costs and tax cuts is over.
“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates,” Pacific Investment Management Co.’s Gross wrote in a market commentary posted on the Newport Beach, California-based company’s Web site. “That world, however, is in our past not our future.”
Gross said that while equities appear inexpensive according to price-to-earnings multiples and the so-called Q ratio, which compares prices with the replacement cost of net assets, the new economic reality means traditional techniques are sending false signals. The 64-year-old money manager didn’t say whether he expects stocks to climb or fall, although he argued that corporate bonds are better investments.
“More regulation, lower leverage, higher taxes and a lack of entrepreneurial testosterone are what we must get used to -- that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner,” Gross wrote in his commentary.
The Dow Jones Industrial Average is unlikely to decline to 5,000 or surge to 14,000, he said. The benchmark stock index, created in 1896, sank to a five-year low of 7,552.29 last month after closing at an all-time high of 14,164.53 in October 2007. In 2002, Gross predicted the Dow would decline to 5,000 at a time when the measure was at about 8,500.
$1 Trillion
The Standard & Poor’s 500 Index has fallen 46 percent since its record almost 14 months ago as credit losses and writedowns at financial firms approach $1 trillion and more economists forecast that the U.S. recession will be one of the most severe in the post-World War II era.
Cheap financing won’t be available once the government is finished intervening in the credit markets, which will reduce corporate earnings, Gross wrote. The U.S. government has pledged more than $8.5 trillion on behalf of American taxpayers during the past 15 months, according to data compiled by Bloomberg.
Corporate tax rates, which declined during President George W. Bush’s administration, won’t keep falling once Barack Obama takes office in January, Gross said in the note.
His Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco’s Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings.
Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management.
To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.
