Mark Kiesel, at Pimco's Pacific Investment Management Company says it's best to sell your junk bonds now. Why is he saying this? The key factor is that economic growth is not there. Kiesel looks for only 1-2% growth in GDP next year.

All of this talk about "green shoots" simply is not materializing. Kiesel says the "green shoots" are turning to weeds. He further said that credit is not re circulating. Business financing costs range from 10-12%, making it difficult for some businesses to stay afloat.

During the current global crisis, many investors have been following the wisdom of Mohamed El-Erian, who is the co-CEO of Pimco, the largest bond manager. In fact, he recently put out a report, called the "Secular Outlook," which has a three-to-five year forecast.

Unfortunately, if El-Erian is correct, we'll need to get accustomed to a "new normal" of muted economic activity.

While the massive governmental intervention has helped to stabilize the financial system, there are nonetheless real costs, which will make it tougher for businesses to innovate and take risks. Plus, the de-leveraging process will continue to be a drag. It will also be tougher to engage in international trade because of new barriers.
The upshot is slower economic growth and higher unemployment.

In February I interviewed Bill Gross back when the Dow traded at 7,182. Gross's message? Equities are dead. Or more specifically, in light of his expectation that there would be no economic growth for the foreseeable future, there was no point in risking an investment in common stock since it stands in line behind all sorts of debt for a piece of the cash flows of a company in the event of a bankruptcy.

Interestingly, President Obama spoke to reporters not long thereafter -- on March 3rd to be specific when the Dow was at 6,726 -- and during that talk, he mentioned that buying stocks might be a good deal. Since then, the Dow has risen 21.5% and since Gross recommended staying away from stocks, they've gained 13.8%. The Dow is at 8,175 as of this writing.

Just when I think I have heard it all, they come up with something even more eye-poppingly incredible. That's right folks. First they sucked you into the dot-com boom; then wiped out your tech stocks. Next they urged you to buy houses with money you couldn't pay back -- and those houses plunged in value while the global stock markets lost half their value -- further decimating your net worth.

Now they want to give you the once in a lifetime opportunity to buy the very toxic waste that is sinking the entire global financial system. And if you have a job in state government, your pension fund may be enticed into this financial sludge as well.

During the Great Depression, Franklin Roosevelt established the Work Projects Administration (WPA) to create work -- such as constructing public buildings, projects and roads and operating large arts, drama, media and literacy projects -- for Americans of all stripes.

Now the W Administration has its own WPA -- but this one only applies to the very wealthiest of Wall Street who are looking for more to do. The three million homeowners who are going through foreclosure won't get that $810 billion ($700 billion is earmarked for buying financial toxic waste and the other $110 billion went to buy the additional votes -- through tax cuts -- needed to get the House to pass the bill).

How will W's Wall Street WPA (WSWPA) program work? It will hire firms such as Bill Gross's PIMCO and Blackrock (NYSE: BLK) to manage a reverse auction to buy that toxic waste. Bill Gross bought $500 billion of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) bonds at distressed prices, "advised" the administration on its $200 billion program to nationalize Fannie and Freddie, and then profited handily when the bailout boosted the value of Gross's bonds. Blackrock is already enjoying our tax dollars as the manager of the $29 billion in Bear Stearns assets which the Fed took on back in March. In total, WSWPA could generate $7 billion in fees (1% of the $700 billion to be spent) for Wall Street.

Bill Gross of Pimco, one of the most respected bond investors in the world, thinks the credit crisis is about to get much, much worse. He also believes that the federal government is the only entity that can save the markets.

Gross's biggest concern is that financial companies will have to keep selling assets to raise cash. With home prices falling, he does not see an early end to this, and that troubles him. According to Reuters, Gross wrote "Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami."

Gross may be right, but his suggested solution is wrong. He wants the U.S. Treasury to start buying distressed assets to help build a floor for their values. Of course, the funding source for Treasury is the U.S. taxpayer.

Solving one problem by creating a larger one is rarely a good program. There is a great deal of evidence supporting the fact that taxpayers are already stretched to the limit. Job losses are up. Easy credit is gone. Gas, oil, and food cost much more than they did a year ago. The average person, who may already be unable to handle his own financial burdens, can hardly be asked to help support the purchase of assets being sold by large financial institutions.

If Gross's vision about the future of the credit markets is right, the financial system is only at the beginning of a growing disaster. But, turning to the U.S. citizen for cash is like looking through a man's pockets for a spare change. All the more valuable paper money has been spent.

Douglas A. McIntyre is an editor at 247wallst.com.

The FDIC took over two more banks. According to The Wall Street Journal (subscription required), "The Office of the Comptroller of the Currency, a division of the Treasury Department, revoked the charters of First National Bank of Nevada, based in Reno, Nev., and First Heritage Bank of Newport Beach, Calif. The FDIC was appointed receiver of both banks." The Nevada bank had over $3 billion in deposits.

Current estimates are that less than 100 banks will fail during the current credit crisis, a much smaller number than closed during the saving and loan debacle of the late 1980s.

But, those estimates may be low. Bill Gross, an extremely prominent investor and head of Pimco, recently wrote that total losses related to the housing market will hit $1 trillion. About $450 billion of those write-downs have made it through the system. That leaves a potentially massive burden on the banking system going forward.

The idea that only 100 banks will fail in the next year is wishful thinking.

Douglas A. McIntyre is an editor at 247wallst.com.

Perhaps the most well regarded bond manager in the country, Bill Gross of Pimco, is making a huge gamble on mortgage debt. The Pimco Total Return Fund, which invests $130 billion, has tripled its exposure to mortgage debt instruments.

According to the FT, Gross is counting on the US government to partially bail out the housing industry. He told the paper that "his decision to raise exposure to mortgage debt in recent months was based on the US government's implicit guarantee of Freddie Mac and Fannie Mae, the government-sponsored mortgage agencies."

Of course, counting on the government to do anything is a bit risky, but Gross is probably making a good bet that the US will not let the housing situation slide much more than it has already. The risk to the entire economy is too great.

Gross could be right, and, if he is, Pimco investors stand to make huge returns on the fund.

Douglas A. McIntyre is an editor at 247wallst.com.

DJIA 13,266.73; -198.94 (-1.48%)
S&P500 1,490.72; -26.66 (-1.76%)
NASDAQ 2,541.38; -45.80 (-1.77%)
10YR Bond 5.10%; +0.13%

We have gone from a raging bull market to what has felt like a sudden bear market in just three days. The DJIA has seen 3 consecutive days with triple-digit drops. Since the highs on Monday June 4, the Dow is down 456.64, although this is only a 3.327% drop. The old rule of thumb for panic buying on severe market drops is after a 5% drop, and that would require the DJIA to reach 13,037.20. Keep in mind that the numbers are right, but the theory of buying the 5% dip is more rough in nature and not exact.

Today you can chalk up to a very negative outlook from Bond mogul Bill Gross of PIMCO. PIMCO recently added Alan Greenspan to its advisory board, and Mr. Gross didn't waste any time in taking it upon himself to begin sounding like the ex-Chairman of the Fed. You can see the summary comments if you wish, and some of the projections are odd. The old 4.0% to 5.5% range for the 10-year US Treasury Note is now moved up to a wider 4.0% to 6.5% range. This is over a 3 to 5 year period, and the article does discuss the expected weakness ahead combined with commodity inflation ultimately being at-risk for pass-throughs.

It will be interesting to see if Jim Cramer maintains his high DJIA target for the year and if he bails on his top 2007 picks, but seeing as that he just gave his DJIA component targets it would be hard to imagine a real change of heart. Here are Cramer's New 4 Horsemen of Technology he just gave last night.

These drops often feel severe, but unless it's a scenario of "it's different this time" then these may just be bigger opportunities.

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.