was going to say,” said Scrooge’s nephew,“ that the consequence of his (not coming to our Christmas party) is that he loses some pleasant moments, which could do him no harm. I am sure he loses pleasanter companions than he can find in his own thoughts.

A Christmas Carol
By Charles Dickens

I used to tell friends that if they ever wanted me to confess to anything, that all they had to do was go for my toes: take some pliers or even a simple pair of nail clippers, apply pressure at exactly the right point and I’d say yes to whatever they wanted to hear. No thumbscrews, iron maidens, or medieval racks required – the highest form of personal torture was to manually gauge my toes. I was wrong. Time and experience have proven that my toes are but a distant second to the cruelest, most heinous form of torture known to humanity – the annual Christmas party. I refer, of course, to not one singular sensational Yuletide festivity, but to the series of parties stretching from December 1st to the eve of the Christ child’s birth – so many parties that they become a blur, forcing the partygoers through sheer desperation to repeat the same stories to the same set of people, night after torturous night until they finally collapse into their sack for the last time, babbling like Poe’s “Raven” – Nevermore, nevermore. That’s real torture.

Now I don’t want to sound like Scrooge here, and his nephew quoted above does have a point about trade-offs between people and private thoughts, but Scrooge’s nephew never attended fifteen parties in one Christmas season. Even he would agree there are limits. So given some consensual agreement among you readers, then the real question is why do we do it? Is this not self-inflicted torture, is this not Yuletide masochism, and if so, why don’t we stop? I have several theories. First of all, a habit once established is hard to break. Imagine a hypothetical mass tradition of buying day-old French fries at local McDonald’s restaurants on New Year’s day. The lines would stretch around the corner and down the street with people waiting to get their day-old fries. “Do you like cold, soggy French fries?” you might ask them. “No,” would come the reply, “but they’re a tradition.” Christmas parties are sort of like cold McDonald’s fries – you should only have a few, and have them quickly, at that.

Of course, there is not only tradition at stake but friendships as well. How can you say no to a friend’s party? Easy, I say. No real friend of mine would ever invite me to his own Christmas party, knowing full well the pain and suffering he was putting me through: home from work at 6:00 pm, shave, fresh shirt, sitter for the kids, half an hour politely late, “isn’t that a lovely tree, who did your decorations,” two hours of nonsensical conversation, the standard “we have to leave early to get to another party,” home, take the sitter back, collapse into bed, repeat the next night and every night thereafter until clinically insane or Christmas Eve, whichever comes first. What kind of friend would do that to me? No friend of mine.

Which leads me to my final explanation for this self inflicted torture. Up until this point I‘ve blamed tradition and friendships, and sort of pretended that we’re all a bunch of sheep being led to a fleecing. Well, there are sheep and sheepherders and Christmas party goers and Christmas party givers. The simple truth is that there could be no Christmas parties unless someone offered up the invitations, so let’s analyze the true culprits. Why would someone give a Christmas party?

To have the chance to gather all of his friends around the hearth at one time? Humbug. The host, at most, has 3-5 minutes to spend with each of his erstwhile friends. Most of the time he or she is off berating the bartender or pantry maid about the lack of booze or the tardiness of the hors d’oeuvres. Perhaps they want to show off their home? Well there’s something to that I’m sure and God bless, I suppose. I’ve christened a new home or two with a few friends but never, I might add, under the guise of Christmas cheer. The real reason people give Christmas parties though is not hard to uncover. It’s really a form of Yuletide self-defense. By giving a party, you assure yourself of at least one night at home during the first 24 days of December. Simple as that. While this type of chicken and egg, mutually destructive behavior seems impossible to correct, I have a suggestion: If partygiving (by unanimous consent) was consolidated to one day and one day only – say the third Friday of the month – then everyone could send out invitations to their own party – comfortable in the assurance that no one would ever show up. Now there’s a Christmas season to look forward to.

For bondholders, 1999 has been the year of the perpetual Christmas party – seemingly endless anguish in the form of lower and lower prices due to an ever-expanding economy and “sky is the limit” stock market profits. While PIMCO has been on the right side of this trade all year – shorter than market durations, long spread product, a seller of volatility – there’s always the year-end self-recrimination of not having done even better. It’s the nature of our profession and its professionals, I suppose. No matter what Scrooge’s ledger tallied on December 31st, there was always the potential for one more Farthing. Still, despite a near reenactment of this century’s worst bear market of 1994, we approach year-end with a continued sense of accomplishment by having outperformed most of our peers and the market as well. Although you can’t spend “relative” dollars, over the long term it’s those “relative” bucks that feed your bottom line because the bond market (and stocks too, believe it or not) is a Fram oil filter “pay me now or pay me later” type of enterprise. Prices go down, but yields go up in the process, adding additional income and total returns to future years as opposed to the present.

The year 2000 promises to be a better year – not much of a forecast there – because yields are beginning to reflect the reality of a global recovery and the potential for 3% inflation in next year’s first few quarters. For some time now - ever since PIMCO’s Secular Forum in May of ’99 – I’ve maintained that 6 1/2% long Treasury yields would represent a significant top in a continuing dis-inflationary economy. That remains our call but don’t hold us to the basis point. The forecasting of yields is an inexact science to say the least and has spelled the doom of many an economist and portfolio manager over the past few decades. PIMCO may be into self-inflicted Yuletide pain via our five internal company Christmas parties, but we’re not into “doom.” Our strategies do not rely significantly on “6 1/2% or not 6 1/2%.” We want you to prosper under varying scenarios, although we recognize that no portfolio can do well under all of them. So portfolio composition becomes a delicate balance of return and risk, with combinations of subjective global thinking and objective risk assessment aided by computer technology playing major roles. Sandwiched in between, but no less important, are the day-to-day value judgments of our specialists at their trading desks.

As we approach Y2K, your portfolios have durations slightly lower than their bogies in anticipation of even higher yields over the near term. They have significant overweights in mortgages because they represent a source of high quality yield in an investment environment where corporate bankruptcies are at almost inexplicably high levels in the ninth year of an economic recovery. They have minor portions of emerging market debt (where permitted) because the global recovery is a positive for emerging nations at the perimeter of an improving Europe and reviving Japan. Your portfolios have “sold” volatility at the outer ranges or “wings” of expected interest rate movements, a strategy that has brought over $200 million to PIMCO portfolios during the past twelve months. And they are making limited but profitable commitments to top tier high yield debt, international bonds, and even convertible securities. Muni’s may be next! This array of bonds – and others – forms the PIMCO menu from which you as clients can select. Which ones are ultimately served after approval, of course, is up to us as portfolio managers, but our job as chefs and waiters is enhanced by as large an available list as possible. We hope to explain this philosophy more clearly to you in the future.

Until then, thank you, as always for the opportunity to serve. You’re always our number one priority – not the merger or the money or anything in between. We value our relationships so much that we’ll even come to your Christmas party if you ask. My suggestion however, is that you have it on the third Friday of December 2000. Oh sorry – that’s the date of the PIMCO party as well. Perhaps another year. Until then –

“God Bless Us, Everyone,” said Tiny Tim.
God look down on us, every one.

William H. Gross
Managing Director


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