Fund Times: PIMCO Remains Pessimistic on Housing Market

PIMCO released this week the latest edition of "Fed Focus", written by Paul McCulley, the firm's Fed guru and the manager of  PIMCO Short-Term Bond Fund  . In this missive, McCulley seeks to make the case for "Regulation Q," repealed in 1980. Sounds like a snooze, right? Not so fast.

Retirees, bond investors of all stripes, and anyone who's sitting on appreciated real estate should pay attention. According to McCulley, "Regulation Q capped the interest rate that banks could pay on deposits, while capping the interest rate that thrifts could pay one-quarter point higher." Thrifts had to deploy or lend out most of their deposits into long-term fixed rate mortgages in return for this perk.

The effect of this regulation was dramatic, as McCulley describes it. Prior to the repeal of Regulation Q in 1980, when the Fed would raise rates beyond the limit that banks and thrifts would pay on deposits, money would naturally find its way into higher-yielding Treasury bills. The lack of money flowing into bank accounts meant that the Fed had the power to slow the housing market and the economy more effectively. Banks had much fewer new deposits and couldn't lend money; it was that simple. The Fed didn't have to wait for the capital markets to decide on their own to sell off longer-term bonds, sending their rates (and consequently mortgage rates) higher. (Incidentally, as McCulley notes, this also caused the birth of the money market fund.)

Because Regulation Q was repealed, banks can continue to accumulate deposits (by offering any rate they want), and the housing market continues to roar. McCulley thinks this situation contains the seeds of an unhappy ending, because banks can simply continue lending, fueling higher real estate prices and ignoring the Fed's efforts to slow the housing market.

Significant Outflows at Fidelity Magellan
 Fidelity Magellan (FMAGX) continues to lose assets at a rapid clip. Recent filings show that for the six months ended Sept. 30, 2005, $9.2 billion went out the door while only $1.7 billion came in.

The problem isn't a new one for Fidelity's flagship fund. It has been experiencing net outflows for the better part of seven years. That combined with the fund's middling performance (it charges a performance-based advisory fee) has undoubtedly pinched Fidelity's top line. So, it's no wonder Fidelity felt compelled to shake things up by appointing a new manager: Harry Lange. Lange did a great job on  Fidelity Capital Appreciation (FDCAX), but he'll have to turn things around here in a hurry to keep investors on board.

Perritt Micro Cap Opportunities Closing
With just over $400 million in assets,  Perritt Micro Cap Opportunities (PRCGX) is shutting its doors to new investors on Dec. 7, 2005. Given the fund's focus on thinly traded tiny stocks, staying small is critical. And the fund is undoubtedly getting investors' attention. It has gained 30% annualized for the three years ended Nov. 30, 2005, and has knocked the socks off its rivals.

An Unprecedented Move by Clipper's Board
Clipper's board was serious when they said they were going to look beyond advisor Pacific Financial Research's (PFR) suggested replacement to take veteran managers James Gipson, Michael Sandler, and Bruce Veaco's place at  Clipper  (CFIMX). On Wednesday, they announced their choice: Davis Selected Advisors (who also runs  Davis NY Venture (NYVTX) and  Selected American (SLADX) among others).