Fund Times: PIMCO Sees Rate Hikes Choking Off Real Estate

PIMCO: Watch Out Below!
In PIMCO's latest Fed Update Letter, managing director Paul McCulley argues that the Federal Reserve has raised interest rates to the point where they are restrictive rather than neutral. In other words, they've actually overcorrected for rising inflation and economic growth so that the economy will slow down and interest rates will come down.

What will be the trigger? A fall in property prices. Says McCulley:

"When the cyclical turn comes, it will be a wicked turn, our guts say, as conventional policy gives way to unconventional property market weakness. It will be time to think and act unconventionally, while listening to a few bars of Mary Chapin Carpenter:

Show a little passion, baby
Show a little style
Show the knack for knowing when
And the gift for knowing how."

Merrill and BlackRock Discuss Megamerger
Merrill Lynch is in talks with BlackRock to exchange its asset management business for a 49% stake in BlackRock, according to reports on Dow Jones and other news services.

Nothing official has been announced yet, and it's worth noting that a similar deal with Morgan Stanley and BlackRock fell apart. If it does go through, the deal would be the second case of a brokerage firm exiting the asset management business. Citigroup sold its asset management group to Legg Mason.

Both sides have something valuable to offer. Merrill Lynch has significantly upgraded the quality of its funds under chief investment officer Bob Doll, but it remains locked into its own broker network. Joining BlackRock would open new sales channels for Merrill Lynch Investment Management and enable it to reduce the conflict of interest inherent in proprietary fund shops selling through their own brokerage networks. In addition, belonging to a pure asset manager may benefit MLIM as it would be a part of a group where managing money is the top priority for a change.

For BlackRock, the deal would provide access to Merrill's broker network. Although BlackRock is a giant in the institutional fixed-income business, it hasn't been able to translate that into retail sales as well as PIMCO has. This deal could change that. In addition, BlackRock would get a broad equity lineup that has improved under Doll.

Davis Selected Funds Loses Oil Analyst
Davis Selected Funds revealed that its energy analyst Kent Whitaker has left the firm. Besides serving as an analyst, Whitaker also was one of eight comanagers listed for  Selected Special (SLSSX) and  Davis Opportunity (RPEAX). Those funds are managed as research funds in which the analysts manage a portion of the assets.

Settlement Is Final Hurdle in Citi/Legg Mason Deal
A dissident shareholder reached a settlement with three closed-end funds formerly run by  Citigroup  (C), closing the final chapter on the long and hostile proxy wars tied to the company's asset swap agreement with  Legg Mason , according to Dow Jones reports.

Karpus Investment Management struck a deal with Salomon Brothers Municipal Partners , Salomon Brothers Municipal Partners II (MPT), and Salomon Brothers Inflation Management Fund  that will entail tender offers, the funds announced late Monday.