Bill Gross: We think there might be one more hike left. I think the Fed's pointed to the housing market, and I think that housing is beginning to weaken. And soon, the Fed will recognize that and it will stop. But, you know, there's a chance that we might see 4.75 %. Some would suggest that there's a chance that we go to 5 %, 5.25% based upon higher inflation and a stronger economy. I just don't see that. I think Mr. Bernanke believes that the global savings glut, which is his phrase, has basically been responsible for the inability of long-term and intermediate rates to rise and to stay at these types of levels. In other words, he believes that the global economy, and certainly the U.S. economy, has more slack in it, has less investment fervor, and therefore, that rates for this level of economic growth belong at these levels. So, it's not a very bullish indicator as far as Bernanke is concerned.

Bill Gross: I think you hit the two most important factors. You see, housing gains have contributed significantly to U.S. growth via wealth effects on consumers, cash-out refinancings, home equity loans, and job growth in real estate-related industries. Higher mortgage rates over recent months and continued pressure on real wages and incomes will crimp housing affordability in 2006, taking the froth out of the property market. The decline in housing affordability has already begun.

Bill Gross: The bottom line is that in the context of slightly higher-than-average P/Es, we expect muted equity returns over a long-term horizon. In addition, we do not see commodity prices as low in a historical context. Rather we see commodity prices as fair, with bullish fundamentals facing the headwinds of "targeted" inflation rates, and prudent monetary policy regimes worldwide. This will make tactical positioning, security selection, and most importantly, what we call structural positioning of your portfolio, PIMCO's key tools over the coming decade.

Bill Gross: My Dow 5,000 estimate was a mistake because the Fed and outside central banks lowered real interest rates from 4% to 1 - 2% over the period, raising the present value of nearly all financial assets in the process. In addition, substantial global labor arbitrage boosted U.S. profits to historic margins as a percentage of GDP. While the latter trend will in time reverse, low real yields may be here for a while, suggesting a permanently higher plateau at 8,000-plus depending on cyclical forces.

Bill Gross: PIMCO is extremely proud of Mohamed's accomplishments at PIMCO, and of his selection to join Harvard University in a leadership position, taking direct charge of Harvard Management Company (as CEO and President) and joining the prestigious faculty at Harvard Business School. Mohamed has worked hard to institutionalize much of what he contributes to PIMCO on a daily basis, including most importantly hiring and mentoring colleagues in the portfolio management area. We expect that existing portfolio management resources, which have developed well under Mohamed, will rise to the challenge and take on the leadership of Mohamed's portfolio and management responsibilities. We have been aggressively adding talent in recent years to keep pace with the demands of our growth, and Mohamed's departure will certainly add to the importance of that task.

Bill Gross: How funny! But I’d be more likely to say, "With my boots and Bloomberg on." Thank you for this opportunity to address your clients and your fine staff of investment professionals.