6-27-13 JEG Market Update by zerohedge



Last week, Jeffrey Gundlach of DoubleLine funds did a webcast, discussing his most recent slide deck. This followed a month of volatility and rising rates. My friend Laura sent me a full rundown of notes from someone a friend of hers who sat in on the webcast (Laura, please forward that name!).

This is a follow up to his last webcast a month ago (notes from that webcast follow these notes. The full presentation is attached.


Gundlach believes the liquidation and massive volatility is most likely over, and that creates some opportunity in specific sectors: EM stocks, closed end muni funds, long end UST and HY corporate bonds. Some of those sectors now have a good value proposition due to the rate rise and spread widening. He still likes the NKY up to 14,000 and is still short the yen.

1. Interest rose more than he expected.

2. Recent interest rate rise has nothing to do with inflation…CPI and PCE both well below Fed’s target. The PCE (Fed’s preferred target) is at half century low.

3. Gold is weak, partially as a loss of inflation hedge. Consensus is gold is going to $1000. Pivot point has been taken out. Chart is ugly.

4. CRB index is eerily stable at low level…feels it could fall below “shelf” and fall to 400. Partly because China is not growing as people think it is.

5. Incomes are stagnant, China is slowing, no global growth…this selloff has nothing to do with inflation

6. Dollar is strengthening…also deflationary for US

7. Global equity markets have been dropping led by Japan and Shanghai

8. NKY finding support at 12,500…thinks it will go back to 14,000

9. Enormous underperformance of EM equities…causing stress among investors

10. Liquidation has seemed to have ended. Expecting things like EM equities to correct…this is a good place for a contrarian play for next few weeks.

11. Brazil is a concern due to social unrest…but a basket of EM equities looks attractive.

12. Shanghai is ugly…brand new low…this along with commodity prices are saying there is no growth in China and the world.

13. Bank of China is shadow tightening…Shibor rates saying Chinese banks not comfortable lending to each other…a concern for Chinese banking system

14. Expecting stability in July to come back

15. Labor market still stressed…employment to population ratio is not recovering along with other job metrics…difficult to make case there is either economic growth or inflation in the pipeline.

16. Fed talking out of both sides of mouth…how does he reduce his GDP and inflation expectations…and talk about reducing QE? Said Fed is basically funding the budget deficit. So tapering is OK if deficit goes down, but Fed not communicating that properly.

17. Higher rates hurt leveraged markets…EM, HY, MBS, muni, etc…margin calls breed selling breeds more deleveraging breeds concern about credit which breeds more selling…this is what really happened past month. Some markets really gave investors big losses which caused concern (EM, MBS, etc), and not the generic rise in rates.

18. Housing market is facing major headwinds now due to major increase in mortgage rates, on top of higher prices. Change in affordability has been huge past month. This will hold back economy for near term.

19. The past 6 weeks, UST was best performer out of Lehman Agg index…in a relative sense, of course. Corporate bonds and MBS fell much more as spreads blew out due to deleveraging. So you can’t say UST are the problem…UST is the tail, not the dog.

20. Yield curve seems too steep now relative to Fed policy. He thinks the worse is over for UST.

21. HY was a big trouble point with leverage money getting stopped out. HY index dropped 7% over past 6 periods. The liquidation cycle seems to have run its course and market has come back. The worse seems to be over for HY for now.

22. HG also dramatically underperformed UST during past 6 weeks.

23. TIPS not protecting you from inflation based on market moves relative to time frame of inflation. Doesn’t like them. Not as against them now at these levels though. But he does not see inflation coming any time soon. The markets in June are telling you “deflation”.

24. Mortgage REITs…NLY as proxy…seeing some but not a lot of rebound.

25. Investors were lulled to sleep by Ben for two years…now he changes his tune to remove leverage…and investors found themselves over-invested. So people have sold to de-risk and get back to more comfortable risk levels.

26. He likes closed end muni funds here…negative price actions has caused massive discounts in the 6-8% range…oversold.

27. HY is now a good value proposition and value buying will stop the route

28. Thinks QE will continue until we see negative consequences. One was too much leverage in the system. If we are done with the liquidation cycle, then Ben did a decent job.

29. If you sell any bond funds here for fear of higher rates, you should keep cash…for if bonds go down again, everything will go down.

30. Thinks will see yields lower at end of year than what we see now…and by a substantial amount to capture decent profits

31. Gold has less than 20% downside from here, and up to 50% upside…but will probably go down first…but wouldn’t bother selling now if you have ridden it all the way down…starting to buy gold now if you have none makes sense.

32. He thinks people have foolishly redeemed bond funds. Thinks there is good value there now.


What is the World is Going on?
June 4, 2013

Policy changes are having an effect on volatility and thus equity markets. Still short yen and A$. Not long any European assets. Dislikes TIPS.

Likes bank loans, USD denominated EM corporate bonds and non-agency mortgages. Also starting to like long term UST at today’s levels.

I. Euro-zone
a. Bail-in of Cyprus where over $100K, 40% is taken is a disturbing development
b. Hot growth areas are centered in Asia and Africa. All global GDP growth coming out of BRICs
c. He believes China is fabricating numbers and is not growing near 7%.
d. The weakness of China economy is causing weakness in commodities…like copper, iron ore, etc…if CRB index breaks below 18 month “shelf”, the index could go down to 400.
e. Very concerned if global growth is supposed to be driven by China
f. North America has tepid growth at best
g. Australia growth likely to taper off due to exposure to China.
h. From 6 months ago, all growth expectations have been lowered, expect for Japan.
i. Global GDP growth on a declining path past 3 years…people increasingly playing a market share game…one great example is Japan, who is just trying to make their exports more competitive relative to other Asian countries. More countries will debase currencies to compete and even start to increase other actions such as tariff.
j. Yen will be weak for some time to come…next 5 years
k. Nikkei seems like it has seen its highs for time being…well deserved rest…but now is not a good time to exit the Nikkei
l. Around 12,500, that would be a good entry point…but won’t see new highs new years. In part of topping process.
m. EZ has no country that has strong economic growth…double recession due to austerity where the US kept growing
n. The Fed will reduce QE…tapering…the Fed is trying to match up size of purchases as compared to deficits…so right-size QE to match financing of budget deficit 1 to 1 and not more than that. The Fed wants to distort markets in a certain way…disturbing they are trying such fine tune manipulations. High probability of negative consequences.
o. EZ’s biggest problem is unemployment, especially among under 25 yo. QE has hollowed out the saver class (older workers), meaning they can’t retire, so young people can’t find jobs. Will cause disharmony among population.
p. But central banks have orchestrated very low yields for all countries, especially higher risk ones. But peripheral yields are starting to edge up again.
q. The ECB may be forced back later this summer to address bond market issues.

a. No inflation. Period. Expectations have turned down. Dislikes TIPS.
b. TIPS just not a great timing mechanism for protecting against inflation…market just doesn’t move at right time.
c. No inflation in commodity prices or wages either
d. Doesn’t really see deleveraging in balance sheets. Total US debt not going down…just a shift from households due to mortgage write-downs to government due to student loan and auto.
e. He doesn’t think yields will go much higher from here.
f. If 10 yr goes over 2.30%, the Fed has to rethink how it talks about policy…would have to talk about increasing QE as the economy would be too negatively shocked from those higher rates.
g. Higher rates will also blow out the Treasury’s budget as interest costs would balloon out of control very quickly…the increase in annual interest cost would dwarf the amount of money politicians are trying to cut due to sequestration.
h. That means there is a put on bonds…not on stocks…there is support on stocks, but there is a direct put on bonds
i. Corporate taxes: current structure not sustainable. Highest nominal rates, but low net receipts…while corporate profits at historical highs…taxes not keeping up with profits.
j. Corporate profits unlikely to keep going in the need for more tax revenue and focus on class warfare.
k. P/Es are at risk if future profit ratios are likely to go down. Could be a stressor for stocks. But this gives a cushion to corporate bond defaults.
l. In order to have inflation, you MUST have wage inflation…that is just not happening…median income not changed since 1994. Personal income on a real basis has not moved in 7 years
m. Wage inflation is nonexistent…1.75%…barely keeping up with inflation
n. No labor market traction as the % of population being employed is now at a multi-decade low. Some of that is demographic and retirements, but the lower employment ratios can’t support population and governmental needs.
o. Just like EZ, the low interest rates are hurting the saver group, so people can’t retire, thus the under 25 yo group is having hard time finding jobs
p. We need the retirement and eligibility ages to go up. The young people can’t support the older cohort needs
q. He thinks this is a horrible time to be exiting bonds and good time to enter

III. Housing
a. Refinancing index dropping with rise in rates
b. Mortgage rates exploded in May…so higher home prices due to supply shortage and higher rates is a dangerous combinations for housing…alters affordability for housing and makes people question whether they want to chase housing prices going forward.
c. Funds being raised to buy and rent houses are a big loser waiting to happen. Economic formula doesn’t work in the backdrop of higher prices, higher rates and strained consumers.
d. Doesn’t like homebuilders…prices of lumber is weak while homebuilders are strong…what is going wrong there?
e. Doesn’t like mortgage REITs. NLY ok for income, but prices won’t go up with dividends going down. But NLY is a buy at $12.
f. Buying longer term MBS in here

Category: Fixed Income/Interest Rates, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Deck + Notes from DoubleLine’s Jeff Gundlach”

  1. Chief Tomahawk says:

    Nice collection of insight.

    “d. Doesn’t like homebuilders…prices of lumber is weak while homebuilders are strong…what is going wrong there?”

    Okay, I’ll take a swing at explaining. A few years ago the lobby arms of the homebuilding industry pushed through tax breaks for themselves. Couple that with Uncle Ben’s “debt refi” program and even the lowly homebuilders have improved earnings. [Lumber???! We don't build with lumber anymore; We rely on our accountants, lobbyists, and a bailed out financial industry to create value!!!!]

    • Lookout Ranch says:

      Tomahawk, a large percentage of the combined west coast timber harvest of Canada and U.S. has been going to China, but those orders have dropped off significantly in recent months, hence the big price drop.

  2. leopardtrader says:

    I dont think the exit in bonds is over though will decelerate. NKY will get to 18000 as the weakness of the yen just witnessed the first pullback. This is a multi-year rally still in its infancy. In fact my take about where money is going after the Bernanke comments last few weeks is playing out as here http://leopardtrader.com/?page_id=1714 My Gold call per 1200/1190 to 1650 some days ago appear to be playing out http://allstarcharts.com/if-this-is-the-gold-bottom-its-totally-random/#comment-942883197

  3. leopardtrader says:

    On inflation..I think Bernanke is right. Current subdued inflation is transitive so could change overnight. 30 year rates could hit 5% first before 3.3%. In general expectation for rates will continue to rise than fall. His assertion of going long bond for big profit expectation going into year end may prove to be wrong footed. From my assessment there is 90% chance to yield rise than fall going forward

  4. dvdpenn says:

    Thanks for this. Converted half my portfolio into a version of Dalio’s All Weather portfolio this spring, so the notes on bonds and EM were especially interesting to read (I own some DJP and ELD).

  5. george lomost says:

    Thanks for the post Barry! Gundlach seems to have an amazing record on predicting bond movements.

    One thing puzzles me though. This notion that something has changed in Japan that will revive its economy. As I understand it, such cannot happen without major structural changes in their businesses practices and structures. Historically, major changes in Japanese culture and practices have only occurred as a result of losing conflicts with outsiders (Commodore Perry, and several wars).

    Secondly, can there be significant changes in the yen without a major unwinding of the “carry trade”? Does anyone know just how big that iceberg is underneath?

    • VennData says:

      LOL. he said bonds would crater and they exploded upward just last month. No one can predict anything.

      This is his way of muddling his big failed prediction, designed to increase his AUM.

  6. cfischer says:

    leopardtrader, what do you think will rise in price to spur inflation? (Wages? Commodities? Housing?)

    I think the closed end muni funds are a good value here. Went from a 5% premium to a 5% discount, on top drop in the NAV very quickly. 6% tax free? Sure.

    • leopardtrader says:

      Cfischer I rely on FEDs take that current inflation is caused by temporal factors. They continue to forecast for rising inflation towards target. I dont have any reason to bet against the FED. FED is clearly no longer worried about deflation( if you follow FED–I am lol). Commodities or Housing could spur inflation any moment. Remember that official economic data are lagging indicators. Trading position is about expectations ( perceptions) not reality. For example FEDs rate is essentially 0.25 yet expectation is rising.
      For me it is better to avoid being the lender in this environment instead be the owner and the borrower. All bond/munis will continue to drop while yield chasers move to large capitalized stocks that pay dividends. It will be shocking what will happen to bond holders as time go on.
      I am pretty confident that Gross or Gundlach is wrong on rates going forward

  7. AtlasRocked says:

    Thanks for this post, lots of goodies in here.

  8. Willy2 says:

    Whether or not the FED is (forced) to fund the US deficit does not only depend on the size of budget deficit. It also depends on the size of the Current Account Deficit. A shrinking US Current Account Deficit or a Surplus forces the FED to increase the purchase of T-bonds.
    The april 2013 US trade deficit ($ 40 bln.) has been shrinking since january 2012 (at ~ $ 50 bln.). Not a good sign for the US.

    “Shrinking Budget Deficit” ? In a combination with (siginificantly) higher taxes ? I believe it when I see it.

  9. bonzo says:

    Moved from 85% cash to 85% intermediate-term investment-grade bond fund this past week. Not a big move- but pretty much in line with Grundlach’s views for a risk-averse investor. I’m ready to move the remaining 15% from stocks to the bond fund if stocks go up and bond don’t go up too much in price (ie yields stay where they are or go up).

  10. Singmaster says:

    I missed the first part of the call but regarding mortgage reits, my notes show that he does not like them.
    He said he felt bad that he uses NLY as a proxy because they are good folk, but he does not like the asset class.
    He also pitched floating rate bonds as an asset class to consider if you believe rates are going up.
    Doubleline just started a floating rate fund.
    Regarding CEF vs Mutual Fund, he said that in his experience, over time CEFs outperform mutual funds. He warned though that they are much more volatile however.
    He mentioned that their CEF DSL is not fully invested so they are happy with the downturn as they can 1) pick up bargains and they 2)don’t need to sell assets for redemptions.
    An action packed call. Those notes are precious because he speaks so fast, you cannot blink.

  11. bonzo says:

    I’m also tempted by the idea of trading my 15% stocks for gold (half mining shares, half GLD), but not at current prices. Like Grundlach, I’m not too worried about inflation, but there’s always the possibility of a surprise. Gold isn’t a long-term inflation hedge, however it should protect against the initial flare-up of inflation in an environment of interest rate repression. Or maybe there’s other reasons for wanting gold. 100% bonds just doesn’t feel right for me, though 85% is fine.

    • We might be due for a bounce in gold, but how long are you going to hold it?

      • bonzo says:

        I wouldn’t buy gold as a short-term trade. I’m only interested as a hedge against unexpected inflation, and I have my doubts about whether gold will act as such a hedge, which is why I want a much better price than what gold is selling for now. I want a nice margin of safety, as Graham puts it.

  12. theexpertisin says:

    Jeff Gundlach is a financial maestro. As BR states, tune out the financial gurus who make lousy calls.

    Gundlach, to date, is worthy of serious attention – and investing with.

    • Willy2 says:

      “Gundlach is a financial maestro” ????

      Gundlach founded Doubleline in 2009 and was therefore able to profit from the “recovery” that started in 2009. Stocks, bonds (muni, corporate, government) and to certain extent even real estate recovered. We’ll have to see how well Doubleline/Gundlach will perform when these three asset classes go down the drain WHEN (not IF) interest rates go (much) higher/go through the roof.

      • He was at Trust Company of the West where he headed the $10B TCW Total Return Bond Fund — got the prior decade, he finished in the top 2% of all funds invested in intermediate-term bonds.

        See this

      • Willy2 says:

        But has he ever gone through a bear market in T-bonds ? Remember that there was a bull market in T-bonds in the last 31 years. That fueled a 30 year bull market in financial assets.

        The next bear market in T-bonds would REALLY put Gundlach to the test. Then he REALLY can prove he’s a “financial maestro”.

      • Although that is True, he has been in the top 2% of all the other managers over that same period.

      • leopardtrader says:

        Yes even he has been lucky to ride the big bull trend ..still a big feat to sit a trend. The hardest aspect of trading/investing is that ability to sit out a big trend.
        Jesse Livermore depicted that in this interesting passage

        “…For instance, I had been bullish from the very start of a bull market, and I had backed my opinion by buying stocks. An advance followed, as I had clearly foreseen. So far, all very well. But what else did I do? Why, I listened to the elder statesmen and curbed my youthful impetuousness. I made up my mind to be wise carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried
        to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kitting up ten points more and I sitting there with my four-point profit safe in my conservative pocket.
        They say you never go broke taking profits. No, you don’t. But neither do you grow rich
        taking a four-point profit in a bull market. I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.
        The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight. Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end”

        However I find Gundlach clear contradiction on his take and bond really amusing. He must be wrong in either. My take is that YEN will continue to be weaker with rising yield as here http://leopardtrader.com/?page_id=1707

  13. Willy2 says:

    Gundlach (wrongfully) equates a rising gold price with rising inflation. But then why did gold poorly in the 1980s & 1990s when inflation (food, energy, TAXATION) continued to rise ?

    Gold does well in an evironment with negative real interest rates (from say 2001 – 2012). But my indicator clearly shows that rates have become positive again. Real rates turning positive mean that an investor benefits (again) from buying a corporate bond. But real rates becoming positive (again) also means that the burden of that bond has shifted onto the issuer. And that’s a killer for the corporate sector.

    And that’s the REAL challenge for every fixed income fund manager going forward. And for Gundlach & doubleline as well.

    • Look at the correlation between Gold and the US dollar . . .

      • Willy2 says:

        Yes & No.

        Yes, a USD going up certainly helps to drive gold lower, because a rising USD helps to drive commodity prices lower.

        No, because a USD going lower does NOT automatically mean that commodity prices go higher. See what happened from 1984 up to say 1995. The USD(x) went lower and lower. Did gold go through the roof ? No, because commodity prices went – on average – lower as well.

      • leopardtrader says:

        Yes it may be naive to believe Gold inverses with USD. This time I believe USD$ firms with Gold. Beware of trading based on so-called correlations..

      • Willy2 says:

        One has to look at REAL interest rates. And REAL interest rates remained positive when the the USD drifted lower from 1984 up to 1995.