Gundlach on the signs of the market being ready to pull back

The investor, who was crowned by Barron's as the new "King of Bonds" a year ago, said in an interview that he thinks the recent rally in stocks, which this week drove the Dow Jones industrial average above 13,000 points for the first time since May 2008, has gone too far.

Gundlach, the chief executive officer and chief investment officer of the $28 billion DoubleLine Capital LP, said he is still concerned about the euro zone crisis and deepening tensions in the Middle East.

The United Nations' nuclear agency said on Friday that Iran has sharply stepped up its uranium enrichment drive in a report that will further inflame Israeli and Western fears that Tehran is pushing ahead with an atomic weapons program.

"It's an awfully easy decision right now to not be making further investments in risk assets," Gundlach said.

"The pricing of the market has returned to the levels prior to the scales falling from investors' eyes regarding the global financial crisis, and I really don't think that's appropriate," he said.

The Dow has gained 8 percent since December and the broader S&P 500 index is up roughly 10 percent.

The size of the gain leaves no cushion of safety given all the dangers in the world economy and leaves the stock market as priced for disaster as it was when the financial crisis hit in 2008, Gundlach argued.

"When I look at the pricing in the market today, I see a good chance of downside movement of some significance," he said.

Such predictions reinforce Gundlach's status as a bit of an outlier given the optimism among many in the U.S. markets prompted by some stronger economic figures in recent months.

Gundlach, whose prescient call to buy U.S. Treasuries last year boosted his DoubleLine funds, said he was concerned about "schizophrenic" investor psychology that had flipped to over-confidence because of some stronger economic data and market gains when only five months ago people felt a new recession was imminent.

He said a decline in stock market volume was a worrying signal. Average daily volume on U.S. exchanges last year was 7.84 billion shares but so far in 2012, average daily trading has been 6.95 billion shares.

Gundlach's investment track record has been very strong. Last year, for example, the DoubleLine Core Fixed-Income fund, Gundlach's multi-sector bond fund which can invest in corporate bonds, mortgage-backed securities, Treasuries, and emerging-market debt, posted returns of 11.5 percent.

In comparison, the Barclays Capital U.S. Aggregate bond index - the fixed-income market's equivalent of the S&P 500 index - posted returns of 7.8 percent.

Gundlach's view clashes with that of many money managers, who cite low Treasury rates, strong corporate balance sheets, and worldwide liquidity programs as reasons to allocate money to riskier assets such as stocks.

When asked why few other money managers agreed with his views, Gundlach said: "I'd say that's because the great majority of money managers never say, 'take money out'."

Like Wall Street analysts who "never have a sell signal on anything," managers tend to only go public with buy or hold sentiments, he said.

Investors that concede that the market may not rally further but still expect to earn their high-yield coupon are the biggest red flag to flee the risk sector, Gundlach said.

"That's usually about as negative as the consensus gets, and usually I warn my clients that when you start hearing a predominance of that method of thinking it's about as close as you're going to come to a sell signal."

Coupons for BBB-rated companies hit a record low this week, according to IFR, a unit of Thomson Reuters. CSX Corp (Baa3/BBB) set a record for the lowest 30-year triple-B coupon with its $300 million 4.4 percent deal at just 133 basis points over Treasuries.

Rising oil prices, tensions in the Middle East, and deficit policies to be announced in the U.S. elections in November are just three possible catalysts to burst the rally, Gundlach said.

"When you see volume decline and you see insider selling at a high level, you're already seeing the market showing cracks, and it's already there," he said. He added that positive economic surprises "can only, at some moment, disappoint."

Gundlach also said that worsening government finances in the United States and much of the developed world were "completely unsustainable" but that once politicians tried to really deal with them, there were major risks of a recession.

"You might also at some point have a well-meaning attempt to address this absurd amount of government borrowing to fund the spending outlays. If you do that, you will go into a recession immediately," he said.

Gundlach said a mix of Ginnie Mae and non-guaranteed mortgage-backed securities is "the best fixed-income strategy right now," since the risks of both, when blended, can be positioned to offset each other. This blend can also yield about five percentage points above a generic Treasury portfolio, he said.

"I've been at this game for about 30 years, and what I've learned is that in the world of finance you tend to make money slowly and lose money quickly, and the idea is to not be there when you have potential for downside movement," he said.

(source: Reuters, Feb 24, 2012)

Jeff Gundlach: The Decline and Fall of the Roman Empire

On February 14, Jeff Gundlach hosted a webcast with clients. The title of his presentation: "The Decline and Fall of the Roman Empire." Not surprisingly, Gundlach drew parallels between the U.S. and Ancient Rome. Like the U.S., he noted that Rome had an insufficient tax system and a huge military budget. Like Rome, the U.S. faces "persistence of a destitute underclass," as reflected by the excruciatingly slow job recovery. Gundlach's talk included commentary on the year-to-date performance of markets as well as his outlook for the rest of the year. As usual, Gundlach's presentation has all of the most important financial and economic charts you need to understand the world.
Click Here To See Jeff Gundlach's Presentation >
(source: Business Insider)

Jeffrey Gundlach on bonds, risky assets and gold

Jeffrey Gundlach, bond-fund manager and CEO of DoubleLine Capital LP, held a conference call late Tuesday, October 11, discussing whether the risky assets are cheap enough. Not yet. “It’s a dangerous market at the present level, and if anything we’d be inclined to short risk assets.”

DoubleLIne Multi-Asset Growth Fund DMLIX is positioned to benefit from further declines in the price of copper ,  which Gundlach called a “wonderful indicator” of global economic health. DMLIX is “significantly underweight” commodities in general. Copper’s weakness “shows that the global recession story has some teeth.”

The global-growth slowdown also has driven Gundlach into U.S. dollar-based assets, with no exposure of any kind to non-U.S. stocks. Gundlach' funds are in a low-risk mode . There will be a better entry point into the emerging market equity, energy and commodity complex and equities in general.

Gundlach is bullish on gold, especially shares of gold miners, which under performed  metal itself. “Gold could come down to $1,500 or so on a sell-off of commodities and inflation-risk generally.” And at that level he would be a buyer .

Gundlach has owned Treasury bonds for some time and his investors have benefited from the rally, but nowadays he sees long-term bonds as hedges, not investments. In fact, if and when the 10-year Treasury yield  touches 1.7% again, Gundlach would be inclined to lighten up on Treasurys. It’s not that he believes inflation is imminent and threatens bond values. It’s more that bonds have rallied tremendously and may have had their best days for capital appreciation.  “I don’t think buying Treasurys at 1.7% on the 10-year can be classified as investments.”

Gundlach's `No Normal' pressure cooker

Jeffrey Gundlach, the lone bond manager to beat Bill Gross in the past 5, 10 and 15 years, said there won’t be any “new normal” to guide investors until policy makers repair the damage caused by the financial crisis.

“I think ‘no normal’ is a good phrase, as opposed to ‘new normal,’ ” Gundlach, chief executive officer of DoubleLine Capital LP, said during an interview in his office in Los Angeles. “Some major policy shift has to happen that will turn everything on its ear. So this idea that we’ll go into some quasi-similar paradigm, some sort of new thing -- no way.”

Gross and Mohamed El-Erian, co-chief investment officers at Pacific Investment Management Co., use “new normal” as shorthand for their forecast that the U.S. will endure below- average economic growth of 2 percent or less for the next three to five years and unemployment peaking at 10.5 percent to 11 percent, from 9.6 percent in August. It’s entered the Wall Street lexicon to describe a post-crisis world in which the U.S. and Europe no longer offer the best investment prospects.

Gundlach, who until December managed the top-ranked TCW Total Return Bond Fund, doesn’t disagree with Pimco’s outlook. His point is that “new normal” fails to recognize that all previous economic and investment assumptions have been permanently altered by the financial crisis.

“Massive” policy changes will be required to bolster the economy and cut the U.S. budget deficit, projected to be at about $1.47 trillion, Gundlach said. The timing and nature of the potential regulatory changes are unpredictable, causing him to shorten the length of time he holds investments.

“You cannot go on with these policies for too very long,” said Gundlach, 50. “The problem is the debt burden is very high to begin with and it’s growing fast.”

The U.S. government will have to increase tax rates, now at historic lows, as it tries to reduce its budget deficit, Gundlach said. It will also have to wean itself from borrowing money to stimulate the economy, he said.

Pimco developed the concept of “new normal” about a year- and-a-half ago as an “attempt to move the general thinking beyond the notion that the crisis was a mere flesh wound, easily healed with time,” El-Erian, 52, said in an interview.

“The crisis cut to the bone, resulting from an extraordinary, multiyear period of debt and credit entitlement which was anything but normal,” he said.

New normal was less about what should happen than “what was likely to happen given our analysis of national and global factors,” El-Erian said.

In an April speech at Princeton University in New Jersey, Christina Romer, then head of the White House Council of Economic Advisers, said she found the fatalism of the new normal distressing. She said that shorter-term cyclical events such as the decline in demand for goods and services were the real drag on job creation.

“Unemployment is high fundamentally because the economy is producing dramatically below its capacity,” Romer said. “That is, far from being the new normal, it is the old cyclical.”

In September, as she exited the Obama administration, Romer said she had underestimated the severity of job cuts and that this “has not been a normal recession.”

Gundlach managed the TCW Total Return Bond Fund until Dec. 4, when he was ousted as chief investment officer of TCW Group Inc. after the company accused him of planning to start his own investment firm. Gundlach said he was fired to reduce expenses.

Co-manager Philip Barach and more than 40 members of Gundlach’s team followed him to DoubleLine, which started three fixed-income mutual funds and plans an exchange-traded fund focusing on emerging-market bonds. Assets in DoubleLine Total Return Bond Fund, run by Gundlach and Barach, have grown to $2.7 billion since its inception on April 6, according to data compiled by Bloomberg.

TCW Total Return under Gundlach averaged gains of 7.5 percent in the five years ended Dec. 4, topping Pimco Total Return Fund, which rose 7 percent in the same period. The TCW fund also beat Gross in the 10- and 15-year periods. He’s the only intermediate-term bond manager to post higher returns than Gross, 66, in each of the three periods, according to Chicago- based Morningstar Inc.

Pimco Total Return is the world’s largest mutual fund, with $252 billion in assets.

DoubleLine Total Return Bond Fund has increased 15 percent from inception through Oct. 4, compared with 7.3 percent by Pimco Total Return, Bloomberg data show.

Gundlach, who is known for his expertise in mortgage-backed securities, was early to spot signs of trouble in the U.S. property market, and by August 2006 he had started a distressed real-estate fund to take advantage of declining prices. He correctly called an end to the five-year property boom and said falling real-estate prices would weaken the U.S. economy.

“He is considered a wunderkind in the bond-fund world,” Jeff Tjornehoj, a senior research analyst at fund researcher Lipper in Denver, said in an interview. “He’s not as well-known as Gross, but he’s well-respected, and part of that reputation comes from being at the right place at the right time.”

Gundlach wasn’t immune to fallout from the subprime- mortgage collapse, investing in securities that lost value during the crisis. Under Gundlach, TCW became the biggest manager of collateralized-debt obligations, with $41.3 billion under management as of Sept. 30, 2007, according to data from Standard & Poor’s. Gundlach has said his CDOs got out of high- risk home loans early in the credit crisis and missed the worst of the losses from those securities.

Confidence in financial markets collapsed in 2008 after the debt securities derived from defaulted properties -- many of which were purchased with subprime loans -- became so toxic that credit dried up for companies and individuals. The bankruptcy of Lehman Brothers Holdings Inc. and ensuing panic-selling of all but the safest government bills and bonds prompted an unprecedented $1.49 trillion rescue of banks and the economy, now recovering from the worst recession since the Great Depression.

The economy grew at a 1.7 percent annual rate during the second quarter, compared with 3.7 percent in the first three months of the year, according to government data.

“The GDP isn’t really growing now, counting all this debt that is being used to prop up consumption over the short term,” Gundlach said.

That the stock market hasn’t declined this year amid predictions of a global economic slowdown and the debt crisis in Europe is “impressive” and signals demand from investors looking for higher returns as interest rates have hovered near zero for the last two years, Gundlach said.

The MSCI AC World Index has climbed 1.8 percent this year, while the Standard & Poor’s 500 Index has advanced 2 percent.

Gundlach said he is less bearish on the market than he was in 2006 and 2007, largely because he was worried about the solvency of the nation’s banks and because securities were “egregiously overvalued.” The S&P 500 peaked at 1,565.15 in October 2007, falling to a low of 676.53 in March 2009.

Investor demand for dividend-paying stocks bears the hallmarks of the next investment “disaster,” he said.

“People that think dividend-paying stocks are a good bond surrogate are greatly mismatching the risk,” he said. “This has the characteristics of something that could potentially be a debacle.”

Gundlach said equities haven’t declined enough to be attractive investments, especially shares of investment banks such as Goldman Sachs Group Inc. He compared bank stocks to those of airlines, as they haven’t made money for investors over the long term. In the past five years,airline stocks fell at an annual rate of 4.9 percent, compared with a decline of 11 percent for financial stocks.

“Banks and investment banks are horrible investments at the top of a debt cycle,” Gundlach said.

As concerns over regulation and the economy have increased, Gundlach said he’s investing in government bonds as well as mortgage-backed securities that will do well as they rebound from deeply discounted values. DoubleLine’s funds, including the Core Fixed Income Fund, haven’t completely sold holdings in 10- year Treasuries, which have the potential to do “reasonably well” in a weak economy where interest rates are low, Gundlach said. The securities can hold up in the event of deflation, which Gundlach said is a possibility.

The funds are also invested in non-guaranteed mortgage securities that Gundlach and his team believe are trading below what they are worth. These bonds, if purchased at the correct valuation, aren’t sensitive to interest-rate increases and inflation, or rising prices.

“It’s the ultimate inflation hedge,” Gundlach said.

In the past couple of months, DoubleLine also bought below investment-grade corporate bonds because they will be in favor for at least a year and yields are 7 percent to 8 percent. Gundlach doesn’t like junk bonds in the long term because there is risk of default, he said.

Gundlach, who joined TCW in 1985 as a quantitative analyst, later became a fund manager and was named chief investment officer of the Los Angeles-based company in 2005. TCW fired him last year, saying that Gundlach had threatened to leave and take key employees with him. Gundlach said he was dismissed so the company could cut costs.

TCW sued Gundlach and three other former employees in January, alleging they secretly downloaded proprietary information that was used to form DoubleLine. Gundlach has sued TCW, claiming he is owed as much as $1.25 billion in anticipated fee income, and said the allegations that he used information from TCW are untrue.

Assets in TCW Total Return, now managed by a team overseen by Tad Rivelle, have fallen by more than half to $5.3 billion since Gundlach’s departure. It has returned an average of 8.7 percent over the past five years.

DoubleLine started with backing from Howard Marks’s Oaktree Capital Management LP, a Los Angeles-based firm that focuses on high-yield and distressed debt. DoubleLine Total Return Fund had the fastest start for a mutual fund, according to Morningstar. It took 16 years for the TCW Total Return Bond Fund to reach $2 billion in assets under management, Gundlach said.

DoubleLine’s assets under management have risen to $5.5 billion, helping the firm turn profitable, according to Gundlach.

(Bloomberg, October 5, 2010)

Reflection Series: Strong USD in 2010, but not for a good reason

Nouriel Roubini, and top fixed income manager, Jeff Gundlach, possess a contrarian view on the future of the U.S. dollar. While most analysts, economists, traders, investors, and speculators call for ongoing weakness in the greenback, Roubini and Gundlach believe the dollar will rebound and risk-based assets will retreat.

Jeff Gundlach of TCW is Calling for Deflation and Dollar Rally.

One of the few areas he’s bullish on is the U.S. dollar — but not for good reasons.

Gundlach sees such large debt defaults in coming years that he thinks the trend will cut the supply of dollars, pushing up the currency’s value.

“We’re standing on the edge of a major default wave,” he said. “Defaults are the elimination of dollars. You could eliminate so much actual wealth that this could be the source of a strong dollar rally.”

While Gundlach is clearly in the minority with this assessment, one individual who shares this outlook is Nouriel Roubini. What does Roubini see? Much of what Gundlach sees. Bloomberg provides interesting perspective in writing, Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble,

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis. “We have the mother of all carry trades.”

“Everybody’s playing the same game and this game is becoming dangerous.”The dollar has dropped 13 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s.

Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit”.

“The risk is that we are planting the seeds of the next financial crisis,” “This asset bubble is totally inconsistent with a weaker recovery of
of economic and financial fundamentals.”

(seekingalpha.com, October 28, 2009)

Jeff Gundlach's swan song at TCW: Too Good To Be True

Jeff Gundlach's swan song as TCW. Last masterpiece from the mortgage bond expert while still a TCW employee. Before Gundlach's unceremonious firing, and subsequent departure of his closest lieutenants.
Full report.

Too Good To Be True

(from ZeroHedge, December 7, 2009)