DoubleLine Capital's Jeffrey Gundlach
Pllush Capital Management's Lisa Ditkowsky
Los Angeles-based DoubleLine Capital founder, Jeffrey Gundlach, held a January 12th, 2016 webinar entitled "Just Markets" from New York City. In typical Bond-King style, the reigning markets guru went live straight from a NYC media appearance with his entourage on hand. Web attendees could hear all of his key players scrambling to get on the call slightly late, which he later explained had to do with his prediction of $40 oil leading to "scary geopolitical events" coming true, as news had just hit the U.S. that Iran had seized our U.S. Navy Ships.
When Jeffrey Gundlach held his last major webinar, before the Fed Meeting in December 2015, he took the contrarian-Fed-raise view of "keep on dribbling sideways, Janet", while all the cheerleaders were yelling for Jumpin' Janet to charge ahead for the easy layup and raise interest rates. Gundlach is a big realist these days, though others may try to portray him as the lone contrarian. This is because even while he seemingly always knows what is going to happen with the markets and the Fed, he almost begs those in command of our world to wake up and realize they are on reality TV and not some sitcom in the running for an Emmy.
Gundlach's speeches and presentations are thoroughly enthralling because he largely conceptualizes and curates them in their entirety, down to the hold music and cultural references. If he has 100 Bloomberg slides to explain, he is not going to cut his presentation short until he gets through each and every point he wants to make. Rarely does a money manager have the resolve and obsessive compulsion toward detail to cover and hammer home every single slide and thought in great detail.
DoubleLine Capital's webinar ran one-and-a-half hours, after which it was almost 6PM or cocktail hour in NYC. Of the thousands of Financial Services professionals and Investors on the call, not a single one got one of his/her hundreds of questions in the queue answered. Maybe the DoubleLine entourage had to take its fleet of limos straight to the airport. Just as Lady Gaga gives all the credit for her success to her "Little Monsters", Jeffrey Gundlach knows and appreciates that it is his Investors and Financial Advisors who are helping the Godspeed ascent of DoubleLine Capital. Hence, he never shortchanges attendees on a webinar - his version of a Lady Gaga concert.
In 90 minutes, Gundlach exhaustively covered everything from interest rates to the Saudis continuing to produce oil.
DoubleLine Capital's Jeffrey Gundlach on INTEREST RATES and THE FED
"Keeping rates at zero for a long time pulls returns forward," said Gundlach to explain the 7-year bull run in the stock market and why rising interest rates mean an end to the lightning-speed rise in equities.
"I think the Fed wants to raise interest rates," said Gundlach. However, Gundlach cited that "The Market is at odds with the Fed with the odds of rising interest rates." The money manager noted that the market indicators show a likelihood of rates rising to 0.60 percent near term vs. the Fed's probable plan to hike up to 1.0 percent. "The Fed needs to dial back the rhetoric. The Fed needs to get away from this concept of raising rates four times in 2016 and four times in 2017." Gundlach believes that if the Fed does not dial back their rhetoric and "lower their dots" that "the markets will just flaunt their rhetoric."
"The FOMC is saying inflation will go up to 2 percent by the beginning of 2018 just because they are saying they will raise interest rates at least 8 times. They must be seeing something no one else is seeing," reasoned Gundlach. In typical Gundlach sarcasm, he joked about possibly buying up t-shirts that say "In Fed We Trust." Historically, normalized inflation is seen at 2 percent, whereas the U.S. had a current inflation rate of 0.50 percent, in advance of its January 20th 0.70 percent announcement.
Gundlach pointed out that the Fed hiking interest rates puts U.S. Real GDP at 2.20 percent, whereas the seemingly infinitive Quantitative Easing in Europe puts European Union Real GDP at 1.60 percent. This is relatively little difference from a serious divergence in government financial engineering strategy. He noted that the FOMC forecasts U.S Real GDP to be between 3-3.25 percent by early 2018.
Gundlach sent an ominous warning that "If the Fed raises interest rates against falling inflation - lower than Europe - equities and high yield will meet at much lower levels."
DoubleLine Capital's Jeffrey Gundlach on THE STOCK MARKET
Jeffrey Gundlach's overall theme was that just as the Fed artificially pumped up the markets for seven years, the Fed's reverse financial engineering is now causing extreme selling in the markets. He believes, "The markets are quite oversold, so a bounce is due." Gundlach repeatedly spoke about "short term bottoms" in different sectors, but acknowledged that any "bounce" is likely only temporary, as we stand threatened by a bear market or full-on recession. "1985 is the only period when a 60 basis point decline in profit margins did not coincide with or predict a recession," he lectured, adding that "Stealth bear markets are usually followed by full-on bear markets."
Gundlach said that because a lot of companies are down 22 percent, "A buying market is probably coming of great significance." Although Gundlach is clear that the big declines across sectors appear to allow only for a "short-term countertrend move in some of these things."
"EBITDA growth is horrific in the market," said Gundlach. In fact, Gundlach notes the halt in earnings growth on a day in the markets (January 12th) when 19 of 23 companies missed earnings guidance, many of which had already lowered earnings estimates. "This is more of a capital preservation environment than a making money environment," Gundlach said. He cites Jim Bianco's research appointing 2015's S&P 500 return of 1.38 percent as "the worst best return since 1937". Gundlach said, "June 2014 will go down in history as when the cycle flipped (for many key sectors)".
However, despite his knack for telling it like it is, DoubleLine's Gundlach considers 2016 anything but a foregone conclusion. "We will see markets struggle and then create potentially a very good buying opportunity later in the year," said Gundlach. "The markets are quite oversold, so a bounce is due."
Gundlach noted that the World growth median estimate has been raised from a 3 percent median estimate in 2015 to a 3.3 percent median estimate in 2016. Although, he said that the World Bank just downgraded World GDP to a 2.9 percent forecast. "There are plenty of countries growing at zero or negative, and those countries want to devalue," he said. For example, "Brazil is in a depression, basically, with GDP contraction at a 4.5 percent annual rate," Gundlach said, calling Brazil one of the biggest emerging markets economies.
On the emerging markets flipside is a steadily growing India, which DoubleLine's Gundlach opined about, while carefully qualifying his remarks. "I am long term immensely favorable on India equities. Wait for the blood in the streets (standard emerging markets benchmarks falling 20-40 percent more, he referenced), buy India, put it in a safety deposit box (i.e. - hold for decades), and your grandkids will be happy."
Gundlach thinks that The Atlanta Fed is a credible source on economic prognostication. "The Atlanta Fed was almost at a 3 percent GDP growth forecast in November 2015 and is at slightly above 50 bps now." Could this sudden shift downward in outlook mean that the Atlanta Fed sees things that others are slow to acknowledge? Gundlach said that "The ISM Manufacturing Index (LHS) seems to indicate Nominal GDP falling to 2 percent."
Jeffrey Gundlach summed up a lot of his thoughts on the markets and global economy by asking, "Does anyone really believe that these markets are efficient?"
DoubleLineCapital's Jeffrey Gundlach on Interest Rates and THE MIDDLE CLASS
The DoubleLine Capital founder cited that for decades we have seen stagnation in growing wealth, hourly wages and median income. "Average hourly earnings are trending up," noted Gundlach. "The middle class hasn't had a raise in income in a very long time, but rents are going up." He sees this as justification for rising wages and believes that hourly wages need to rise.
DoubleLine Capital's Jeffrey Gundlach on CORPORATE BONDS
In my June 2015 "Reading Between the Lines of DoubleLine" article for "Financial Advisor Magazine", I quote Jeffrey Gundlach on the high-yield bond market –
"I am not afraid of the high-yield bond market in 2015 or even in 2016; I am fairly copacetic on the high yield bond market," said Gundlach. He said via webcast that he has long-term skepticism. Gundlach sees companies possibly borrowing at 15 percent come 2019-2021. He says that default rates could go from the historical 4 percent to 8 percent if companies have to roll over loans, driving some portfolio yields less than Treasuries. Gundlach says that by this time frame, we could see a $1T-$2T deficit spurred by the demographic problems, and he includes Obamacare in the anticipated entitlement blowup.
The bottom line, he said is, "It's ok to be dancing in the high-yield bond market, but I suggest we all dance near the door."
One needs familiarity with the DoubleLine Capital founder Gundlach's live speeches and presentation style to know that when he uses phrases like "fairly copacetic", "even in 2016" and "dance near the door", trouble is a coming. The reason for the June article title "Reading Between the Lines of DoubleLine" was that even while making confident-but-cautious statements such as these, Gundlach was quietly making news and government filings about becoming the actual issuer of debt, branching out into healthcare and equities, issuing more debt obligation offerings, etc. He was strategically taking his firm towards the money, while careful not to incite panic about where most yield-starved investors had been flocking for income for seven years.
So, it came as little surprise on January 12th when Gundlach pointed out that junk is down greater than 10 percent since September 2015. "Junk bonds, which are highly correlated with stocks, are going to continue to struggle," Gundlach predicted. "The S&P seems to be preparing the corporate bond market for a lot of downgrades," he explained
Gundlach said that he pointed out a year ago that junk bonds would be the next big problem and that he has been "right in spades". He said that junk bonds are yielding 9 percent on average and Treasuries 2 percent, so there is a 700 basis point spread. "High yield spreads (Junk over Treasuries) are wider than prior rate hikes in past cycles," he noted, advising the Fed to really focus on the junk bond market. By focusing on high yielding bonds, what he is really recommending is that the Fed does not just keep raising rates in some sort of market-agnostic bubble.
As far as words to investors, Gundlach pointed out that junk bonds have fallen to 33.5942 (as of January 12th) from their high of almost 40 in 2015. He is advising people to get out of junk if it is down big (20 percent for example, he said), and particularly if it is leveraged. On that note, Gundlach warned, "Redemption notices will be coming in for the credit hedge funds." He told Financial Advisors and investors that it is too early to be buying a lot of speculative credit. Gundlach called "credit hedge funds" one of the "malinvestments" out there, and he warned investors to "Be Careful!"
"The market says a lot of these bonds will default unless there is a monster rally in commodities, which I am not predicting there will be," Gundlach explained. Although, Gundlach was sure to point out, "Gold at least has started to rally, which might indicate a short term bottom in junk." He cited the performance of gold mining companies as an indicator. "I still do think gold is going to $1400.00 (an ounce)," he predicted.
DoubleLine Capital is always pointing to verifiable economic indicators and trends to back up those towing the company line. Nothing is without a cause or correlated economic indicator (even Gundlach's jokes). Gundlach said that the reason he said in December that "the stock market is whistling through the graveyard" is that the S&P 500 versus high yield spreads are similar to pre-2008/2008 (Example - joke / economic indicator).
Gundlach said that the corporate spreads widening which began in June 2014 will continue. The spreads over metals and mining stocks are even wider than over energy, Gundlach showed on Bloomberg slides. "When the upgrade / downgrade (all rated bonds) ratio falls below zero, it's usually really bad. That's what's happening now."
DoubleLine Capital's Jeffrey Gundlach on TREASURIES
Gundlach said that nominal GDP (Currently at 3.1 percent) is "a great benchmark for the 10-year Treasury Yield." He added that "The 2.11 10-year yield is appropriately yielding." Gundlach explained, "The Treasury keeps living in a narrower and narrower range."
Gundlach believes that the health of manufacturing in the United States is indicative of where Treasury yields may be headed. "If the ISM Manufacturing Index continues to fall, you may see a breakdown in Treasury yields." He said that the ISM Manufacturing Index seems to indicate nominal GDP falling to 2 percent, which would also mean the 10-year Treasury at 2.11 is accurately priced. "It will give metrics on how to play the markets based on the set up we're seeing."
DoubleLine's slides showed that the 2-year Treasury Yield has been rising for five years and only recently has stopped rising; It is at 0.954. Gundlach says the 5-year Treasury is at 1.601. "If it breaks out to 1.80 or 1.90, the Fed has every intention of blowing up the short end of the yield curve - flattening (the yield curve)." As of January 12th, the 10-year was at 2.164, and Gundlach noted, "The 30-year Treasury is at 2.947." Regarding the 30-year Treasury, he said, "Should it break in the days or weeks ahead, rates might break to the upside."
DoubleLine Capital's Jeffrey Gundlach on THE DOLLAR
DoubleLine's Gundlach called the dollar "a very crowded trade". The dollar was at $98.832 on January 12th, and Gundlach said that he did not think it would break out. Gundlach tried to correct a lot of people that think "When the Fed tightens, the dollar will go up - wrong, wrong, wrong!" he said. "The dollar is not a good sign for the Fed raising interest rates; It is worried about importing disinflation," said Gundlach.
DoubleLine Capital's Jeffrey Gundlach on OIL
"Since I do not think the dollar is going to go up, I think there is a short term bottom in oil," said Gundlach. He said that on a technical basis, DoubleLine predicted that the bottom in oil would be today (January 12th). "All the negatives about oil are priced into the market," said Gundlach.
The DoubleLine founder, with his meteoric rise to recognition, holds his own forecasts in much higher regard than other analysts' forecasts. While giving thanks to buddy Jim Bianco for a few slides and noting Ed Hyman as the frequently cited "most well-respected economist in the market," he almost mocks predictions such as that of Standard Chartered - "Oil has dropped from $90 to $30, and Standard Chartered came out and predicted $10, but was probably predicting $150 at $90," Gundlach said.
Continuing negatives such as Al Qaeda and ISIS attacks in Jakarta, Indonesia and a Westerner hotspot in Burkina Faso, West Africa possibly contributed to oil closing below $30 on January 15th. This would be in alignment with Gundlach noting his previous prediction when oil was at $70 that if it dropped to $40, we would begin to see international geopolitical violence heat up. The lower oil goes, the more Gundlach's interconnected prediction plays out, day by day.
Gundlach advises that oil might experience a 50 percent rise from current levels, but he warns that "even that number won't be enough to save what's going on in the energy markets." Gundlach points out that supply keeps widening over demand in oil and illustrates the widening gap and fact that the Saudis just keep producing oil despite there not being the demand. He does not see any signs of oil production slowing.
Jeffrey Gundlach warns holders of credit hedge funds in general. He warns them regarding being very careful with speculative credit, but especially junk in energy names. The problem he explained - "Nobody can hedge for $30 oil for years to come when oil was at $90; it would bankrupt them."
Gundlach is sure to address Master Limited Partnerships as an asset class for those that still might not be in the know. "MLPs were a massive malinvestment," he says. This echoed a warning last summer from Richard Bernstein of Richard Bernstein Advisors; "Everybody's up to their schnozes in MLPs." Likewise Josh Brown of Ritholtz Wealth Management ("Downtown Josh Brown aka "Reformed Broker") tweeted in August 2015, "Repeat after me - MLPs are not f***ing bonds. Bonds are bonds." Brown pointed out that if something is yielding four or five times Treasuries, one is taking four or five times the risk, and if investors must endure a 40 percent crash, they come out way behind all because of a blind search for yield.
DoubleLine Capital's Jeffrey Gundlach on COMMODITIES
Broadening his thoughts on a possible short-term recovery in the price of oil, Jeffrey Gundlach believes we will see a short-term bounce in commodities in general. "It is quite remarkable how much commodities have dropped and how much they continue to drop," Gundlach said, calling the January 12th level of 75.8560 "really weak". He showed the extraordinary drop from 1/9/96 to 1/12/15.
Gundlach stopped short of calling a temporary bottom in commodities prices, as "The MSCI Emerging Markets Index and commodities are very closely correlated," he said. "If the emerging markets go from 500 to 300, there could be another 40 percent decline in emerging markets, which continue to drop every day," he added.
It is interesting to note that Investment Bank Goldman Sachs came out on January 15th and predicted a bull market in commodities at the end of 2016. Goldman Sachs represented on CNBC that it thinks increasing liquidity is coming this year in the commodities' markets, the markets will better absorb excess surplus and the supply demand imbalance will be brought under control. This type of "magical thinking" is already at odds with DoubleLine's predictions of short-term bounces, secular rises and increasing supply demand divergences, especially in energy.
Goldman Sachs has really beefed up its commodity fund offerings in the last decade, and Morningstar, the ratings agency, continues to show the Investment Bank's commodity strategies underperforming the commodities'' benchmarks. So, the Investment Bank definitely has "skin in the game".
DoubleLine Capital's Jeffrey Gundlach on CHINA
Gundlach thinks that people have been lulled to sleep by thinking "China has a birthright to always grow at 7 percent and has an economic model that is superior to free market capitalism." The Shanghai Composite Index had already expanded its 2015 crash to 3016.74 (January 12th), and fell below 3000 to close down year-to-date 18 percent by the end of the week (January 15th). "Obviously people are desperate to buy the Shanghai," Gundlach deadpanned. Gundlach called China a "huge variable in the global economy" right now. DoubleLine showed slides illustrating China's outsized share of trade exports and its voracious need for and consumption of global natural resources.
China's currency devaluation continues to make global news. Gundlach said, "The Yuan will have to be allowed to weaken further." He cites the furthering of the devaluation of the Yuan as "one of the reasons we are in for a rough first half of 2016."
The way that Gundlach reads market data is like a seasoned card counter in Vegas; His analysis is instinctual, and his instincts are usually right.
Lisa Ditkowsky, CFP®
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