GUNDLACH ON THE OUTLOOK FOR THE BOND MARKET
Josh Brown has posted a monster summary from some recent comments Jeff Gundlach made in NYC this week. I highly recommend reading the whole piece as he provides some really valuable investment insights. I am posting a brief snippet of some of his fixed income ideas here:
On Government Bonds: The big winner this year in asset classes is Government Bonds, up 9% year-to-date.
On Duration: Basically he says ‘No, thank you.” to anything with a yield under 1% – “this glass of water is more worthwhile than a government bond under 5-year duration”. DoubleLine had been loading up on long-dated Treasurys since March in anticipation of the end of QE2. The trade is working right now obviously. Markets don’t wait for some publicly known date and then adjust to something, they anticipate and game it in advance, which is what the end of QE2 trade was about. People looking at the 30-year bond lamenting the low yield forget that it is the price action that made the trade work – the long bond’s price can move 20%. Says the 30-year has not yet “punched through” to the yield lows of 2008 although the 5 and 10-year bonds have. It definitely could but is short-term overbought.
On Corporate Bonds: Investment grade corporates have done extremely well but the below investment grade (junk) market “has absolutely fallen apart”. Junk bonds will really hit the wall and face serious wave of defaults beginning in 2012 as all the refinancings of 2009 and 2010 vintage come due. Many of these companies have improved cash flow by lowering their interest expense with refis but they haven’t reduced their indebtedness overall. That said, pension funds are still underfunded and will be forced to use investment grade corporates to make their assumptions, this will keep a “technical bid” beneath that market.
On Muni Bonds: “They’ve done well but can this market really stand up to a wealth tax” imposed on the income?
On Money Market Funds: Why would anyone own a non-government money market fund? “This is what we call ‘Reward-Free Risk’.”
On Mortgage Bonds and the Big Trade: This is where Jeffrey began his career and what he knows best. ratings agencies don’t understand how to rate securitized mortgage pools and he takes advantage of what the the repayment risk that they misperceive as credit risk. He is pairing mispriced GNMA bonds with long-dated treasurys to put together a risk-offsetting bond position that offers both interest rate-risk protection and a higher yield than the other total return bond funds. There is no repayment of capital or leverage involved in getting a higher yield, just a better constructed trade than the next guy.
On Emerging Markets Fixed Income: “A secular improving credit story”. G7 countries have 4 times the debt-to-GDP ratio of EM nations. He is blown away that EM Debt trades at “twice the yield of developed country debt and triple the fundamentals”
Check out the whole piece at Josh’s site.
Been a fan of Gundlach for a while. Converted a significant position in BND into DBLTX and DBLFX and very happy that I did. Interestingly, he is sitting on a large cash position in both funds in anticipation of buying assets in distress.
For those of us who trust Gundlach this is why we like him.
I am a smaller scale investor and I bought Gundlach’s Class N fund DLTNX at no load back in March this year. I am very happy with the results. I used to own TCW Total Return bond fund two years ago back when Gundlach was managing that one and achieving great results. His returns over the past 5 yrs beat the Bond King Bill Gross’s PIMCO fund by a lot. I still think it makes sense to buy, and to hold, Gundlach’s DoubleLine Total Return bond fund, even though yields have come down a lot. The risk in bonds is greater now, but Gundlach’s skills have a better than even chance of providing a mid single digit annual return.
Cullen, Thanks for linking up to Jeff G. It was his commentary (i read on here) a few months back, along with some others that crystalized my thinking about going long in size (and some with leverage) 30 yr. bonds back around the end of June. I am so grateful for the internet and those who share their wisdom on it for the benefit of others.
TNO
Enjoyed Josh’s posting of this…looking forward to his book…thanks for pointing us to the post, He links to his Arnott luncheon notes which are worthwhile as well.
Have you seen this from Pritchard?
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100012332/nein-nein-nein-and-the-death-of-eu-fiscal-union/
“Repeat after me:
THERE WILL BE NO FISCAL UNION.
THERE WILL BE NO EUROBONDS.
THERE WILL BE NO DEBT POOL.
THERE WILL BE NO EU TREASURY.
THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.
THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.
Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.
It has certainly been an electrifying few weeks.”
Martin Wolf is standing on his tippy toes to sound the alarm as well..and Krugman. You can’t call an 11,000 Dow “blood running in the streets” but some smart people are smelling something coming.
You may want to also look into the new Doubleline/RiverNorth Strategic Bond Fund(RNSIX)
If the market behaves at all like we saw in late 2008, this fund should be able to capture huge alpha by selling the liquid bonds (Gundlach’s segment) and buying distressed closed-end debt funds at monster discounts from NAV (relative to their historical spread). Back in 2008, my firm was able to bid on some high quality debt cefs at discounts up to 30% from NAV. The gap then closed fairly quickly once markets stabilized.
Greed,
This one is interesting. I have it on my watch list. Very new though.
The webinar I watched was pretty compelling but I would like to listen in to the next one as I am not quite sure of the overlap that exists between the various funds. It seems to me that part of RNSIX includes DBLFX as its core holding.
Any thoughts?
You are correct – it does actually behave like two funds. What’s nice is that the managers decide if the opportunities in the closed-end funds space (RiverNorth’s expertise) are sufficient to shift assets from Gundlach/Doubleline.
Gundlach (and myself) believe that there will be ample opportunity to pounce on CEF values during times of panic. This fund does the reallocation / toggle for you without having to do your own CEF research and watch closely to seize the opportunity (which may only last for days or hours)
Good catch on RNSIX. Thanks.
Schwab lists it available as a no load with a $100,000 minimum, $50 transaction fee and a 2% redemption charge if sold in under 90 days. Do you know of better terms through other brokers? Thanks.
Alan,
You can pick up the “retail” share version, RNDLX, with a lower minimum ($3000) at Interactive Brokers (one of my preferred brokers). They charge about $15 to purchase. Be aware the retail shares have about 0.4% higher expense ratio. I think they automatically convert to Institutional once you cross $100k.
http://www.interactivebrokers.com/en/trading/mf.php?exch=Rivernorth
Only no-load funds with no early redemption fees are offered. In some instances, IB may receive a 12b-1 fee from a mutual fund company. See individual prospectuses for details.
Delivery of prospectuses will only be made electronically and not by postal mail.
All dividends will be automatically reinvested.
Minimum size on initial fund order is USD 3,000. Subsequent minimum order size is USD 100.
Mutual fund orders are accumulated during the day and transmitted to the fund at 15:59pm for pricing.
Investors are prohibited from purchasing a fund for 60 calendar days after any portion of the fund has been redeemed or exchanged.
Money market mutual funds require a 200,000 purchase minimum.
Funds are only available to customers who are U.S. legal residents and have a U.S. address.
Funds are not available for our Brokers and their clients.
Thank you.
I thought v. intresting JG said two thirds of his persoanl money and 50% of high net worth clients monies are “outside of the financial system”
Personally I have been cash, watchlists and rental units. I am no why qualified to figure this market out.
“JG said two thirds of his persoanl money and 50% of high net worth clients monies are “outside of the financial system” ”
Can you please clarify what is meant by “outside of the financial system”? Does that mean real estate, physical precious metals, physical commodities? If one buy futures contracts on things like metals and commodities, the money is still technically within the financial system, am I correct?
Humble,
This is the note provided from the article link:
“On Asset Allocation for the Ultra High Net Worth: Jeffrey says his own assets are now 2/3rd’s outside of the “financial system” other than his ownership stake in DoubleLine. This means fine art, gold, gemstones, rental property etc. He says the ultra wealthy should have 50% of their assets outside of the financial system.”
Keep in mind that his net worth is quoted to be at least $90 million.
CW:
Thanks for the reply, especially “Keep in mind that his net worth is quoted to be at least $90 million.”
I’ve tried buying some collectibles from the US Mint. The problem is once you are serious about that type of investment, you will have to deal with other issues like storage, portability, safety etc. I really couldn’t find practical ways to manage those issues. So I pretty much gave up.
Actually, this is one thing I’ve been pondering: How does a retail guy, not with a net worth of 90million, but 3-5 million handle the situation. I’ve been sitting in cash and treasuries, and own no gold or rental property. Any thoughts on this are much appreciated from all.
CW, although the net worth is 90m (actually surprised it’s not more) to have two thirds of that outside the financial system is quite a lot, says more about the market than any commentors opinions. If you look at apartment buildings in some cities, there looks to be some good value and cash flow.
Paul. I am in the same position has you. If you agree with Shilling, JG and Pragcap, basically varying degrees of deflation or muddle through then my personal view is rental apartment buildings in good cities, strong balance sheet stocks w/divs.
At present i’m in Cash, which is probably were I will stay until Euro and now China develop into stability or worse. If worse I would hopefully move into some good funds and stocks on my watch list, then start making moves with the agents for the rental apartments in the areas I like.
I come here through out the day to learn and keep up to date on the macro. I like ECRI also. I am nowhere near qualified to move my money into different assets of this market so I stay out for now.
Good stuff. Gundlach has done well in the markets, though he clearly doesn’t understand MMT. This may end up hurting him eventually.
John/Paul,
Not sure where you guys live but you might want to consider getting involved in the Angel investing world. There are groups in most Metropolitan areas that you can join.
Angel/VC investing tends to be weakly correlated with stock markets (it might even be non-correlated)and as such for accredited investors it provides a unique way to diversify your assets. It also adds to the productive capital stock of the country – instead of investing in financial assets that don’t do anything you can help an entrepreneur grow the next generation of publicly traded companies. This is where future employment and productivity growth is going to come from.
It’s not altruism either. Expected returns are in the range of 25-30% CAGR. The key is investing in a lot of deals on a small scale ($10k/investment) with a group that has a track record and methodology. Most people look to allocate 5-10% of their liquid net worth to this area over time.
CW, good point. Also to note in this area of investing depending on the area you can get Tax credits, that can be can’t attractive.