Doubleline Capital Looks Back at 2011, Ahead to 2012 for Markets

Below are tons of quick-hit, forward- and backward-looking observations about the economy and the markets from Jeffrey Gundlach’s DoubleLine capital call on Thursday, Jan. 5.  Thanks to Nathan Dutzmann for the analyst coverage. 

Europe

  • Money markets’ exposure to European banks is trending down rapidly.
  • European banks are living on ECB life support.
  • Italy’s nearly static, just-under-7% bond level appears to be price fixing via ECB bank lending.
  • Enormous amounts of Italian debt need to be rolled over in 2012.
  • Increases pressure, could accelerate crisis.
  • European GDP is anemic; even Germany downgraded its 2012 growth estimate to 0.6%.
  • Unemployment rates are high and growing in Europe.
  • Workers per retiree is already low (around 5) and projected to get lower (2-3) in the next couple decades.  Similar story, but not quite as bad, in U.S. 

Bond Markets 

  • 2011 flat performance represents global outperformance by U.S. stocks.
  • Today is an interesting example: S&P up today although Europe down; rush to put capital to work somewhere?
  • In fixed income, risk-taking was rewarded in 2010 in all categories (high yield corporate, emerging, etc.).  In 2011, treasurys and guaranteed mortgages did well, while high yield did badly.
  • Same is true if sorting by credit rating: 2010 the opposite of 2011.
  • Strength of U.K. bonds perhaps the biggest surprise story of 2011. 

The Dollar

  • U.S. dollar continues to benefit from global shock/slowdown.
  • Emerging market equities were a double disaster (price and currency return)
  • Possible contrarian case here.
  • Gundlach strongly believes dollar index is headed higher.  DoubleLine is 100% in U.S. dollar-denominated assets. 

Precious Metals and Energy

  • Speculative fervor around precious metals appears to be over.
  • A further correction may happen, but shouldn’t crash either.
  • Natural gas (especially nat gas MLPs) makes sense for a 10- to 20-year hold, but is down a lot over the past year. 

Equities

  • Shanghai Index is unbelievably weak; not suggestive of a healthy China.
  • Emerging market equity makes sense over the long run (10-15 years).
  • Good candidate for dollar-cost averaging.
  • Expect a major roller coaster as global crises continue to get sorted out.
  • S&P 500 had a wild, schizophrenic year.
  • Lots of people in cash.
  • 2012 “shot clock reset” should give strong January, petering out against a bad global economic scenario.
  • Not likely to be up much in 2012; the rally since Sept. 30 has eaten up much of the extant undervaluation.

Treasuries, Munis, Junk 

  • Treasuries increasing as percentage of bond market.
  • If you’re indexing, you own way too much (and increasing) short-term Treasuries at zero yield.
  • Even 2-year Treasuries “nailed to the mat” at 25 bps.
  • Don’t expect rates to skyrocket in 2012, but don’t expect to profit from being long Treasuries either.
  • Eroding default fundamentals in high yield credit (DoubleLine is out of high yield), but high yield bonds have gone from highly overvalued vs. long-term Treasuries to somewhat undervalued.
  • Munis were up in 2011, but have underperformed Treasuries, despite very low defaults.
  • Muni market seems cheap right now.
  • Refis mostly aren’t happening, even with record low interest rates.
  • Small refi uptick in prime loans only.
  • Delinquency rates remain high and aren’t changing, except in prime where they’re getting worse; servicers are liquidating at the same rate new delinquencies are occurring.
  • Still a 3- to 5-year overhang in defaults.
  • In an election year, the threat of a sovereign debt crisis seems very low. (Budgets will get passed as necessary, etc.)
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