GundlachsForecastfor2014

ByRobertHuebscher January21,2014 Inhis30yearcareerasafixedincomemanager,JeffreyGundlachhasneverseena forecastassolidifiedacrosseveryassetclassasistheconsensusfor2014.Investors expectstockstooutperformbonds,goldtobealoser,commoditypricestohead lower,domesticmarketstooutperformnonU.S.marketsandthedollartobestrong, accordingtoGundlach. Butmanyofthoseviewsarewrong,hebelieves. Gundlachsprojectionshaveearnedhimareputationasacontrarianandsuccessful investor.Gundlach,thefounderandchiefinvestmentofficerofLosAngelesbasedDoublelineCapital, deliveredhis2014forecastinaconferencecallJan.14. Theconsensusiswronginitsassumptionthatinterestrateswillrise,accordingtoGundlach.Idontthink thatlongtermbondsaregoingtodoallthatbadlyontheyieldcurvebasis,hesaid. HistalkwastitledTheYearoftheHorse:LettheRaceBegin!andtheslidesfromhispresentationare availablehere. Gundlachisrecognizedasaprescientforecaster.Forexample,heforesawthecollapseofthehousing marketleadinguptothefinancialcrisis.Buthisforecastlastyeardidnotturnoutthatwell.Ayearago,he saidhewouldnotbesurprisedifyieldswerelowerattheendof2013thantheywereatthebeginning.In mid2013,hepredictedthe10yearyieldwouldbe1.7%bytheendoftheyear.Ityielded3.04%instead.A yearago,hesaidU.S.equitiesofferedapoorriskreturntradeoffandpredictedthateconomicgrowth wouldbeslow,volatilitywouldbehighandChineseequitieswouldperformwell.Noneofthosewere accurate.However,hedidcorrectlypredictthepoorperformanceofTreasuryinflationprotectedsecurities (TIPS),outperformanceintheJapanesemarkets. LetslookatGundlachsforecastforFederalReservepolicy,variousfixedincomeassetsubclasses,stocks, commoditiesandothermarkets.IllconcludewithwhathesaidaboutApplesstockandthenextbig, disruptivetechnology. Fedpolicy,interestratesandthefixedincomemarkets Barringanysurprisesfromtheeconomyorspikesinbondmarketvolatility,GundlachsaidtheFedwill continuetaperingandbeoutofthebondbuyingprogrambytheendoftheyear.

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GundlachsaidthattheFedmightevensurpriseinvestorsbyallowingshorttermratestoriseatsomepoint duringtheyear.Hedoesntexpecttheyieldcurvetosteepenthespreadsbetweenlongandshortterm ratesarealreadyatrecordhighs. Nonetheless,Gundlachsaidheexpectsshorttermratestoremainlowinto2016,althoughthemarkets faithintheFedtokeepthosepromiseswillbeshaken.TheshortendoftheTreasurymarketwillexperience morevolatility,hesaid.TheFedlostalittlebitofcredibilityonitssocalledguidancestrategyalready,he said,andthatmaybechallengedfurther. Gundlachsaidthedownwardmovementinthe10yearTreasuryyieldwillcontinueintheneartermand thattheriseinyieldisfairlycomplete.Intheshortterm,hesaidbondyieldmaydropto2.5%onthe10 year. Mutualfundflowsmayworkagainstbondinvestors.Gundlachsaidthatmuchofthemoneythatwentinto bondfundsin2012wasinvestedwithelevatedexpectationsandhasbeguntoflowout.Hesaidthose outflowsbeganinthemiddleoflastyearandwillcontinueduringthisyear. Drivingbondpriceshigherandstockslowerwillbeinvestorswhoneedtorebalancetomaintaina60/40 assetallocation.Gundlachsaidthoseinvestorswouldhavetosell7%oftheequityassetsandreinvestin bondsasaresultof2013pricemovements. Inflationiskeepinginterestrateslow.Theresnoinflationinthepipeline,hesaid.Deflationaryfearsin Europe,fallingcommoditypricesandminimalgainsinaveragehourlyearningsarepreventinginflation fromaccelerating,accordingtoGundlach. Pensionfundswillbeacatalystpushingrateslower,hesaid.Pensionplanfundinghasimprovedoverthe lastseveralyears,duetoequitypriceincreasesandlowerliabilities.Gundlachsaidpensionswillmoveto lockintheirimprovedpositionsbyshiftingtheirassetallocationtowardfixedincome. GundlachwarnedthatjunkbondinvestorsparticularlythosewhoarealsoshortingtheTreasurymarket couldfacethemotherofallliquidationcalls.IfTreasuryratesfall,ashortsqueezewouldconfront thoseinvestors.WiththeFedbuyingalargepercentageofgovernmentguaranteedbonds,Gundlachsaid thiscouldpropelaviolentmoveinTreasurybonds,asbuyersoutnumbersellers.Iwouldnothaveazero Treasuryposition,hesaid. BasedonaproprietaryrelativevalueanalysisthatGundlachsaidhehasbeenusingfor20years, investmentgradebondsareataveryrichlevelversusTreasurybonds.Buthighyieldbondsareevenmore overvalued.Gundlachsaiditwouldbemoreappropriatetocallthemnotsohighyieldbonds.Still,he doesntexpectahighrateofdefaultsamongthosebonds.Ithinkweskippedadefaultcycle,hesaid. Yetanothersignoflowerratesisthevalueofemergingmarketcurrenciesagainstthedollar.When emergingmarketsstrengthenagainstthedollar,ratestendtogodown,hesaid,andrecentmovements suggestloweryieldsforthenearterm. -2 Copyright 2014, Advisor Perspectives, Inc. All rights reserved.

Mortgageratesareheadingup,Gundlachsaid,andthehousingmarketissofterthanpeoplethink.Data suchasexistingandnewhomesalesandhousingstartsareofftheirlowsin200910,buthesaidtheyve onlyrecoveredbacktolevelsthatusedtobecharacteristicofthedepthsofarecession.Demographics andhouseholdformationarewildlyagainsttheconceptofhomeownershipgoinghigher,hesaid. Municipalbondsareslightlyovervalued,hesaid.Investorswhoarewillingtotoleratevolatilitywillget rewardedfortheriskinPuertoRicosbonds.Toomanypoliticiansrelyonvotestiedtothestabilityof PuertoRicotoallowacrisisthere,accordingtoGundlach.PuertoRicosbondsaregoingtomakeittothe othersideofthevalley,hesaid. GundlachstilldoesntlikeTIPS,buthisdistasteforthemhaswanedastheirpriceshavefallen.Hewarned, however,thatTIPSpricesarelikelytodecreasefurtherbeforeinflationsetsin,becauserealinterestrates willriseinadvanceofaspikeininflation. Stocks Gundlachpointedtoanumberofominoussignsforthestockmarket. Hedisplayedchartsshowingthattherunupinthestockmarkethasnearlyparalleledtheincreaseinthe Fedsbalancesheet.Hesaidcontinuedtaperingmightmeanweaknessincrementallyforriskassets, whichwouldtakeawaysupportforthestockmarket. Margindebtdoesntgetenoughattention,Gundlachsaid,anditisataveryhighlevelnowconsistent withlevelsattheprevioustwomarketpeaks.Youshouldwatchthemarginsveryclosely,becauseifit hooksoverandstartsheadingdown,itremovesanotherkeysupportforthestockmarket,hesaid. TodaysbullishmarketsentimentreinforcesGundlachsbeliefthatstocksarenearingtheirpeak. Evenmarkettechnicalslookbad,hesaid,withthestockmarketextremelyextendedaboveits200day movingaverage. TheaveragepriceoftheS&P500duringthesecondhalfof2013wasapproximately1,750,andGundlach saidinvestorswillgetnervouswhenthepricedropsbelowthatlevel,asinvestorswhoweredollarcost averagewillbeunderwater. Abouteverythingthattendstocharacterizethevicinityofatopintheequitymarketseemstobein place,hesaid.Thestockmarketisatbestfullyvalued,maybealittleover. Stockmarketvolatility,whichwasextremelylowin2013,islikelytoincrease.Gundlachsaidthisis consistentwiththisbeingtheChineseyearofthehorse.

-3 Copyright 2014, Advisor Perspectives, Inc. All rights reserved.

Commodities,currencies,gold,Appleandthenextbigtechnology Goldwillseeapriceofatleast$1,350atsomepointduringtheyear,Gundlachsaid.Itisnow$1,209.He addedthathelikesgoldminingstocksasadiversifierwhichhasbeenhispositionforthelastcoupleof yearsandasanoutrightpurchase. Forothercommodities,Gundlachofferedonlyvaguepredictions.Itseemstomewearegoingtohaveto seesomeformofvolatilityinthecommoditymarketduring2014,Gundlachsaid.Commoditiesaregoing tohavetohaveamovethisyear.Imnotconvincedwhichwayitsgoingtobe,hesaid. Foratleastthepastseveralyears,Gundlachhasfavoreddollardenominatedinvestinginemerging markets,andheexpectsthedollartoheadhigherin2014.Thatcallisnowalignedwithconsensusviews, althoughhesaidthatasrecentlyas2012,localcurrencyemergingmarketfundswereextremelypopular. OnNov.7,2012,GundlachsaidApplestockwouldfallto$425.Atthetime,ittradedat$560pershare.By thebeginningofMarch,Applehadfallentobelow$420. Now,withApplebackto$541asofJan.17,Gundlachsaidhelikesitinaportfolio.Hesaidithasverylow correlationtootherstocksandgeneratesalotofcashflow.Hesaiditmaygoto$600in2014,butits unlikelytoexceedthatthisyear. Gundlachconcludedthecallwithalongtermprediction:Threedimensional(3D)printingwillbeoneof themostmonumentallytransforminganddisruptivetechnologies.Hesaid3Dprintingapplicationsextend fromfabricatingautomobilereplacementpartstobuildinghomespotentiallyinlessthan24hours. 3Dprintingispartofanongoingtrend,Gundlachsaid.Aclassoflaborersisbecomingunemployableas theirskillsarebeingreplacedwithtechnology.Investorpsychologyandinvestmentanalysishavenotfully incorporatedthepotentialofthistransformation,accordingtoGundlach.

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