Yesterday, I listened to Jeffrey Gundlach’s “2015 Market Outlook” webcast along with much of the financial community. DoubleLine’s Gundlach has certainly peaked in his notoriety as one of the most prestigious bond fund managers, and he continues to draw fascination for his timely insights into global economic machinations.
One of the bearish themes that Jeffrey Gundlach noted throughout his call is that the U.S. consumer is focused on the positive impact of the oil space, while Wall Street has yet to fully embrace the impending negative aspects.
He noted that currently 35% of the S&P 500 capital expenditures are represented in energy companies, though that spending could completely evaporate later this year — ultimately leading to employment cuts, potential bankruptcies for leveraged energy companies and deeper impact across the high-yield bond spectrum.
The Energy Select Sector SPDR (ETF) (XLE) has certainly been pricing in some of these possibilities as crude oil prices continue to decline. Despite some modest rallies, XLE is down 25% off its 2014 high. The one thing I have noted recently is how much buying the XLE has seen throughout the decline — you’d typically expect widespread distribution across energy stocks rather than just accumulation in energy ETFs.
That said, Gundlach was bullish about a few broader areas of the market. Here are three he likes for 2015, as well as a few parting warnings:
Jeffrey Gundlach on the U.S. Dollar
Click to Enlarge Jeffrey Gundlach spoke favorably about the underlying fundamentals in the strong U.S. dollar despite its rapid ascent last year and how currency trends can be “persistent and long lived.”
However, he candidly stated that “I know it’s a crowded trade. I’m as uncomfortable as everybody else.”
The PowerShares DB US Dollar Index Bullish (UUP) has been a big mover as declines in the euro and Japanese yen continue to fuel a flight to the dollar. The overarching themes of lackluster growth and quantitative easing efforts in these foreign developed countries make the U.S. dollar, and concomitantly U.S. Treasuries, an attractive trade for overseas dollars.
Jeffrey Gundlach on Gold
Click to Enlarge Gundlach also spoke favorably about gold as a flight to quality instrument. He thinks that gold will move higher as the stress to the financial system from the repercussions of oil deflation takes hold.
We have already seen the SPDR Gold Trust (ETF) (GLD) advance 6% since the beginning of 2015 as it comes off multiple years of heavy declines. This sector certainly bears watching as volatility in both stocks and commodities may favor investors seeking out hard assets with non-correlated returns as a hedge against other investments.
Jeffrey Gundlach on Treasuries
Click to Enlarge On interest rates, Gundlach noted how far off economists were in predicting the outcome of the 10-Year Treasury yield at the end of 2014. He believes that the trend in higher bond prices (lower bond yields) will continue in the first half of this year and probably will overshoot most investors’ expectations.
The strong price trend in the iShares 7-10 Year Treasury Bond ETF (IEF) has continued to stretch further than many believed possible, and has gone almost vertical since the beginning of 2015. On a relative basis, the U.S. 10-year yield near 1.8% still is far more attractive than other developed nations in Europe and Japan.
There is obviously no concern right now for a rate-hike scenario being priced into the market. Instead, investors are focusing on sheltering their portfolio from low global yields and a volatile stock environment.
Of course, Gundlach also mentioned a few bullets of caution …
Jeffrey Gundlach on Bitcoin, TIPS and More
- Gundlach did not speak favorably about bitcoin and noted it was virtually (pun intended) the worst performing asset class of 2014.
- The stock market has been positive for six consecutive years (2009-14). Stocks have not been up seven years in a row since 1871.
- He still feel that Treasury Inflation-Protected Securities (TIPS) are for losers because near-term inflation expectations are actually pointing toward negative trends. He did note that they are cheap on a relative basis, but the overriding argument to own them is flawed in this market. Avoid the iShares TIPS Bond ETF (TIP) for the time being.
- He is “afraid of mall REITs” due to more retail sales moving online and shrinking need for conventional shopping centers.
- He noted that “It’s a little late to buy the Shanghai (China)” after last year’s run and that you probably don’t want to own European stocks or bonds right now.
- Also beware of leveraged ETFs with respect to compounding and tracking error over time. He noted the big decline in the DirexionShares Daily Gold Miners Bear 3x Shares (DUST) for 2014, despite the fact that the Market Vectors Gold Miners ETF (GDX) was down heavily last year as well.
No one man knows the fate of the markets, and most will probably take these comments with a grain of salt. However, those that take a wider macro view in their investment analysis may be intrigued by some of the correlations that Jeffrey Gundlach noted.
Many of the observations Gundlach made in his monologue mirror our own thoughts on the market at this juncture. Our most recent January 2015 client memo outlined several salient points on interest rates, volatility and areas of perceived value as well.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. He has owned the DoubleLine Total Return Fund (DBLTX) for himself and his clients for many years now as well as various other Doubleline funds along the way. To get more investor insights from FMD Capital, visit their blog.