Thoughts from the Bond King

The S&P500 inched up another 1.0% last week.  In what many experts are calling surreal, the melt up continues.  But there’s really nothing surreal about it.  It’s fairly simple really, and The Economist’s Buttonwood column locked in on the true explanation: “When you buy equities, you are betting of Ben [Bernanke]”.

Technical divergences abounded.  Volume again went down.  Volatility jumped.  Momentum continued to wane.  Money flows were not as strong as they were a few months ago.  The advance-decline line is weakening. 

But none of this matters, as long as Ben keeps printing.  And as long as no big shock event emerges.  So the key signal to watch will be the market’s behavior as QE2 winds down in about two months.

The macro data were mixed. Retail sales (headline and ex-auto) in January were lower than expected.  Housing starts were better than expected; permits were lower.  Still, starts in January were 2.6% below the level in January 2010.  Industrial production missed badly; it was expected to rise 0.5%, but instead it fell 0.1%.  PPI and CPI came in hotter than expected, but that’s no surprise to analysts who point to the negative side-effects of the Fed’s massive printing programs.  Initial jobless claims met expectations, solidly in the 400,000 range.  Leading indicators disappointed.  The Philly Fed survey beat estimates, but the prices paid (less prices received) component was higher than at any point since 1979.  This does not bode well for corporate profit margins.

Gracing this week’s cover of Barron’s is Jeffrey Gundlach, who is being promoted as a better bond fund manager than even Bill Gross, perhaps one of the most successful bond managers over the last 25 years. 

Gundlach reads the economy well; for example, he accurately forecast the housing crisis in 2006.  But more importantly, he has translated his insightful macro analysis into outstanding investment performance, beating the legendary Bill Gross over the last several years.

What does Gundlach see now?

With stocks, he thinks “the Standard & Poor’s 500, which is now over 1300, will hit 500 in the next couple of years.”  In other words, the stock market is at high risk of falling by almost 65%.

What a coincidence; so does PNN Capital Management.

With respect to housing, “Gundlach expects home prices to fall by another 10% to 15%.”

That’s funny; so does PNN Capital Management.  Actually, another 15% to 30% drop cannot be ruled out.

What about Treasuries?  Gundlach “sees little chance in the near term of a surge in inflation that would send Treasury bond yields soaring.”  In fact, Gundlach considers that a renewed slowdown in the economy would drive the 10-year bond yields sharply lower”.

Bingo; so does PNN Capital Management.

Finally, how about the sell-off in the muni bond market.  Gundlach “foresees a major collapse in the municipal bond market, beyond the declines to date”.  And he’s preparing to swoop in with purchases “in the next year or so when the predicted apocalypse arrives”. 

Wow.  So does PNN Capital Management.

Thank you Jeffrey Gundlach.  While nobody can be sure with absolute certainty what will happen in the markets in the future, it’s still reassuring that the “Bond King” sees the markets in ways that are very similar to one’s own.

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