January 27, 2009
In a January 21 conference call with investors, Jeff Gundlach, Chief Investment Officer of the TCW Group, provided a broad overview of the markets, identifying those sectors that are attractively valued for 2009, and those that are not.
The biggest investment dilemma for advisors, Gundlach said, is whether to go from a defensive posture – seeing cash as the only safe option – into “some attractive sectors that might seem cheap.”
Some sectors of the credit markets are attractively priced, he concluded, but the US equity market is “not cheap yet.”
The “inflation program must gain traction” before the equity markets improve, he said, pointing to an improvement in commodity prices as the likely signal of such a shift. “At some point, commodities will go back up with a vengeance,” said Gundlach. He offered no specific forecast for the timing of this move.
Over the last 18 months, the dollar (when measured against a weighted basked of currencies) has moved inversely to commodities prices, culminating in the current situation where commodity prices have plunged and the dollar has strengthened. Gundlach believes a surge in commodity prices will be accompanied by a decline in the dollar.
Gundlach walked through each sector of the fixed income markets (providing the historical spread data below) and offered his forecast:
- Floating Rate ABS – These currently trade at record-wide spreads of 900 basis points over LIBOR. Since LIBOR is currently zero, they yield 9%. There is no principal paid and no real demand for these securities. Gundlach expects the Fed “will do everything it takes to keep short-term interest rates low for at least all of 2009.” Consequently, he does not like this sector, and he believes it will be the last to rally.
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