In a cryptic email sent to Reuters today, bond King, Jeff Gundlach, suggested the market wasn’t panicking enough to put in a bottom. He warned of credit fund bankruptcies and other niceties.
Also, he suggested not to go about ‘flopping’ around in this market, as you’re sure to get hooked.
Credit fund bankruptcies are coming,” said Gundlach, who warned in December that the Federal Reserve might regret raising rates because of deteriorating financial conditions. “It’s not a market to be flopping around in. The trends are relentless and powerful.”
Gundlach, in emailed comments to Reuters, said: “Clearly, weaker-than-hoped-for global growth is the major factor in this weakness” in credit markets. “That and the credit overload I have been warning about ad nauseum.”
Gundlach said the CBOE Volatility index needs to be above 40 before a bottom can be made in the high-yield junk bond market. On Monday, the VIX was up 16.4 percent at 27.21. The VIX, known as Wall Street’s fear gauge, has not touched 40 since late August.
The collapse last year of Third Avenue Management, a near $1 billion junk bond fund which marked the biggest failure in the U.S. mutual fund industry since the height of the financial crisis in 2008, had ignited concerns that less liquidity in the corporate bond market would cause more volatility.
“This is not a trader’s market,” Gundlach said. “It is a freight train that you want to stay in sync with. There’s too much order and belief in markets in spite of big losses.”
He said equities are in a bear market, with the Nasdaq down 18.3 percent from its highs and “many, many, many stocks down over 25 percent from their highs.”
Gundlach is right. Despite the record drop in stocks, volatility, the index that measures fear, has been somewhat subdued.
People will only get fearful when Yellen pens a letter to CNBC that reads: “Dear Idiots, you are on your own. PS – I killed Ben.”
SPX could be at 900 and VIX would remain low because everyone, like me, is 100% certain the advance is coming. This is why we go lower.
Why is Gundlach getting some much ink? He’s right up there with Gartman in throwing out attention getting headlines:
On March 9, 2011, Gundlach was quoted on CNBC that “Munis Are The New Subprime.” “You’ve got a history of low defaults, which is comforting. But that kind of sounds like what subprime sounded like back in 2006,” Gundlach said. Gundlach pointed out that even if defaults do not ultimately climb as high as critics like Meredith Whitney have warned, muni bonds will likely trade much lower. “Between here and the end game, lies the valley. And the valley is full of fear. I think the muni market is going to go down by at least, on the long end, something like 15 and 20 percent,” he said.
Gundlach reportedly liquidated 55 percent of his personal holdings in municipal bonds on Thursday March 10, 2011.
However, the decline he predicted did not occur: on March 10, 2011, the Bond Buyer Index closed at 106.151904, with this index closing at 119.886063 12/30/2011 the last day of 2011 or an improvement of +12.9%. The index closed at 129.99416 on 12/31/012.
At the time, Gundlach also stated: “Nobody owns California general obligation bonds because they think it’s an improving credit story,” he said, drawing chuckles from the audience.
However, since March 2011, the ratings of California General Obligation bonds improved from A- to AA- by Standard and Poors and from A1 to Aa3 by Moody’s