Jeff Gundlach on High Yield Bonds, Ginnie Maes, Treasuries (CNBC, 3/9/2011)

Jeffrey Gundlach on CNBC
This video is old, but still relevant. Jeffrey Gundlach, CEO of DoubleLine Capital, which manages about $9 billion (check out DBLTX, the DoubleLine Total Return Bond Fund), gave his views on high yield bonds, Ginnie Mae securities and Treasuries on CNBC on 3/9/2011. He released a research report in January and was featured in Barron's ("The King of Bonds") in February. According to his website, Gundlach will appear on CNBC's Strategy Session on April 14. My next post will feature the deflation and muni bond segments.

Gundlach on high yield bond volatility, spreads to Treasuries and Ginnie Maes (not from an official transcript):
"The problem with high yield bonds is that their volatility is so high and they are priced for the reality of low defaults. For the last 12 months defaults on high yield bonds are under 1%; they were back in double digits just 2 years ago.."
"People compare high yield to Treasuries and they say Treasury bonds yield about 2%, and they use the whole basket of Treasuries; and then they say high yield to no losses, the way they quote it, yields about 6.75%. So it's a spread of almost 5 points; and they say, hey, that's historically average, so what's wrong with that? I point out that the volatility of high yield bonds is a lot more like the 20-year Treasury. It has a standard deviation persistently of 12. The Treasuries that they are comparing it to have a standard deviation persistently of 5. So you really can't compare high yield to the total basket of Treasuries, you need to compare it to the long Treasuries... The actual spread is only about 225 basis points, which is about as low as it's been in history"

Obama's Empty Gasoline Tank - Guest Post

Guest post by Llewellyn King for

Source: Wikimedia
Obama's Empty Gasoline Tank

There is a piece of doggerel which goes:

They said it couldn't be done.
So I went right to it -- that thing they said
Couldn't be done.
And I couldn't do it.

And that is the way it has been with presidents since the 1973 oil crisis. All of them -- from Richard Nixon to Barack Obama, who has just joined the club -- have wrung their hands and exhorted Americans to use less oil in general and less foreign oil in particular.

Nixon had his commerce secretary, Peter G. Peterson (he of enormous wealth these days), promise far reaching and revolutionary "initiatives" to tame our thirst for oil. But Nixon was out of office before these palliatives were revealed.

Gerald Ford, caught up in vicious inflation, partly linked to the cost of oil, launched the Energy Research and Development Administration (ERDA), combining the Atomic Energy Commission, the Office of Coal Research and other energy entities in the federal government. ERDA initiated many programs, while politicians invoked the Manhattan Project and the Apollo 11 moon landing. But the search for the Fountain of Eternal Energy failed.

Jimmy Carter wanted not only to solve the energy challenge, but to be seen to be solving it. Ergo, he expanded ERDA into the Department of Energy (DOE) and created a separate Synthetic Fuels Corporation. The latter failed after a short and unhappy life. No oil reached the pumps.

When the price of oil collapsed in the 1980s, so did hopes for many of the alternative energy sources, including ocean thermal gradients and flywheel energy storage.

To its credit, though at great cost, DOE, through its chain of national laboratories, kept searching. The result has been evolutionary improvements in many fields, and some really revolutionary ones in how we find oil and drill for it; these include seismic mapping, new drill bits and horizontal drilling.

Rep. Paul Ryan Plans $6.2 Trillion Spending Cut (Budget PDF, CNBC)

I embedded the House Budget Committee's Fiscal Year 2012 Budget Resolution, Rep. Paul Ryan's appearance on CNBC, and a 3-minute video showing a visualization of the House Republican's budget. The budget plans to cut "$6.2 trillion in government spending over the next decade compared to the President’s budget, and $5.8 trillion relative to the current-policy baseline." It targets Medicare, Medicaid, corporate welfare (Fannie Mae, Freddie Mac, energy and farm subsidies), the tax code and new health care law. I linked to articles, counterpoints and President Obama's Budget for Fiscal Year 2012 below. Thoughts?

Moody's Downgrades Portugal to Baa1, Bonds, EUR/USD Fall (Charts)

Portugal 10y Bond 8.76% (Bloomberg)
From Moody's Investors Service:

"London, 05 April 2011 -- Moody's Investors Service has today downgraded Portugal's long-term government bond ratings by one notch to Baa1 from A3 and placed the rating on review for possible downgrade. Concurrently, Moody's placed the government's (P)Prime-2 short-term debt rating on review for possible downgrade.

Moody's rating action was driven primarily by increased political, budgetary and economic uncertainty, which increase the risk that the government will be unable to achieve the ambitious deficit reduction targets set out in the update of its Stability and Growth Programme for 2011-2014 and put its finances on a sustainable trajectory."
(read full release at

Baa1 is three notches above junk (Ba1). As a result of the downgrade, yields on Portugal's 2-Year government bonds and 10-Year government bonds spiked to 8.971% and 8.766%, respectively (chart above). Greek government bonds still have higher yields.

EUR/USD is at 1.4164, down 0.41% since early Monday (1.4223, see chart). It was testing the 3 year downtrend. EUR/USD is also near the uptrend from early January, an important near-term support level.

Further reading:

Portugal Banks Threaten to Shun Sovereign Bonds: Report (Reuters)

Moody's cuts Portugal, says bailout needed urgently (Reuters)

Portugal Rating Cut to Baa1 From A3 by Moody’s on Bailout View (Bloomberg)

Portuguese Government Bonds Decline for 11th Day After Moody’s Cuts Rating (Bloomberg)

Portugal Hit With Downgrade (New York Times)

European Stocks Lower On Portugal Downgrade (Dow Jones Newswire)

Bernanke Speech on Clearinghouses, OTC Derivatives, Financial Reform (4/4/2011)

Fed Chairman Ben Bernanke ("The Bernank") gave a speech at the Federal Reserve Bank of Atlanta's Financial Markets Conference yesterday. It involved clearinghouses, OTC derivatives and financial reform. "Tonight I would like to discuss post-crisis reform as it relates to a prominent part of our financial market infrastructure--namely, clearinghouses for payments, securities, and derivatives transactions." In case you didn't already know, bank balance sheets leveraged with worthless subprime debt securities (built on fraud), OTC credit derivatives, "uncertain counterparty credit risk" (debt insurers) and failures made by credit rating agencies and bank regulators, all caused the financial system to collapse in 2008. Listen to John Paulson's interview with the FCIC for the full run down.

This is selected text; read the full speech at
"Clearinghouses and Financial Reform
Broadly speaking, the recent financial reform legislation bears on the future structure and role of clearinghouses in two different ways. First, it aims to increase the resilience of these critical institutions against severe financial shocks, the issue that I have emphasized thus far. Second, it also encourages the greater development and use of clearinghouses to address weaknesses identified in other parts of the financial system. Of course, increased reliance on clearinghouses to address problems in other parts of the system increases further the need to ensure the safety of clearinghouses themselves. As Mark Twain's character Pudd'nhead Wilson once opined, if you put all your eggs in one basket, you better watch that basket.

The theme of expanded use of clearinghouses as a tool to address other problems in the system is perhaps best illustrated by the derivatives provisions of the Dodd-Frank Act. Prior to the crisis, some of the same economic forces that had led to the development of clearinghouses for other instruments were already pushing industry participants toward greater use of clearinghouses for OTC derivatives transactions. For example, as one response to the growth of the market for interest rate swaps in the early 1990s, a clearinghouse was created in London in 1999 that, by the onset of the financial crisis, was handling a major portion of interdealer activity in those swaps. Also, in the years leading up to the crisis, the Federal Reserve Bank of New York initiated joint efforts with other regulators and market participants to improve clearing arrangements for credit default swaps. However, for several reasons, the willingness of market participants to move all derivatives transactions to clearinghouses was limited. Notably, many believed that the standardization of derivatives contracts that is needed for multilateral clearing imposed too high a cost on end users with needs for customized arrangements. Market participants also were concerned that the establishment of clearinghouse guarantees might require implicit subsidies from clearinghouse members with stronger credit to those with weaker credit.

These calculations, however, were substantially changed by the galvanizing events of 2008, notably the development of large and uncertain counterparty credit risks in many bilateral derivatives agreements. On the heels of the crisis, the Group of Twenty countries endorsed a policy of mandatory central clearing for standardized OTC derivatives. The aim was to reduce systemic risk in the financial system more broadly as well as to improve the transparency of the OTC derivatives markets. In the United States, title 7 of the Dodd-Frank Act incorporated a mandatory clearing policy for standardized derivatives. Other major countries are following suit. In the spirit of keeping a close eye on the basket, as dependence on clearinghouses grows, private-sector participants and regulators will need to review risk-management and member-default procedures for financial market utilities to ensure that they meet high standards of safety."

Muni, Corporate Bond Index Yields, Spreads, Nikkei VIX, Hang Seng VIX (Links)

The St. Louis Fed added BofA/Merrill Lynch Corporate Bond Indexes (US Corporate Master and High Yield Master II) and Bond Buyer GO 20 Municipal Bond Indexes to its FRED databases:

Corporate bond effective yields (BofA/ML)
Corporate bond option-adjusted spreads (BofA/ML)
Corporate bond yields (Moody's) -already in the database
Municipal bond yields (Bond Buyer)

I found the NIKKEI Volatility Index on (VNKY.IND). I couldn't find it during the Japanese crisis. Here is a chart; look at the spike.

NIKKEI Volatility Index (Source: Bloomberg)

There is now a volatility index for the Hang Seng Index in Hong Kong using CBOE VIX methodology.

EUR/USD (1.42) Testing Long-Term Downtrend From July 2008 Again (Charts, Articles)

Technical Update: EUR/USD (1.4223) is testing its long-term downtrend again, which started in July 2008. The pair is currently above the 200-week moving average. The second chart is more short-term; you can see the trend line EUR/USD must hold to prevent a near-term breakdown. It is also testing the exhaustive high made on November 4, 2010 (1.4282). Read the articles below for more analysis.

EUR/USD (weekly log charts - courtesy

Analysis on the web:

*ECB Dual Strategy Will Cause Problems: Ulrich Leuchtmann, CommerzBank Head of Research (CNBC Video)

*ECB Rates and Federal Reserve Policy (ForexYard)

*Forex: EUR/USD failed at 3-year downtrend - Commerzbank (

*ECB set to raise interest rates for the first time - BHF Bank (

*EUR/USD ended higher despite fairly strong payrolls - KBC Market Research (

*Euro Declines Versus Dollar on Concern Rate Increases May Damage Periphery (Bloomberg)

*Trichet Seen Burying Ailing Nations With Rate Rise on Inflation (Bloomberg)

*EURUSD: A Double Top Taking Shape? - Ilya Spivak (Daily FX)

*Euro is Guaranteed Trend and Momentum with the ECB Rate Decision - John Kicklighter (Daily FX)

Greece Has Highest Default Probability, 5Y CDS Spread at 1028, 2-Year Bonds Yield 15.79% (Charts)

Greece 5Y CDS -
I haven't blogged about Greece in a while so here is a checkup on Greek CDS and government bond yields. According to CMA Datavision's Sovereign Risk Monitor, Greece has the highest default probability percentage at 57.42%, with a 1028 mid-spread (in basis points). You can check out Greece's CDS quote and chart (Greece CDS USD SR 5Y:CGGB1U5) at It is testing resistance.

Greece 10Y Bond Yield - Bloomberg
Greece Government Bond Yields are also testing their highs. 10-Year GGBs yield 12.74%, 5-Year GGBs yield 14.36% and 2-Year GGBs yield 15.79%, as of April 1. According to, 10-Year Greek Government Bonds trade at a 9.58 spread to German Bunds and a 9.51 spread to 10-Year Treasuries. Is it time again for Eurozone volatility? What about the Euro. I'm watching the EUR/USD downtrend line on the 5-Year chart, as well as the short term uptrend line (see Daily FX link).

Greece in the News:

Sovereign CDS sector eyes day of reckoning (Financial News, 4/4/2011)

Germany Press: IMF Pushes For Restructuring Of Greece's Debt (Automated Trader, 4/3/2011)

EURUSD: A Double Top Taking Shape? (Daily FX, 4/3/2011)

Greek FinMin rules out debt restructuring (Reuters, 4/2/2011)

Papaconstantinou Says Still Chance for Bond Sales in 2011 (Bloomberg, 4/1/2011)

Portugal, Greece Downgraded by S&P on Restructuring Concerns (Bloomberg, 3/29/2011)

George Soros Speech on Reflexivity at INET Conference (4/9/2010)

INETeconomics (Youtube)
On April 9, 2010, George Soros gave a speech (Anatomy of a Crisis: The Living History of the Last 30 years) at an Institute for New Economic Thinking (INET) conference at King's College in Cambridge, UK. He explained his theory of reflexivity and how it relates to economic behavior and financial markets. Below I provided quotes from the speech transcript. Watch the full video after the jump courtesy of INET.

Rational expectations and the Efficient Market Hypothesis failed:

"Anyhow, rational expectations theory was pretty conclusively falsified by the crash of 2008 which caught most participants and most regulators unawares. The crash of 2008 also falsified the Efficient Market Hypothesis because it was generated by internal developments within the financial markets, not by external shocks, as the hypothesis postulates.

The failure of these theories brings the entire edifice of economic theory into question. Can economic phenomena be predicted by universally valid laws? I contend that they can’t be, because the phenomena studied have a fundamentally different structure from natural phenomena."

Theory of Reflexivity:

"In human affairs thinking serves two functions: a cognitive one and a causal one. The two functions interfere with each other: the independent variable of one function is the dependent variable of the other. And when the two functions operate simultaneously, neither function has a truly independent variable. I call this interference reflexivity.

Watch 'Inside Job' by Charles Ferguson, Full Video (Must See!)

Inside Job, a documentary film directed by Charles Ferguson on the 2008 global financial meltdown, is now available to watch online for free. I embedded it below via (with embed code). Hat tip to Zero Hedge and Open Culture. I saw Inside Job when it was in theaters; it is a must see if you care about the economy and financial markets.

The DVD is available on Amazon. Charles Ferguson won an Oscar for Best Documentary Feature at the 2011 Academy Awards. Watch his acceptance speech here. He was also interviewed by Charlie Rose, Deal Book (Andrew Ross Sorkin), PBS (Tavis Smiley), INET (Institute for New Economic Thinking) and France24 (2010 Cannes Film Festival).*Update: The video was down the last time I checked. Perhaps it is still at in a different location. I still recommend you see the movie.

David Sokol Resigns From Berkshire (CNBC Interview, Buffett's Letter, Lubrizol Trades LZ)

David Sokol on CNBC 3/30/2011
David Sokol, former Chairman and CEO of NetJets, and Chairman of MidAmerican Energy and John Mansville, all owned by Berkshire Hathaway/BRK, resigned unexpectedly on March 28, 2011. His resignation letter came as a "total surprise" to Warren Buffett (read Buffett's response below). Many people thought Sokol would be Buffett's successor; but he told CNBC yesterday that resigning "has been on his mind for two-and-a-half years" in order to start a "mini-Berkshire".

This is where it gets interesting. In early January, Sokol bought 96,060 shares of Lubrizol (NYSE:LZ) for $104 per share (roughly $10 million), two months before Buffett bought the company for $9.7 billion or $135 per share! This has to be the takeout trade of the year so far.

Lubrizol/LZ -
During the CNBC interview (watch below), Sokol mentioned that he bought Lubrizol for his personal family account, as he thought it was an attractive undervalued investment. He recommended Lubrizol to Buffett as a potential opportunity for Berkshire and disclosed that he bought LZ shares. He didn't think Buffett was interested in the company, or would have acted as quickly.

Call options could have been betting on a deal. According to Livevol, LZ April call options traded 7 times normal volume on March 9. Was that Buffett levering up or someone in the know? I provided links below for more analysis on what happened. In any event, Sokol timed his $LZ investment pretty well (+30% non-annualized). Here are quotes from the CNBC transcript: