(ZH) "This Is A Big, Big Moment" - Gundlach Warns Yellen May Sur

Full DoubleLine presentation attached

In his latest webcast to DoubleLine investors and the general public, the "new bond king" Jeffrey Gundlach, who had taken a one month sabbatical from public appearances after warning (hyperbolically as he explained yesterday) to "Sell Everything, Nothing Here Looks Good", said that the Fed is determined to show it is independent from market forces, and may hike rates even as investors bet they will not.

As a result, Gundlach said it’s time for fixed-income investors to prepare for rising rates and higher inflation by reducing the duration of their positions, moving money into cash and protecting against volatility. In his presentation titled appropriately "Turning Points" (presented below) Gundlach said that “this is a big, big moment,” predicting that “interest rates have bottomed. They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something and you’re supposed to be defensive.”

"They want to show that they are not guided by the markets," Gundlach told Reuters in a telephone interview following the DoubleLine webcast. "The Fed wants to show, at some point, that they can’t be replaced by WIRP (World Interest Rate Probability). The only way they can do that is to tighten when WIRP is below 50."

However, by trying to prove its independence from the WIRP, the Fed might be "blowing itself up," Gundlach warned. The Fed will not hike in September if the WIRP is below 40 and the S&P 500 is below 2150, he said on the webcast, which we assume means that the market is in control after all.

Meanwhile, the economy continues to contract: Gundlach pointed out that the non-mfg ISM released earlier this week is at the lowest level since 2009, and it is almost on recession watch. "Clearly, it's a bad environment to be raising rates," yet some Fed members are talking about two rate hikes between now and the end of the year, Gundlach said. Gundlach said investors should get defensive with bonds, adding that he is sensing a "bond unfriendly turn" such as fiscal stimulus and that bond yields bottomed several years ago.

Quoted by Bloomberg, Gundlach cited a July low of 10-year Treasuries that didn’t hold as evidence interest rates have hit bottom. The fund manager said rates on the U.S. 10-year bond may surpass 2% by the end of 2016. If we are correct, and if Japan is about to unleash a 2003-like VaR shock, they may surpass 2% in a few days.

As a justification for his higher rates call, Gundlach stuck to his prediction that Republican Donald Trump will be elected the next U.S. president, and said both Trump and Democrat Hillary Clinton have advocated more spending on infrastructure, which would add fiscal stimulus to the economy, which as we have explained, simply means "more debt."

“This idea that fiscal stimulus may be coming seems to be getting sniffed out by the bond market,” Gundlach said. More debt spending may increase the cost of government borrowing by adding supply and making investors demand higher yields, he said. “People say, ‘How can rates rise?”’ he said. “That’s how they can rise and they’re sort of rising already.”

Gundlach told Reuters this summer that his firm went "maximum negative" on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent. The 10-year now yields around 1.60 percent. All told, Gundlach said he turned short-term negative on gold and gold miners but has not sold any of his firm's positions. He also said DoubleLine's bet on emerging-market debt over high yield "junk" bonds have paid off, given that EM has posted returns of more than 15.2% so far this year.

Gundlach's full presentation is below.

RTRS - EXCLUSIVE-EUROPEAN COMMISSION TO PROPOSE EXTENDING INVESTMENT SCHEME TO

RTRS - EXCLUSIVE-EUROPEAN COMMISSION TO PROPOSE EXTENDING INVESTMENT SCHEME TO 2020, BOOSTING ITS SCOPE TO OVER 500 BLN EUROS -OFFICIALS

EXCLUSIVE-EU exec aims to boost investment co-funding scheme to 500 bln euros-plus - Reuters News

09-SEP-2016 16:47:12
BRATISLAVA/BRUSSELS, Sept 9 (Reuters) - The European Commission will next week propose extending an EU-wide investment-generating scheme by two years to 2020 and increasing its scope to at least 500 billion euros, European officials said.

In its current form the co-financing scheme - focused on infrastructure, energy, research and education - is using 21 billion euros of EU cash and guarantees to attract private investments for 15 times that amount up to 2018.

"The Commission will present an extension of the programme to ...trigger investments of a total of at least half a trillion euros by 2020," one official familiar with the project said.

After its first year, the programme is slightly ahead of schedule with already 116 billion euros of private investment generated.

In its most ambitious form, the proposal aims to double the investment generated to 630 billion euros if European governments contribute money.

It is to be presented by Commission President Jean-Claude Juncker in his state-of-the-union speech on Sept. 14, officials said.

WSJ : Fed’s Eric Rosengren Sees ‘Reasonable Case’ for Gradual Rate Increases

Fed’s Eric Rosengren Sees ‘Reasonable Case’ for Gradual Rate Increases
Federal Reserve Bank of Boston president finds U.S. economy resilient despite drag from overseas

Federal Reserve Bank of Boston President Eric Rosengren said Friday that “a reasonable case can be made” for tightening interest rates to avoid overheating the economy.

Holding rates at their current low level for much longer risks making labor markets too tight, forcing the Fed to raise interest rates sharply, which could result in another recession, he warned in remarks prepared for a morning speech in Quincy, Mass.

“If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” he said. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Mr. Rosengren didn’t specifically say whether he supports raising interest rates at the central bank’s Sept. 20-21 meeting. But his remarks, which echoed a speech in China last month, serve as a warning against becoming too complacent.

Mr. Rosengren’s speech puts to rest any thought that a disappointing August employment report might dim his support for higher interest rates. Although he has previously been an outspoken advocate for holding interest rates low, the strength of the labor market and a steep rise in asset prices have caused the Boston chief to support tighter monetary policy.


The unemployment rate now stands at 4.9%, right around policy makers’ estimate of the lowest sustainable rate. Mr. Rosengren said continuing tightness in the labor market could push the unemployment rate below full employment in the next year, which would result in labor shortages.

The Fed last raised rates in December to a range between 0.25% and 0.5%.

Mr. Rosengren pointed to rising commercial real estate costs as an indication the economy may be reaching the point where low rates may be doing more harm than good.

And even though the Fed has yet to reach its 2% inflation target, Mr. Rosengren suggested the strong labor market would nudge up consumer prices, citing “modest evidence of the upward pressure on wages and salaries that would support inflation reaching the Federal Reserve’s 2% goal.”

Mr. Rosengren is among several Fed officials who say the time is coming to raise interest rates. This week San Francisco Fed chief John Williams said it “makes sense” to raise rates “sooner rather than later.” And Fed Chairwoman Janet Yellen in August said “the case for an increase in the federal-funds rate has strengthened in recent months.”

Some Fed officials, however, have been resistant to another rate increase, pointing to soft global growth and the central bank’s inability to push inflation up to the target. Fed governor Lael Brainard, who has been among the most vocal to make this argument, is scheduled to give remarks Monday that will be closely watched to gauge her willingness to go along with another rate increase at either the September or the December policy meeting.

Mr. Rosengren, in his Quincy speech, sought to counter those arguments. He said the U.S. economy has performed well despite the weak global environment, citing the strong stock market and low volatility measures.

He said disappointing economic growth numbers for the U.S. in the first half of the year are likely to rebound in the second half.

And Mr. Rosengren suggested the risks of running the economy too hot outweigh the risks of stifling inflation growth.

The Fed’s policy of holding down borrowing costs “increases the chances of driving the core inflation rate closer to the Federal Reserve’s 2% target, but it also increases the changes of overheating the economy,” he said.

>>> FDML/Icahn First Thoughts on today's NY Post story

FDML - The NY Post http://nypost.com/2016/09/09/gabelli-and-icahn-are-dueling-over-federal-mogul-shares/

reported this morning that Mario Gabelli "appears to be angling for $13/share"; Gamco owns 11M shares (6.5% S/O) which is ~36% of the share float excluding Carl Icahn (138.6M shares / 82% S/O). The $9.25/share offer is conditioned on a majority of the minority tender. A $7.00/share proposal was announced 2/29/16 and was further increased to $8.00/share on 6/20/16.

 

Gamco was an investor in Pep Boys (PBY) which initially had a definitive agreement to be acquired by Bridgestone Corp for $15.00/share and subsequently received a number of proposals from Carl Icahn, who ultimately acquired the company for $18.50/share in cash (note: Bridgestone had raised its offer to $17.00/share). Gamco owned ~3.3M shares (~6.1% S/O) of PBY.

 

FDML was trading in the $4-$5/share range in January-February 2016 prior to Carl Icahn making his initial proposal; the shares had traded in the $7.00-$8.50/share range during 4Q15 and had closed at ~$16/share at the end of 2014. The current $9.25/share deal price values FDML at 2017E multiples of 0.6x EV/Revs ($7.7B), 5.9x EV/EBITDA ($770M, 10% margin) and 7.4x P/E ($1.25 EPS).

 

The Gamco "ask" implies FDML valuation multiples of 0.67x EV/Revs, 6.7x EV/EBITDA and 10.4x P/E. A standalone comparable is AXL ($1.3B MC, $2.4B EV) which at $17/share has 2017E valuation multiples of 0.6x EV/Revs ($4.15B), 4.0x EV/EBITDA ($609M, 14.7% margin) and 5.4x P/E ($3.17 EPS). A 250bp margin improvement at FDML (12.5% EBITDA margin) and the current $9.25/share deal price implies adjusted 2017E valuation multiples of 4.7x EV/EBITDA ($962M) and 4.7x P/E ($1.99 EPS); a $13/share price implies multiples of 5.3x EV/EBITDA and 6.5x P/E.

 

FDML is a cyclical business (Auto Parts industry) with significant capex requirements as well as pension obligations; the single digit valuation multiples reflect those dynamics. Unlike PBY, Carl Icahn already owns 82% of the company and there is not a competing proposal (nor is there expected to be one). The Gamco statement suggests an attempt to squeeze some additional deal consideration with the leverage being the unaffiliated shareholder tender condition.

 

A 10%-20% bump gets a price of about $10.15-$11.10/share; the alternative is the FDML stock price trading at ~$7/share absent the Icahn deal offer. Gamco has some leverage in its large block of shares and the inefficiencies of Carl Icahn having full ownership of FDML. Net is that expect there to be a price bump contingent on Gamco tendering its shares into the tender offer.

 

 

DISCLAIMER This information represents neither an offer to buy or sell any security nor, because it does not take into account the differing needs of individual clients, investment advice. Those seeking investment advice specific to their financial profiles and goals should contact their Oscar Gruss & Son Incorporated sales representative. Oscar Gruss & Son Incorporated believes this information to be reliable, but no representation is made as to accuracy or completeness. This information does not analyze every material fact concerning a company, industry, or security. Oscar Gruss & Son Incorporated assumes that this information will be read in conjunction with other publicly available data. Matters discussed here are subject to change without notice. There can be no assurance that reliance on the information contained here will produce profitable results. A security denominated in a foreign currency is subject to fluctuations in currency exchange rates, which may have an adverse effect on the value of the security upon the conversion into local currency of dividends, interest, or sales proceeds. The value of securities and depositary receipts of foreign issuers that are denominated in United States dollars are also influenced by fluctuations in currency exchange rates. © 2016 Oscar Gruss & Son Incorporated. All rights reserved.

FT : Emerging market fund sales hit 42-month high

Emerging market fund sales hit 42-month high
Sales of European mutual funds that invest in emerging markets hit a 42-month high in July as investors looked to take advantage of a rally in the asset class.
Almost €9bn was invested in emerging markets-focused mutual funds in July, according to figures for European-domiciled funds from Morningstar, the data provider.

It marked the highest levels since January 2013, when investors placed €10.7bn into emerging market funds just a few months before the US’s “taper tantrum” that would result in billions being withdrawn from developing market debt funds.
Ali Masarwah, editorial director for Europe, the Middle East and Africa at Morningstar, said investors have returned to the asset class this year in an attempt to escape low yields in developed markets and take advantage of potential growth in some emerging market countries.
“People are desperately seeking yields and emerging market bonds are still relatively attractive,” he said. “There is also the fact that [fund] flows follow performance. Emerging markets are outperforming global markets. It is really remarkable. So we are seeing money move.”
The MSCI Emerging Market index, a benchmark that includes large and mid-cap companies in 23 countries, is up by more than 16 per cent this year. It lost more than 20 per cent in 2015.
Emerging markets fell out of favour in 2013 after the US Federal Reserve began gradually reducing the amount of money it was feeding into the economy, leading to a spike in US Treasury yields — and leaving developing market bonds less attractive.
This combined with concerns about falling commodity prices and the strength of the US dollar against local currencies, both of which hurt emerging market returns.
Alexis de Mones, a portfolio manager at Ashmore, the London-listed fund manager that has seen its share price rally on the back of the rebound in emerging markets, said sovereign wealth funds, insurance companies and central banks have also returned to the market this year.
“We think there is huge remaining pent-up demand for emerging market bonds, and it is not just from people that are captured in mutual fund data,” he said.
Morningstar’s figures showed a strong rebound in emerging market bond funds since March, with almost €5.7bn flowing into the products in Europe in July alone.
Gary Greenberg, head of emerging markets at Hermes Investment Management, the £26bn fund house, said: “[The investor interest in emerging markets] is mostly a search for yield and that search for yield has spilled over into equity markets. The question now is: can emerging market profits justify the recovery that we have seen?”

David Hauner, head of emerging market strategy at Bank of America Merrill Lynch, warned earlier this month that a “bubble” is “highly possible” in emerging markets next year.
However, the International Monetary Fund said it expects the pace of gross domestic product growth in emerging markets to increase every year for the next five years while developed markets stagnate.
Roy Scheepe, senior client portfolio manager of emerging market debt at NN Investment Partners, the Dutch fund house, agreed: “European investors will continue to invest into emerging market debt funds as the differential between the yield of developed markets bonds and emerging markets is still significant.”