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Jeffrey Gundlach’s Secret Recipe

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“I look at news wires more than anything else,” Gundlach said in an exclusive interview with Yahoo Finance’s Julia La Roche. “And I try very hard to pay no attention to what other people think.”

DoubleLine Capital’s assets under management have ballooned to over $120 billion. So, how does the firm’s head, Jeffrey Gundlach, process information in a way that he is able to generate alpha?

‘Watch for those times when the news doesn’t change, but the interpretation does’

“I think what’s important is to look at the news flow and watch for those times when the news doesn’t change, but the interpretation does,” he added. “Or the news does change, and the interpretation doesn’t.”

This makes for a dislocation in the market, and the savviest traders will find a way to profit as those dislocations correct themselves. The real key was “to look for Harbingers and instances of the cusp of change. When you actually get a moment, you can act on it.”

An instance in 2011 where former Fed chair Ben Bernanke had announced that he was keeping short-term interest rates at zero for at last three years.

“He pre-announced three years of zero interest rates. Shockingly, many instruments in the bond market that were sure to profit tremendously from zero interest rates for three more years, they didn’t go up in price for half a day,” said Gundlach.

Taking advantage of the pricing delay, he acted fast: “I bought them all. It was like, ‘Why aren’t people buying it? I don’t know, but they should be like 20 points higher.’ And they were 20 points higher about two weeks later. But they were actually there to be had, because people want to see the idea that they have get ratified or corroborated, by a crawler on some financial program.”

So while others were waiting for validation for the opportunity they may have just discovered, “by the time it’s safe, and you have confirmation that your idea might be broadly embraced. By then it’s too late.”

‘Look for correlations’

That belief in his decision was based from his underlying affinity for correlations.

“I have a whole team, that what we do is, we just look for correlations,” he said.

Gundlach shared one relationship he found: “For example, things like the Fed’s underlying inflation gauge, which doesn’t get nearly enough attention. It correlates incredibly well to CPI, core CPI, on about an 18 month lead basis. It’s got about an 80% correlation. Nobody knows about this.”

But trades based on correlations need to be monitored.

“Relationships don’t hold up forever,” he said. “The world changes, the variables change, the coefficients change that drive things. And so it’s really important that you just stay on top of it.”

Reference:

Yahoo Finance, Aarthi Swaminathan, 2019-02-19, “How Jeffrey Gundlach Uncovers Winning Trades in the Market”

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