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James A. Daniel, CFP®
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Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and in the U.S., which it
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tafThe Advisory Firm Newsletter:  October 2011



As we have just wrapped up a quarter where world economies, interest rates and the stock market have been front page news, I thought it would be interesting to share with you highlights of two investment conferences I recently attended. Both of these were from fund managers in the fixed income area: One was by Jay Chitnis who runs YieldQuest Securities and the other by Jeffrey Gundlach the famed bond manager formerly with TCW and now running his own group at Doubleline Capital. Both discussions were very interesting and each manager had his own take on where the economy was heading.


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John Hedgcock: was recently VP of Strategy with CibaVision and is now looking for a similar role in Strategy or Business Development. Linked In profile

Robert Rhoades: was COO of a local manufacturer. He is looking for a small business to purchase. LinkedIn profile

Views from Fixed Income (Bond) Managers:

As much as we focus on where the stock market is at any given hour, the bond market is probably a much more important area. Especially now as "debt" and "interest rates" are being discussed in more serious terms both in the US and in Europe. As a refresher let's remember that a bond is basically a loan. Whether it is the US Government issuing treasuries or a Corporation selling a debt issue to the public, both are basically loans that promise to pay a certain interest rate for a specific period of time and then redeem the debt at "par" value.

Both Fixed Income managers (Jay Chitnis and Jeffrey Gundlach) pay very close attention to the economy and interest rates as it has a huge effect on how their portfolios are positioned.

Below are some highlights of each discussion:


Doubleline Capital / Jeffrey Gundlach:

Mr. Gundlach's presentation focused on the unsustainable Federal debt, tax policy and income inequality that is prevalent today. (he also joked that although he was discussing income inequality, that he was someone in the top 1% of earners) However, he did bring up some very good arguments:

  • US Government Debt is unsustainable and something has to give.
  • Income inequality (ie. the percentage in the top 1%) is at the highest it has been since the late 1920's.
  • Marginal tax rate on the highest income earners is at it's lowest since the 1920's.

His theory was that we had reached a tipping point in Federal Debt and with public perception of income inequality and that either income tax rates for high earners would rise, government spending would be dramatically reduced or a combination of both would happen. The result being a period of slowing growth in the economy for several years. He saw opportunities in emerging market debt and still liked his specialty of pairing GNMA debt with non-agency Mortgage Backed Securities for a higher yield. For investors fearing a rise in rates he advised to focus on lowering duration of fixed income portfolios and raising yield to limit the affects.




Yield Quest / Jay Chitnis:

Mr. Chitnis had a little bit different take on the economy in general. Like Mr. Gundlach he thought that something would happen with taxes and spending, however his thinking that it would be big. Something that would be seen as the "grand deal" of 2011.

His rationale was that neither political party wanted the unemployment issues to drag on until the elections in 2012 and with the Deficit Reduction Committee's recommendations due on Nov. 23 of this year and approval by Congress by Dec. 23rd, then he felt something big was going to happen to reignite growth. The reasoning was that there would be an across the board reduction in spending that would affect both political parties if a consensus could not be reached by the deadline.

His discussion also took a look at indicators and he felt that another recession was not coming and that growth was actually stronger than many people were admitting.

A couple of other points:

  • consumer sentiment was very negative but retail sales were holding steady.
  • the situation in the US was not like the lost decade in Japan and he did not see a deflationary spiral happening.
  • with the election looming he expected job creation to be number one focus
  • with 10 year treasuries yielding under 2% the market was pricing in deflation. He felt this was incorrect and coupled with true inflation at 3% you would be losing 1% in real nominal interest per year by holding.
  • He felt that 10 Year rates could go to 4% without slowing growth.

His main theme was that while bond fund holders had done well over the past few years, that the fixed income space could return very little and actually lose money on an inflation adjusted basis in the coming 2 to 5 years. His advice was to keep duration low (like Gundlach), diversify fixed income holdings and consider using hedges to lock in principal.



With interest rates at historical lows we are left to debate whether that will eventually prompt inflation and a rise in the stock market, or will the low rates simply persist as housing muddles along and economic growth is limited? The question for investors is do you continue to overweight fixed income out of fear of the markets, or is it time to begin returning to stocks as an inflation hedge?

We are definitely at a pivotal point and both Fixed Income Managers had some insightful commentary. I will leave it to each reader to weigh the comments and determine what they think will happen as we get through this interesting juncture in our domestic economy and the world economy.


© 2011 The Advisory Firm. All Rights Reserved.


The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.