Doubleline Capital Looks Back at 2011, Ahead to 2012 for Markets

Europe

Money markets' exposure to European banks is trending down rapidly.
European banks are living on ECB life support.
Italy's nearly static, just-under-7% bond level appears to be price fixing via ECB bank lending.
Enormous amounts of Italian debt need to be rolled over in 2012.
Increases pressure, could accelerate crisis.
European GDP is anemic; even Germany downgraded its 2012 growth estimate to 0.6%.
Unemployment rates are high and growing in Europe.
Workers per retiree is already low (around 5) and projected to get lower (2-3) in the next couple decades. Similar story, but not quite as bad, in U.S.

Bond Markets

2011 flat performance represents global outperformance by U.S. stocks.
Today is an interesting example: S&P up today although Europe down; rush to put capital to work somewhere?
In fixed income, risk-taking was rewarded in 2010 in all categories (high yield corporate, emerging, etc.). In 2011, treasurys and guaranteed mortgages did well, while high yield did badly.
Same is true if sorting by credit rating: 2010 the opposite of 2011.
Strength of U.K. bonds perhaps the biggest surprise story of 2011.

The Dollar

U.S. dollar continues to benefit from global shock/slowdown.
Emerging market equities were a double disaster (price and currency return)
Possible contrarian case here.
Gundlach strongly believes dollar index is headed higher. DoubleLine is 100% in U.S. dollar-denominated assets.

Precious Metals and Energy

Speculative fervor around precious metals appears to be over.
A further correction may happen, but shouldn't crash either.
Natural gas (especially nat gas MLPs) makes sense for a 10- to 20-year hold, but is down a lot over the past year.

Equities

Shanghai Index is unbelievably weak; not suggestive of a healthy China.
Emerging market equity makes sense over the long run (10-15 years).
Good candidate for dollar-cost averaging.
Expect a major roller coaster as global crises continue to get sorted out.
S&P 500 had a wild, schizophrenic year.
Lots of people in cash.
2012 "shot clock reset" should give strong January, petering out against a bad global economic scenario.
Not likely to be up much in 2012; the rally since Sept. 30 has eaten up much of the extant undervaluation.

Treasuries, Munis, Junk

Treasuries increasing as percentage of bond market.
If you're indexing, you own way too much (and increasing) short-term Treasuries at zero yield.
Even 2-year Treasuries "nailed to the mat" at 25 bps.
Don't expect rates to skyrocket in 2012, but don't expect to profit from being long Treasuries either.
Eroding default fundamentals in high yield credit (DoubleLine is out of high yield), but high yield bonds have gone from highly overvalued vs. long-term Treasuries to somewhat undervalued.
Munis were up in 2011, but have underperformed Treasuries, despite very low defaults.
Muni market seems cheap right now.
Refis mostly aren't happening, even with record low interest rates.
Small refi uptick in prime loans only.
Delinquency rates remain high and aren't changing, except in prime where they're getting worse; servicers are liquidating at the same rate new delinquencies are occurring.
Still a 3- to 5-year overhang in defaults.
In an election year, the threat of a sovereign debt crisis seems very low. (Budgets will get passed as necessary, etc.)