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MKTcc9758 - Too Good To Be True - 9-9-09 Gundlach
MKTcc9758 - Too Good To Be True - 9-9-09 Gundlach
September 9, 2009
Jeffrey Gundlach
Chief Investment Officer, The TCW Group
Portfolio Manager, TCW Total Return Bond Fund (TGLMX)
Too Good to be True
Jeffrey Gundlach
Table of Contents
I. Market Overview
The information contained herein may include estimates, projections, and other “forward-looking” statements.
Actual events may differ substantially from those presented herein. TCW assumes no duty to update any such statements.
Any opinions expressed are current only as of the time made and are subject to change without notice. The views expressed herein
are solely those of the author and do not represent the views of TCW as a firm or of any other portfolio manager or employee of TCW.
1
I. Market Overview
Too Good to be True
Jeffrey Gundlach
3
Source: Exhibit by TCW Research from Federal Reserve, Commerce Department and Ned Davis Research data
3
Cash For Clunkers Program
5
Source: Moody’s, U.S. Treasury
5
Too Good to be True
Jeffrey Gundlach
$60 $56.5
$52.8
$50.1
$50
$46.4
$43.3
$40
$30 $30.1
$26.5
$20
$10
$5.8 $8.5
$3.6 $3.9 $4.3 $4.6 $4.9 $5.1
$0
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009E
6
Source: TCW Research, U.S. Treasury
6
Too Good to be True
Jeffrey Gundlach
Nominal GDP
$2,500
2007
$2.24
$2,000
$1,500
Ten Years Ago – 1997
$1.12
$1,000
$0
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Source: Federal Reserve
8
Too Good to be True
Jeffrey Gundlach
14%
12%
10%
8%
6%
4%
2%
0%
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Source: Federal Reserve
9
Too Good to be True
Jeffrey Gundlach
U.S. Dollar Index Futures – Year End 2007 through September 8, 2009
‐8.00%
‐6.00%
‐4.00%
‐2.00%
0.00%
2.00%
4.00%
6.00%
1/ 71
31
/1
1/ 9 73
31
/1
1/ 9 75
31
/1
1/ 9 77
31
/1
1/ 9 79
31
/1
1/ 981
31
/1
1/ 983
31
/1
1/ 991
31
/1
1/ 993
31
/1
1/ 995
31
/1
1/ 997
31
/1
1/ 999
31
/2
1/ 001
31
/2
1/ 003
31
/2
1/ 005
31
/2
1/ 007
31
/2
00
9
Jeffrey Gundlach
Too Good to be True
19
Too Good to be True
Jeffrey Gundlach
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8
c- 8 c- 8 c- 8 c- 8 c- 8 c- 9 c- 9 c- 9 c- 9 c- 9 c- 9 c- 9 c- 9 c- 9 c- 9 c- 0 c- 0 c- 0 c- 0 c- 0 c- 0 c- 0 c- 0 c- 0
De De De De De De De De De De De De De De De De De De De De De De De De
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
4 5 6 7 8 9 0 1 2 3 4 5 6 7 8
c t - 9 c t - 9 c t - 9 c t - 9 ct - 9 c t - 9 c t - 0 c t - 0 c t - 0 ct - 0 c t - 0 c t - 0 c t - 0 c t - 0 c t - 0
O O O O O O O O O O O O O O O
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
7 8 9 0 1 2 3 4 5 6 7 8
c-9 c-9 c-9 c-0 c-0 c-0 c-0 c-0 c-0 c-0 c-0 c-0
De De De De De De De De De De De De
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
5 7 8 0 1 3 4 6 7 9 0 2 3 5 6 8
e c-8 un - 8 e c-8 un - 9 e c-9 un - 9 e c-9 un - 9 e c-9 un - 9 e c-0 un - 0 e c-0 un - 0 e c-0 un - 0
D J D J D J D J D J D J D J D J
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
5 - 87 e c-88 n - 90 e c-91 n - 93 e c-94 n - 96 e c-97 n - 99 e c-00 n - 02 e c-03 n - 05 e c-06 n - 08
c-8
De J un D Ju D Ju D Ju D Ju D Ju D Ju D Ju
Ja 1
Ja 3
Ja 6
8
00
01
02
03
04
05
06
07
08
09
l‐0
l‐0
l‐0
l‐0
l‐0
l‐0
l‐0
l‐0
l‐0
n‐
n‐
n‐
n‐
n‐
n‐
n‐
n‐
n‐
n‐
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Ja
Ja
S&P/Case‐Shiller 20‐City Index YoY % Chg
26
Source: Prepared by TCW from data from Standard & Poor’s
26
Too Good to be True
Jeffrey Gundlach
16
100
14
Recession
80
Starts 12
Subprime De lqs 10.3%
Dec 2007
2Q00, 4Q04, 2Q05
60 10
Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar-
98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09
27
Source: Prepared by TCW from data from Standard & Poor’s and Mortgage Bankers Association
27
Too Good to be True
Jeffrey Gundlach
@ 133 2Q09
140 Positive HPA
during 2001
recession 4
120
3
100
60 1
Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar-
98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09
28
Source: Prepared by TCW from data from Standard & Poor’s and Mortgage Bankers Association
28
Too Good to be True
Jeffrey Gundlach
$85.0
Liquidation
$75.0
$65.0
Price
$55.0
$45.0
$35.0
$25.0
07
07
07
08
08
08
09
09
09
20
20
20
20
20
20
20
20
20
2/
2/
2/
2/
2/
2/
2/
2/
2/
1/
5/
9/
1/
5/
9/
1/
5/
Source: TCW Research and Deutsche Bank ABX 2006-2 AAA tranche data through September 4, 2009. 9/
1. The boxes in the chart represent typical stages of market cycles. However, this is not a prediction of when the stages will begin or end, or of valuation, or of when any TCW Strategy will
invest or realize on investments. 29
Too Good to be True
Jeffrey Gundlach
$100.0
$90.0
$80.0
$70.0
$60.0
Price
$50.0
$40.0
$30.0
$20.0
$10.0
$0.0
- 07 a r- 0 7 a y- 07 ul- 07 ep -07 o v-0 7 an - 0 8 a r- 08 a y- 0 8 ul- 08 ep -08 o v-08 an - 09 a r- 09 a y- 09 ul- 09 ep -0 9
Jan M M J S N J M M J S N J M M J S
Source: TCW Research and JP Morgan ABX 2006-2 A tranche data through September 4, 2009.
30
Too Good to be True
Jeffrey Gundlach
50.0%
60++
45.0% Constant Default Rate (CDR) 44.3%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
15.1%
10.0%
5.0%
0.0%
1/1/2000
6/1/2000
11/1/2000
4/1/2001
9/1/2001
2/1/2002
7/1/2002
12/1/2002
5/1/2003
10/1/2003
3/1/2004
8/1/2004
1/1/2005
6/1/2005
11/1/2005
4/1/2006
9/1/2006
2/1/2007
7/1/2007
12/1/2007
5/1/2008
10/1/2008
3/1/2009
8/1/2009
Source: LoanPerformance data and TCW as of August 1, 2009 31
Note: Serious delinquencies refers to 60++ days late on first liens only. CDR on first liens only. Subprime is defined as FICO <675. Based as a percentage of unpaid principal balance. 31
Too Good to be True
Jeffrey Gundlach
20.0%
15.1%
15.0%
10.0%
5.0%
0.0%
1/1/2000
7/1/2000
1/1/2001
7/1/2001
1/1/2002
7/1/2002
1/1/2003
7/1/2003
1/1/2004
7/1/2004
1/1/2005
7/1/2005
1/1/2006
7/1/2006
1/1/2007
7/1/2007
1/1/2008
7/1/2008
1/1/2009
7/1/2009
Source: LoanPerformance data and TCW as of August 1, 2009 32
Note: Foreclosure+REO+Bankruptcy, CDR on first liens only. Subprime is defined as FICO <675. Based as a percentage of unpaid principal balance. 32
Too Good to be True
Jeffrey Gundlach
1,400,000
1,200,000
1,000,000 SubPrime LC 60++
800,000
600,000
400,000
200,000
‐
M ‐0 0
Ju 2
M 07
Ju 0 5
Se 0 4
Ap 04
De 0 2
9
Au 00
Ja 06
Au 07
Fe 3
M ‐01
No 5
M ‐08
Oc 01
Oc 08
0
r ‐0
‐0
l‐0
c‐
g‐
v‐
n‐
b‐
p‐
‐
n‐
n‐
‐
‐
g
ay
ay
t
t
ar
ar
Ja
60++
30.0% Constant Default Rate (CDR)
25.0% 24.4%
20.0%
15.0%
10.6%
10.0%
5.0%
0.0%
1 /1 /2 0 0 0
7 /1 /2 0 0 0
1 /1 /2 0 0 1
7 /1 /2 0 0 1
1 /1 /2 0 0 2
7 /1 /2 0 0 2
1 /1 /2 0 0 3
7 /1 /2 0 0 3
1 /1 /2 0 0 4
7 /1 /2 0 0 4
1 /1 /2 0 0 5
7 /1 /2 0 0 5
1 /1 /2 0 0 6
7 /1 /2 0 0 6
1 /1 /2 0 0 7
7 /1 /2 0 0 7
1 /1 /2 0 0 8
7 /1 /2 0 0 8
1 /1 /2 0 0 9
7 /1 /2 0 0 9
Source: LoanPerformance data and TCW as of August 1, 2009
Note: Serious delinquencies refers to 60++ days late on first liens only. CDR based on first liens only. Alt-A is defined as FICO 675-725, LTV >=75. 34
Based as a percentage of unpaid principal balance. 34
Too Good to be True
Jeffrey Gundlach
12.0%
10.6%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
1/1/2000
7/1/2000
1/1/2001
7/1/2001
1/1/2002
7/1/2002
1/1/2003
7/1/2003
1/1/2004
7/1/2004
1/1/2005
7/1/2005
1/1/2006
7/1/2006
1/1/2007
7/1/2007
1/1/2008
7/1/2008
1/1/2009
7/1/2009
Source: LoanPerformance data and TCW as of August 1, 2009 35
Note: Foreclosure + REO + Bankruptcy, CDR based on first liens only. Alt-A is defined as FICO 675-725, LTV >=75. Based as a percentage of unpaid principal balance. 35
Too Good to be True
Jeffrey Gundlach
700,000
Alt‐A LC 60++
600,000
500,000
400,000
300,000
200,000
100,000
‐
Aug‐00
Apr‐05
Aug‐07
Oct‐01
Dec‐02
Feb‐04
Sep‐04
Nov‐05
Jun‐06
Oct‐08
Jan‐00
Mar‐01
May‐02
Jul‐03
Jan‐07
Mar‐08
May‐09
Source: LoanPerformance data and TCW as of August 1, 2009 36
Note: Loan counts based on first liens only. Serious delinquencies refers to 60++ days late on first liens only. Alt-A is defined as FICO 675-725, LTV >=75.
36
Too Good to be True
Jeffrey Gundlach
60++
Constant Default Rate (CDR)
7.0% 6.2%
6.0%
5.0%
4.0%
3.0%
2.1%
2.0%
1.0%
0.0%
1/1/2000
7/1/2000
1/1/2001
7/1/2001
1/1/2002
7/1/2002
1/1/2003
7/1/2003
1/1/2004
7/1/2004
1/1/2005
7/1/2005
1/1/2006
7/1/2006
1/1/2007
7/1/2007
1/1/2008
7/1/2008
1/1/2009
7/1/2009
Source: LoanPerformance data and TCW as of August 1, 2009
Note: Serious delinquencies refers to 60++ days late on first liens only. CDR based on first liens only. Prime is defined as FICO >725 and LTV <75. 37
Based as a percentage of unpaid principal balance. 37
Too Good to be True
Jeffrey Gundlach
3.0%
2.5%
2.1%
2.0%
1.5%
1.0%
0.5%
0.0%
1/1/2000
7/1/2000
1/1/2001
7/1/2001
1/1/2002
7/1/2002
1/1/2003
7/1/2003
1/1/2004
7/1/2004
1/1/2005
7/1/2005
1/1/2006
7/1/2006
1/1/2007
7/1/2007
1/1/2008
7/1/2008
1/1/2009
7/1/2009
Source: LoanPerformance data and TCW as of August 1, 2009
Note: Foreclosure + REO + Bankruptcy, CDR based on first liens only. Prime is defined as FICO >725 and LTV <75. 38
Based as a percentage of unpaid principal balance.
38
Too Good to be True
Jeffrey Gundlach
35,000
Prime LC 60++
30,000
25,000
20,000
15,000
10,000
5,000
‐
Ju 0 0
Ju 1
Ju 2
Ju 0 3
Ju 4
Ju 5
Ju 0 6
Ju 0 7
Ju 8
Ju 9
Ja 0 0
Ja 0 1
Ja 0 2
Ja 3
Ja 0 4
Ja 5
Ja 0 6
Ja 0 7
Ja 0 8
9
0
0
l‐0
l‐0
l‐0
n‐
n‐
n‐
n‐
n‐
n‐
n‐
n‐
n‐
n‐
l‐
l‐
l‐
l‐
l‐
l‐
l‐
Ja
40.00%
35.00%
30.00%
25.00% Prime
20.00% 21.7%
15.00%
10.00% Alt-A
7.59%
5.00% Subprime
0.00%
2.47%
1/1/2005
6/1/2005
11/1/2005
4/1/2006
9/1/2006
2/1/2007
7/1/2007
12/1/2007
5/1/2008
10/1/2008
3/1/2009
8/1/2009
Source: Loan Performance data based on FICO and LTV. August servicing reported as of September 4, 2009.
Prime: FICO > 725 and LTV <75
Alt-A: FICO 675-725; and FICO > 725 and LTV >= 75
Subprime: FICO < 675
40
Too Good to be True
Jeffrey Gundlach
80%
Prime Alt A Sub Prime 66.4%
70%
60% 56.4%
50%
40%
41.9%
30%
20%
10%
0%
2005‐01
2005‐04
2005‐07
2005‐10
2006‐01
2006‐04
2006‐07
2006‐10
2007‐01
2007‐04
2007‐07
2007‐10
2008‐01
2008‐04
2008‐07
2008‐10
2009‐01
2009‐04
2009‐07
Source: Loan Performance data based on FICO and LTV. August servicing reported as of September 4, 2009.
Prime: FICO > 725 and LTV <75
Alt-A: FICO 675-725; and FICO > 725 and LTV >= 75
Subprime: FICO < 675 41
Too Good to be True
Jeffrey Gundlach
43
Too Good to be True
Jeffrey Gundlach
The primary risks affecting this Fund are “interest rate risk” (including “extension risk” and “prepayment risk”), “liquidity
risk,” “market risk,” and “credit risk.”
• Interest rate risk refers to the possibility that the value of the Fund’s portfolio investments may fall since fixed income securities
generally fall in value when interest rates rise.
– Extension risk is the possibility that rising interest rates may cause owners of the underlying mortgages
to pay off their mortgages at a slower than expected rate. This particular risk may effectively change a security which
was considered short or intermediate term into a long-term security. Long-term securities generally drop in value more
dramatically in response to rising interest rates than short or intermediate-term securities.
– Prepayment risk refers to the possibility that falling interest rates may cause owners of the underlying mortgages to
pay off their mortgages at a faster than expected rate. This tends to reduce returns since the funds prepaid will have
to be reinvested at the then lower prevailing rates.
• Liquidity risk refers to the possibility that the Fund may lose money or be prevented from earning capital gains if it cannot
sell a security at the time and price that is most beneficial to the Fund.
• Market risk is the possibility that the returns from the types of securities that the Fund invests in will underperform returns
from the various general securities markets or different asset classes.
• Credit risk refers to the loss in the value of a security based on a default in the payment of principle and/or interest of the
security, or the perception of the market of such default. The value of the Fund’s share price will fluctuate up or down based
on the value of the portfolio holdings, which can be affected by these risks.
The information contained herein may include estimates, projections, and other “forward-looking” statements. Actual events may differ
substantially from those presented herein. TCW assumes no duty to update any such statements.
Any opinions expressed are current only as of the time made and are subject to change without notice. The views expressed herein are
solely those of the author and do not represent the views of TCW as a firm or of any other portfolio manager or employee of TCW.
44
Too Good to be True
Jeffrey Gundlach
Biography
Jeffrey Gundlach
Chief Investment Officer
The TCW Group, Inc.
Mr. Gundlach is the Chief Investment Officer and a member of the Board of Directors of the TCW
Group, Inc. In addition, he oversees fixed income investments as Chairman of the TCW Multi-
Strategy Fixed Income Committee and is the Co-Founder and lead portfolio manager of the
Mortgage-Backed Securities group. His investment strategies have been featured in leading
publications including the New York Times, the Wall Street Journal, Barrons, Forbes and
Institutional Investor. In 2007, Morningstar named Mr. Gundlach Fixed Income Fund Manager
of the Year and Standard & Poor’s/BusinessWeek gave its Excellence in Fund Management Award
to TGLMX, the only bond fund to win the prestigious award five years in a row. Mr. Gundlach joined
the firm in 1985, prior to which he was associated with Transamerica Corporation's Los Angeles
based Property/Casualty Insurance division. He worked in the Finance Department as Senior Loss
Reserve, Analyst, responsible for investment discount and funding strategies. He is a graduate of
Dartmouth College summa cum laude holding a BA in Mathematics and Philosophy. He attended
Yale University as a PhD candidate in Mathematics.
45
Too Good to be True
Jeffrey Gundlach
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46