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Author Topic: Where Is This Market Headed?
Post Captain
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In another thread I asked about the safety of the DAP SV Option. Here's one reason why I asked that question...

The worst is yet to come.

'No market for old men,' TCW investment strategist warns in gloomy forecast

By Jonathan Burton, MarketWatch
Last update: 9:34 p.m. EDT Sept. 17, 2008

SAN FRANCISCO (MarketWatch) -- An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation's top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor's 500 Index SPX) could fall another 30%, giant Citigroup (CCC) could become an "AIG-sized debacle," Morgan Stanley (MS) would merge with a banking company, Wachovia (WB) won't be able to stand alone, default rates on even prime mortgages could soar, and European banks' woes are just beginning.

"This is no market for old men," said Gundlach, who also manages TCW's flagship Total Return Bond Fund (TGLMX). "This is no market for old-school thinking."

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it's possible that home prices could be sluggish until 2022. "If it's like the Depression experience -- and it sure is shaping up that way -- it could take several years. Maybe we won't see a bottom in home prices until 2014," he said.

Write-offs could top $1 trillion

As a forecaster, Gundlach didn't just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end. "The subprime market is a total unmitigated disaster and it's going to get worse," Gundlach told money managers and financial advisers at an investment conference in June 2007.

And Gundlach has put his shareholders' money where his mouth is, shunning derivatives and counterparty risk in his bond fund portfolio.
That defensive posture should offer protection in the continuing credit storm that Gundlach foresees. In this bleak scenario, an unprecedented -- and growing -- number of home foreclosures, along with mortgage loans that are under water as soon as they're originated and a glaring lack of buyers for even modestly risky assets keeps the financial system under enormous stress.

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said. "The current environment is maybe a little worse that what was experienced in the Depression in terms of the housing market," Gundlach said.

More troubles ahead

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said. As of late August, credit losses and writedowns at the world's 100-largest banks and brokerages topped $506 billion, he noted.

Among the casualties, Gundlach said, is Citigroup. The company's balance sheet problems could be on a scale similar to that of insurer American International Group, which the U.S. bailed out this week. "I would give a very meaningful probability to the biggest, next AIG-size debacle being Citigroup," the strategist said. "I would definitely not be a buyer of Citigroup stock," Gundlach said. "If I were going to buy financial market stocks," he added, "I would be a buyer of Wells Fargo (WFC) , JP Morgan (JPM) and Bank of America (BAC) .

Other financial giants also won't escape the crisis unscathed, Gundlach said. "I don't see how Wachovia can make it as a stand alone," he said. He expressed the same sentiment about Morgan Stanley. Indeed, late Wednesday the New York Times reported that Morgan Stanley was exploring a merger with Wachovia or another bank.

Europe's financial giants are in similar or even worse shape than their U.S. counterparts, Gundlach said, with "substantial exposures to assets which U.S. banks are now getting taken to the woodshed over. I would rate all European banks as not a buy."

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: "None of us have ever seen this, and it's no market for old men, but risk aversion is the order of the day."

End of Story
Jonathan Burton is an assistant personal finance editor for MarketWatch, based in San Francisco.

As an aside, the home next to mine will be auctioned off in a foreclosure sale on October 3rd. That's hitting close to home. Scary!!!


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Tom Leffingwell
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So how safe is the DAP Stable Value Fund?
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dave carr
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So how safe is anything? If you hide your money in a mattress along comes inflation or flood or earthquake or thieves or the wolf blows down the walls. How about annuities? What company provides a safe annuity? How about our PBGC money that we receive monthly? Will this continue in this economic environment. So I invest in government bonds. How much in debt is the US government and at what point do these bonds become risky or lose their value? Is continued payment of social security and medicare a sure thing?

I'm not a doom and gloomer but I've certainly never seen anything like this in my lifetime. With the complexity of the global economy and so much international interdependency we could be in for a real ride.

So, where is the safe harbor? I just don't have a clue!

Dave Carr

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Post Captain
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I've solved the problem of what to do with my money...I put everything that I have into the company that makes Tampax. After all, it's the only company in the country that goes into the hole every year but still makes money! [Big Grin]

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Post Captain
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I'm also sure that someone is going to make the remark that it's always in the 'red.'
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Post Captain
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That stock comes with "strings attached to it"

Originally posted by Retav8r:
I'm also sure that someone is going to make the remark that it's always in the 'red.'

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