Since I first started writing The Palm Beach Letter in June 2016, my main goal has been to help you find safe, income-generating ideas.
And in my very first issue, my strategy was to follow a maverick income investor who was known for making outlandish predictions about the markets.
- In 2007, he publicly warned that the subprime market would get worse. After his call, the market dropped a spectacular 70%. In the process, he made a cool $4 billion in profit.
- In 2015, he warned investors not to be fooled by a rally in oil. He pounded the table and said oil prices would crash. Later that year, oil crashed 42% from its peak, hitting a 13-year low.
- In January 2016, he said gold would hit $1,400 per ounce. At the time, gold was trading at $1,050 per ounce. By early May 2016, gold had already hit a high of $1,305.
In mid-2016, he started betting against an interest rate hike. At the time, Wall Street was convinced rates would rise.
That’s when we followed his contrarian lead… and I recommended the iShares Mortgage Real Estate Capped ETF (REM).
(The strategy paid off well for us. In February 2018, we sold REM for a 15.1% profit… Along the way, we collected $7.63 per share in dividends.)
By now, you should be asking yourself two questions: Who is this market oracle? And what’s his next pick?
Today, I’ll tell you who this market wizard is and what he’s buying next.
Investing Alongside One of America’s Brightest Stars
The name of the bond trader who’s quickly developing into an investing legend is Jeffrey Gundlach. His DoubleLine Capital family of mutual funds manages more than $85 billion in assets.
His investment returns are the envy of Wall Street.
Over the last five years, his bond fund has generated 0.02%, 6.73%, 2.32%, 2.17%, and 3.79% respectively in annual returns—outperforming the sector by an average 0.86% per year.
That might not seem like much, but in the world of bonds—where the yield on the benchmark 10-year Treasury was 1.88% last September—it puts him in the upper echelon of his industry.
In fact, Gundlach’s Total Return Bond Fund ranked ninth in its category the last five years—out of 958 funds. That’s in the top 10% of his field.
Gundlach’s track record was the main reason we followed him into mortgage-backed securities (MBS) in June 2016.
MBS are a type of bond composed of thousands of property loans and packaged into a single security.
At the time, Wall Street hated MBS. The Street was convinced interest rates were going to rise. When rates rise, MBS (as well as all bonds) decrease in value.
Gundlach said that there would be only one Fed hike in 2016. And he was right again… The Fed raised rates only once in 2016, and that’s how we made 15% in REM.
So, what’s Gundlach looking at now?
Gundlach’s Next Big Idea
During a live interview on CNBC in December 2017, Gundlach was asked point-blank: “What’s your highest-conviction idea for 2018?”
His answer: “Commodities.”
He went on to say:
If you ever thought about buying commodities, … maybe you should buy them now. …We’re right at that level where in the past you would have wanted commodities instead of stocks.
And he continued, “The repetition of this is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy.”
Below is the chart Gundlach referenced. It shows the valuation of the S&P Commodity Index (GSCI) relative to the S&P 500.
When the ratio is below the median, commodities are cheap relative to stocks. And when the ratio is above the median, commodities are expensive relative to stocks.
The red and green circles show areas of extreme valuation. The green circles show when commodities are extremely undervalued compared to stocks. And the red circles show when commodities are extremely overvalued compared to stocks.
As you can see, commodities haven’t been this cheap relative to stocks since the early 1970s.
The next two charts show the last two times commodities were this cheap compared to the S&P 500 (1970 and 1999). They went on to rally 200% and 560%, respectively.
And according to Gundlach, the 1970s commodities market eventually grew eight times larger than the market capitalization of the S&P 500.
If that happens again, we could see commodities skyrocket…
How to Play the Commodities Rally
If you’re looking to gain broad-based exposure to commodities, you can take a look at the PowerShares DB Commodity Tracking ETF (DBC).
It’s an exchange-traded fund that gives you exposure to the price of oil, gas, precious metals, industrial metals, and agricultural commodities like wheat and corn.
One drawback of DBC is that it doesn’t pay a dividend.
In this month’s issue of The Palm Beach Letter, I’ve found an idea that gives you broad exposure to the commodities sector and pays a dividend.
It yields 7% per year in dividends alone… and could make as much as another 200% in capital gains over the next three years.
PBL subscribers can access the issue right here…
Let the Game Come to You!
Editor, The Palm Beach Letter