Investment Cubism: Chief Executive Officer Chief Investment Officer

Investment Cubism
Jeffrey Gundlach
Chief Executive Officer
Chief Investment Officer
June 20, 2011
Domestic Credit Market Debt as % of Gross
Domestic Product 1929-2009
2009
353%
400%
Year 1
Year 1
BHO
1933
299%
300%
350%
FDR
Year 1
Year 1
GWB
P id
Presidency
2001
276%
250%
Year 1
HST
Year 1
GHWB
Presidency
Presidency
Year 1
1951
130%
1981
1989
229%
150%
200%
Presidency RWR
Presidency
1981
161%
100%
2
9
3
2
3
5
3
8
4
1
4
4
4
7
5
0
5
3
5
6
5
9
6
2
6
5
6
8
7
1
7
4
7
7
8
0
8
3
8
6
8
9
9
2
9
5
9
8
0
1
0
4
0
7
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
2
0
2
0
2
0
Source:MorganStanley,FederalReserve,BureauofEconomicAnalysis
2
Government Promises-To-Pay
$80.0
Publicly Held Treasury Debt & Accrued Interest
Current Liabilities and Unfunded Promises to Pay
$50 1
$52.8
$56.4
$62.3
$60 0
$70.0
$80.0 Current Liabilities and Unfunded Promises to Pay
$43.3
$46.4
$50.1
$40 0
$50.0
$60.0
$26.5
$30.1
$20 0
$30.0
$40.0
$3 6 $3 9 $4 3 $4 6 $4 9 $5 1
$5.8
$7.9
$0 0
$10.0
$20.0
$3.6 $3.9 $4.3 $4.6 $4.9 $5.1
$5.8
$0.0
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009
Source:U.S.Treasury,PeterG.PetersonFoundation
3
Nonfarm Payroll
108
110
104
106
t

=

1
0
01953
1957
1960
98
100
102
c
e
s
s
i
o
n

S
t
a
r
t
1960
1970
1973
1980
94
96
98
R
e
c
1981
1990
2001
2008
92
94
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40
2008
Source: Bureau of Labor Statistics, Bloomberg Financial
4
Months Since Start of Recession
Federal Receipts as % of Debt:
1940 through 2016
60%
70%
b
t
Gross Receipts as % of Debt
Net Receipts as % of Debt
1940 through 2016
OMB Estimate
40%
50%
F
e
d
e
r
a
l

D
e
b
g
h

2
0
1
6
)
20%
30%
p
t
s

a
s

%

o
f

(
1
9
4
0

t
h
r
o
u
g
0%
10%
20%
R
e
c
e
i(
0%
1
9
4
0
1
9
4
3
1
9
4
6
1
9
4
9
1
9
5
2
1
9
5
5
1
9
5
8
1
9
6
1
1
9
6
4
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2

(
e
)
2
0
1
5

(
e
)
Source: Office of Management and Budget (OMB)
Gross Receipts equal Individual Tax, Corporate Tax, Excise Tax and Social Insurance and Retirement Receipts
Net Receipts equal Gross Receipts less Social Insurance and Retirement Receipts
5
Federal Tax Receipts as a % of GDP
25%
20%
%

o
f

G
D
P
0
9
10%
15%
R
e
c
e
i
p
t
s

a
s

t
h
r
o
u
g
h

2
0
5%
10%
F
e
d
e
r
a
l

T
a
x

R
1
9
2
9

0%
5%
F
Source: Office of Management and Budget, DoubleLine Capital
1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
6
Government Options
T S l Th D bt To Solve The Debt
Problem
* Tried These Already ed ese eady
7
Impact of Quantitative Easing on
US 10-Year Treasury
4.5%
3/31/10
QE1 purchases
end
J an 1, 2009: QE1 Start - $600 bn
Mar 18, 2009: QE1 Expanded to $1.725 tn
Mar 31, 2010: QE1 Ends
Nov 3 2010: QE2 Start - $600bn
3 5%
4.0%
end
11/25/08
Nov 3. 2010: QE2 Start - $600 bn
J un 2011: QE2 Proposed End
3.0%
3.5%
8/27/10
QE1
announced
3/18/09
QE1 expanded
2.5%
8/27/10
Jackson Hole
speech QE2 hinted
1/1/09
11/3/10
QE2 purchases
begin
2.0%
QE1 purchases
begin
Source: US Treasury Department, Bloomberg Financial Services
8
National Debt Ceiling versus Gross Federal Debt
Statutory limits have been reduced 5 times since 1940
25
6
)
Debt Subject to Limit
15
20
h
r
o
u
g
h

2
0
1
6
Gross Federal Debt
10
$

T
r
i
l
l
i
o
n
Y
e
a
r

1
9
4
0

t
h
5
n
d

o
f

F
i
s
c
a
l

Y
0
1
9
4
0
1
9
4
3
1
9
4
6
1
9
4
9
1
9
5
2
1
9
5
5
1
9
5
8
1
9
6
1
1
9
6
4
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
0
1
2

(
e
)
0
1
5

(
e
)
(
E
n
Source: Office of Management and Budget, DoubleLine
9
2
0
2
0
Fiscal Year 2011 Requested Budget
Dept of Homeland
Security
1.53%
Dept of HUD
1.48%
Dept of
Energy
1.28%
Dept of J ustice
0.89%
Dept of State
0.80%
International
Assistance Programs
0.68%
Dept of Health and
Human Services
26 08%
Dept of Veterans
Aff i
Dept of
Education
2.63%
Dept of
Transportation
2.42%
NASA
0.50%
Blue indicates
Discretionary
Spending
26.08%
Social Security
Administration
Dept of Defense
20.13%
Affairs
3.47%
Grey indicates
Mandatory
Spending
Administration
22.04%
Allowances
FDIC
0.41%
Dept of Agriculture
4.07%
Dept of the
Treasury
3.84%
Dept of
Labor
3.32%
Office of Personnel
Management
2.10%
Other Defense Civil
Programs
1.71%
0.60%
Source: Office of Management and Budget (OMB)
10
Top 0.1% Income Earners
Share of Total Income Share of Total Income
%
Year Year
U.S J apan U.K. France
Source: Saez and Piketty
11
Marginal Tax Rate on Highest Individual
Income Bracket
90
100
70
80
90
50
60
.
20
30
40
0
10
20
1
9
1
3
1
9
1
6
1
9
1
9
1
9
2
2
1
9
2
5
1
9
2
8
1
9
3
1
1
9
3
4
1
9
3
7
1
9
4
0
1
9
4
3
1
9
4
6
1
9
4
9
1
9
5
2
1
9
5
5
1
9
5
8
1
9
6
1
1
9
6
4
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
Source:InternalRevenueService,DoubleLineCapitalLPasofDecember31,2009
12
U.S. Housing Market
13
S&P Case- Shiller 20-City Home Price Index
200
220
0
1
1
180
200
e
x
F
e
b
r
u
a
r
y

2
0
140
160
P
r
i
c
e

I
n
d
e
2
0
0
1

t
h
r
o
u
g
h

-32.6%decline
peak to trough
120
140
J
a
n
u
a
r
y

2
peak to trough
J uly 2006 to April
2009
100
Source: S&P Case Shiller, Bloomberg Financial Services
14
U.S. Homeownership Rate
70%
60%
65%
p

R
a
t
e
2
0
1
0
-4.2% drop from
1930-1940
2.7%dropfrom
20042010
55%
m
e
o
w
n
e
r
s
h
i
p
0
0

t
h
r
o
u
g
h

2
peaktotrough
45%
50%
H
o
m
1
9
0
40%
Source: U.S. Census Bureau
*1900-1960 based on Decennial Census Data; 1965-2010 Annual Census Data
15
New Single-Family Home Sales
1400
1600
'
s
)
0
,

2
0
1
1
1000
1200
a
l

R
a
t
e

(
,
0
0
0
'
o
u
g
h

A
p
r
i
l

3
0
600
800
S
o
l
d

A
n
n
u
a
1
,

1
9
6
3

t
h
r
o
200
400
U
n
i
t
s

J
a
n
u
a
r
y

3
0
1
/
1
/
1
9
6
3
1
1
/
1
/
1
9
6
4
9
/
1
/
1
9
6
6
7
/
1
/
1
9
6
8
5
/
1
/
1
9
7
0
3
/
1
/
1
9
7
2
1
/
1
/
1
9
7
4
1
1
/
1
/
1
9
7
5
9
/
1
/
1
9
7
7
7
/
1
/
1
9
7
9
5
/
1
/
1
9
8
1
3
/
1
/
1
9
8
3
1
/
1
/
1
9
8
5
1
1
/
1
/
1
9
8
6
9
/
1
/
1
9
8
8
7
/
1
/
1
9
9
0
5
/
1
/
1
9
9
2
3
/
1
/
1
9
9
4
1
/
1
/
1
9
9
6
1
1
/
1
/
1
9
9
7
9
/
1
/
1
9
9
9
7
/
1
/
2
0
0
1
5
/
1
/
2
0
0
3
3
/
1
/
2
0
0
5
1
/
1
/
2
0
0
7
1
1
/
1
/
2
0
0
8
9
/
1
/
2
0
1
0
Source: Bloomberg Financial Services
16
11111
Housing Starts
250
300
200
250
r
t

=

1
0
0
1960
1970
100
150
c
e
s
s
i
o
n

S
t
a
r1970
1973
1980
1981
50
100
R
e
c
1990
2001
2008
0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38
Source:BloombergFinancialServices,USCensusBureau
Aninvestmentcannotbemadedirectlyinanindex.
17
17
Building Permits
200
250
150
200
a
r
t

=

1
0
0
1960
1970
100
e
c
e
s
s
i
o
n

S
t
a
1973
1980
1981
1990
50
R
e
1990
2001
2008
0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38
18
New Home Sales
200
250
150
t
a
r
t

=

1
0
0
1970
1973
100
R
e
c
e
s
s
i
o
n

S
t
1973
1980
1981
1990
2001
50
R2001
2008
0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36
19
SubPrime Serious Delinquency and
Conditional Default Rate Conditional Default Rate
43.4%
50%
60%
60++
40%
50%
6
0
+
+
M
a
y

2
0
1
1
CDR
20%
30%
m
e

C
D
R

v
s

6
0
5

t
h
r
o
u
g
h

M
8.5%
0%
10%
S
u
b
p
r
i
m
J
a
n
u
a
r
y

2
0
0
60++referstoseriousdelinquencydefinedasloans60or90dayslateinmortgagepayments,oralreadyinforeclosureorREOstatus.
Prime defined as FICO > 725 and LTV < 75
0%
J
PrimedefinedasFICO>725andLTV<75
AltAdefinedasFICO675725;orFICO>725andLTV>=75
SubprimedefinedasFICO<675
Source:DoubleLineCapitalbasedLoanPerformanceandVichara data
20
Alt-A Serious Delinquency and Conditional
Default Rate Default Rate
27.1% 25%
30%
60++
CDR
27.1%
20%
25%
6
0
+
+
h

M
a
y

2
0
1
1
CDR
8.3%
10%
15%
t
-
A

C
D
R

v
s

6
2
0
0
5

t
h
r
o
u
g
h
0%
5%
A
l
t
J
a
n
u
a
r
y

2
Prime defined as FICO > 725 and LTV < 75 PrimedefinedasFICO>725andLTV<75
21
Prime Serious Delinquency and Conditional
Default Rate Default Rate
10.7%
10%
12%
60++
6%
8%
0
+
+
M
a
y

2
0
1
1
CDR
3.3%
4%
6%
e

C
D
R

v
s

6
0
0
5

t
h
r
o
u
g
h

M
0%
2%
555566667777888899990000
P
r
i
m
e
J
a
n
u
a
r
y

2
0
Prime defined as FICO > 725 and LTV < 75
J
a
n
-
0
5
A
p
r
-
0
5
J
u
l
-
0
5
O
c
t
-
0
5
J
a
n
-
0
6
A
p
r
-
0
6
J
u
l
-
0
6
O
c
t
-
0
6
J
a
n
-
0
7
A
p
r
-
0
7
J
u
l
-
0
7
O
c
t
-
0
7
J
a
n
-
0
8
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
PrimedefinedasFICO>725andLTV<75
22
Historical Loss Severity
72.6%
70%
80%
Prime
Alt-A
47 5%
59.3%
50%
60%
r
i
t
y
g
h

M
a
y

2
0
1
1
Subprime
47.5%
20%
30%
40%
L
o
s
s

S
e
v
e
r
2
0
0
5

t
h
r
o
u
g
0%
10%
20%
J
a
n
u
a
r
y

Prime defined as FICO > 725 and LTV < 75 PrimedefinedasFICO>725andLTV<75
23
Loss Severities Increase With Longer
Liquidation Lags Liquidation Lags
Source:AmherstSecuritiesasofApril30,2011
24
Loss Severities Increase With Longer
Liquidation Lags Liquidation Lags
25
Liquidation Lag Times Are Systematically
Increasing Increasing
26
ABX 07-1AAA
100
120
0
1
1
80
A
A
A

J
u
n
e

1
3
,

2
0
40
60
A
B
X

2
0
0
7
-
1

0
0
7

t
h
r
o
u
g
h
20
40
A
M
a
y

1
0
,

2
0
0
y
-
0
7
u
l
-
0
7
p
-
0
7
v
-
0
7
n
-
0
8
a
r
-
0
8
y
-
0
8
u
l
-
0
8
p
-
0
8
v
-
0
8
n
-
0
9
a
r
-
0
9
y
-
0
9
u
l
-
0
9
p
-
0
9
v
-
0
9
n
-
1
0
a
r
-
1
0
y
-
1
0
u
l
-
1
0
p
-
1
0
v
-
1
0
n
-
1
1
a
r
-
1
1
y
-
1
1
Source:MarkIt
27
M
a
y
J
u
S
e
p
N
o
v
J
a
n
M
a
M
a
y
J
u
S
e
p
N
o
v
J
a
n
M
a
M
a
y
J
u
S
e
p
N
o
v
J
a
n
M
a
M
a
y
J
u
S
e
p
N
o
v
J
a
M
a
M
a
ABX 07-1AAA v. Bank of America Stock
50
60
100
110
0
1
1
0
1
1
ABX 2007-1 AAA
40
50
80
90
S
t
o
c
k

P
r
i
c
e
h

J
u
n
e

1
3
,

2
0
A
A
A
h

J
u
n
e

1
3
,

2
0
BAC Equity
20
30
50
60
70
o
f

A
m
e
r
i
c
a

S
0
0
7

t
h
r
o
u
g
h
A
B
X

0
7
-
1

A
0
0
7

t
h
r
o
u
g
h
10
30
40
B
a
n
k

o
M
a
y

1
0
,

2
0
M
a
y

1
0
,

2
0
0 20
Source:MarkIt,BloombergFinancialServices
28
S&P 500 Index and Shanghai Index
Year-End 2007 through June 13, 2011 g ,
6000
1400
1600
2
0
1
1
2
0
1
1
4000
5000
1000
1200
s
i
t
e
g
h

J
u
n
e

1
3
,

g
h

J
u
n
e

1
3
,

2000
3000
600
800
S
H

C
o
m
p
o
s
2
0
0
7

t
h
r
o
u
g
S
&
P

5
0
0
2
0
0
7

t
h
r
o
u
g
1000
2000
200
400
S
e
c
e
m
b
e
r

3
1
,

e
c
e
m
b
e
r

3
1
,

S& S C
0
0
D
e
D
e
S&P 500 Shanghai Composite Index
Source:BloombergFinancialServices,DoubleLineCapitalLP
29
30
Rolling 5-Year Volatilities of Investment
Grade Bond Sectors
Historically, mortgages have had lower volatility than other investment grade credits
6 5%
7.0%

Treasury
5.5%
6.0%
6.5%
e
d

S
t
a
n
d
a
r
d
M
a
y

2
0
1
1
)
Treasury
Municipal Bonds
IG Credit
MBS
4.5%
5.0%
t
h

A
n
n
u
a
l
i
z
e
a
r
c
h

1
9
9
6

-
M
3.0%
3.5%
4.0%
l
i
n
g

6
0
-
m
o
n
t
e
v
i
a
t
i
o
n

(
M
a
2.0%
2.5%
R
o
l
l
D
Source: Bloomberg, BofA/Merrill Lynch Indices
An investment cannot be made directly in an index.
31
Rolling 3-Year Volatilities of Investment
Grade Bond Sectors
8%
9%
a
r
d

Treasury
7%
8%
i
z
e
d

S
t
a
n
d
a
-
M
a
y

2
0
1
1
)
Municipal Bonds
IG Credit
MBS
5%
6%
o
n
t
h

A
n
n
u
a
l
M
a
r
c
h

1
9
9
6

3%
4%
o
l
l
i
n
g

3
6
-
m
o
D
e
v
i
a
t
i
o
n

(
2%
R
32
Rolling 5-Year Volatilities:
High Yield Comparison g p
14%
16%
D
e
v
i
a
t
i
o
n
Treasury
Municipal Bonds
10%
12%
S
t
a
n
d
a
r
d

D
a
y

2
0
1
1
)
Long Treasury
High Yield
6%
8%
A
n
n
u
a
l
i
z
e
d

c
h

1
9
9
6

-
M
a
2%
4%
6%
g

6
0
-
m
o
n
t
h

(
M
a
r
c
0%
2%
R
o
l
l
i
n
33
Rolling 3-Year Volatilities:
High Yield Comparison g p
18%
20%
e
v
i
a
t
i
o
n
Treasury
Municipal Bonds
12%
14%
16%
S
t
a
n
d
a
r
d

D
a
y

2
0
1
1
)
Municipal Bonds
Long Treasury
High Yield
8%
10%
12%
A
n
n
u
a
l
i
z
e
d

c
h

1
9
9
6

-
M
a
4%
6%
g

3
6
-
m
o
n
t
h

(
M
a
r
c
0%
2%
R
o
l
l
i
n
g
34
Hedge Fund Investment Cubism
Weightings Sector
Yield
(Cash
Refinancing
Capital At
Depression
Capital At Risk
RisingInterest
RateRisk
Flow) Risk
CapitalAtRisk
(Duration)
1 25% GNMAPrincipalPaying 14% 5.7 5.7 5.0
2 15% GNMAInterestOnly 27% 15.0 0.3 2.2
3 5% OtherGNMA 6% 0.1 0.6 0.6
4 40% AltARMBS 11% 8.3 6.0 1.6
5 10% PrimeRMBS 8% 1.6 1.0 0.2
6 5% OtherMBS 18% 0.5 0.5 0.2
100% Total 14% 0.2 1.5 6.2
RateHedged 12% 0.2 13.9 0.0
35
Disclaimer
Important InformationRegardingThis Report Important Information Regarding This Report
Issue selection processes and tools illustrated throughout this presentation are samples and may be modified periodically. Such charts are not the only tools
used by the investment teams, are extremely sophisticated, may not always produce the intended results and are not intended for use by non-professionals.
DoubleLine has no obligation to provide revised assessments in the event of changed circumstances. While we have gathered this information from sources
believed to be reliable, DoubleLine cannot guarantee the accuracy of the information provided. Securities discussed are not recommendations and are
presented as examples of issue selection or portfolio management processes. They have been picked for comparison or illustrationpurposes only. No
securitypresentedwithinis either offeredfor sale or purchase DoubleLine reserves the right to change its investment perspective andoutlookwithout security presented within is either offered for sale or purchase. DoubleLine reserves the right to change its investment perspective and outlook without
notice as market conditions dictate or as additional information becomes available.
Important Information Regarding Risk Factors
Investment strategies may not achieve the desired results due to implementation lag, other timing factors, portfolio management decision-making, economic
or market conditions or other unanticipated factors. The views and forecasts expressed in this material are as of the date indicated, are subject to change
without notice, may not come to pass and do not represent a recommendation or offer of any particular security, strategy, or investment. Past performance y p p yp y gy p
is no guarantee of future results.
Important Information Regarding DoubleLine
In preparing the client reports (and in managing the portfolios), DoubleLine and its vendors price separate account portfolio securities using various sources,
including independent pricing services and fair value processes such as benchmarking.
To receive a complimentary copy of DoubleLines current Form ADV Part II (which contains important additional disclosure information), a copy of the
DoubleLines proxy voting policies and procedures, or to obtain additional information on DoubleLines proxy voting decisions, please contact DoubleLines
Client Services.
Important Information Regarding DoubleLines Investment Style
DoubleLine seeks to maximize investment results consistent with our interpretation of client guidelines and investment mandate. While DoubleLine seeks to
maximize returns for our clients consistent with guidelines, DoubleLine cannot guarantee that DoubleLine will outperform a client's specified benchmark.
Additionally the nature of portfolio diversificationimplies that certainholdings andsectors in a client's portfolio maybe risingin price while others are falling; Additionally, the nature of portfolio diversification implies that certain holdings and sectors in a client's portfolio may be rising in price while others are falling;
or, that some issues and sectors are outperforming while others are underperforming. Such out or underperformance can be the result of many factors, such
as but not limited to duration/interest rate exposure, yield curve exposure, bond sector exposure, or news or rumors specific to a single name.
DoubleLine is an active manager and will adjust the composition of clients portfolios consistent with our investment teams judgment concerning market
conditions and any particular security. The construction of DoubleLine portfolios may differ substantially from the constructionof any of a variety of bond
market indices. As such, a DoubleLine portfolio has the potential to underperform or outperform a bond market index. Since markets can remain inefficiently
priced for long periods, DoubleLines performance is properly assessed over a full multi-year market cycle. p gp , p p p y y y
As of J une16, 2011 the DoubleLine Total Return Bond Fund did not hold any shares of Bank of America.
2011 DoubleLine Capital LP
36

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