Explaining Southern California's economy

How can you profit from Apple's decline? Listen to Jeff Gundlach

Asia Reacts to the Death of Steve Jobs

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Dark days have arrived for Apple, as its stock prices falls from 2012 highs. One investor was bearish on the the stock when its was riding high, however: L.A.'s Jeff Gundlach.

Last year, Jeffrey Gundlach, the CEO of Los Angeles-based DoubleLine Capital, lay out what some called the most contrarian Apple trade imaginable. In spring of 2012, Apple was riding high, climbing to almost $640 per share in early April. It gave some of that back over the summer, but by September, it made all-time highs above $700 and Apple observers started seriously talking about it as the first $1,000 per share/$1 trillion company. 

Back in the spring, Gundlach predicted, in effect, that Apple's run was over. He put himself in the mind of a risk-craving hedge fund trader — his reputation is as a solid manager of bond investments, although his exit from his previous employer, TCW, was controversial — and recommended betting that Apple's share price would collapse. He paired that bet, his short position, with a call to go long on natural gas, so cheap at the time that it was practically free: around $2 per million BTUs. 

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FAQ: Why is Apple's stock sliding? And how low can it go?

A view of the main entrance to Apple Inc.

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A view of the main entrance to Apple Inc. in Cupertino, California. The company's stock has been crushed over the past few months. How low can it go?

Last year, Apple's share price rose above $700. Some analysts started getting all crazy with their predictions for where it might go. Could Apple hit $1000 and become the world's first $1 trillion company?

For a while these calls didn't look so crazy. As a company, Apple was a beast. It could do no wrong. The declines were inevitable, but temporary. The stock would always recover and resume its inexorable match to quadruple digits.

Apple dipped below the psychologically important $500 per share barrier this week (it's since recovered a bit as investors waiting for it to dip below the psychologically important $500 per share barrier piled in). There are some serious and well-respected investors who are bearish on this stock. Jeff Gundlach, of L.A.'s DoubleLine Capital, is one of them. He's set a target price for Apple of $425.

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DoubleLine Capital's Jeff Gundlach says housing recovery has a ways to go (Chart)

DoubleLine Capital's CEO, Jeff Gundlach, doesn't see a robust housing recovery in 2013, the "Year of the Snake."

DoubleLine Capital's Jeff Gundlach presented his 2013 market outlook on Tuesday. DoubleLine, based in Los Angeles, is a fast-growing financial start-up. It has amassed more than $50 billion in assets under management (AUM) since CEO Gundlach left rival TCW — also L.A. based — in 2009, under controversial and eventually litigious circumstances. 

With Newport Beach based PIMCO, DoubleLine and TCW form what I call a Southern California "bond triangle" — together the trio manages more than $2 trillion, dealing mostly with fixed-income investments (although PIMCO and DoubleLine have been edging toward equities as a greater portion of their portfolios).

Add in Pasadena-based WAMCO, with $450 billion under management, and you have a constellation of bond funds with portfolios that surpass the annual economic output of the entire state of California, which is about $2 trillion.

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Bond kings chase returns in a low-interest-rate world

A short sale home in the Spring Valley a

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A recovering housing market has yielding big returns for Southern California bond funds that have invested in risky assets.

Heather Perlberg and Pierre Paulden at Bloomberg have a good piece Wednesday about what I call Southern California's "bond triangle" - and its investment managers' relentless quest for returns when interest rates are at historic lows. 

The major players in the story are PIMCO, the nearly $2 trillion fixed-income colossus based in Newport Beach; TCW, with $135 billion in assets under management and in the process of being taken over by the Carlyle Group, a big private-equity firm; and DoubleLine Capital, run by former TCW trader Jeff Gundlach and one of the fastest-growing financing startups in history, with more than $50 amassed in assets in three years. ( TCW and DoubleLine are based in L.A.)

Here's Perlberg and Paulden on how these firms' investment in a risky category of debt has paid off big time:

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In SoCal's Bond Triangle, the Carlyle Group hits some trouble

TCW-Getty

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The Carlyle Group, a huge private-equity firm, has hit snag with its purchase of a majority stake in TCW, one of the big bonds finds headquartered in California.

Reuters ran a dense "exclusive" Monday about some financial gyrations that are making potential trouble for private-equity colossus the Carlyle Group's deal to buy a chunk of TCW, one of the biggest bond funds in the world and a part of what I call the Southern California Bond Triangle. It also includes PIMCO and DoubleLine Capital.

PIMCO is the biggest bond fund in the world, with $1.8 trillion under management. TCW has around $135 billion on its books. DoubleLine has been growing at a furious pace since CEO Jeff Gundlach established it after a controversial departure from TCW. It has taken on nearly $50 billion in under three years. 

You could also throw Pasadena-based WAMCO in there, creating a Bond Quadrangle. WAMCO has around $450 billion under management and has tried in recent years to regain its competitive mojo versus PIMCO.

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