DoubleLine Strategist: Beware The "Walking Dead"

Bonnie Baha, the director of global developed credit at Jeffrey Gundlach’s DoubleLine Capital, says that investors should beware of “zombie retailers”.

“Screams and moans. Cries of despair. The smell of burning cash. Voracious appetites for capital that can never be satiated. Those should be the sounds coming from the boardrooms of two legacy retailers, J.C. Penney and Sears Holdings,” Baha writes for Forbes. “Yet these zombies somehow continue to anchor shopping malls.”

Baha says that the Federal Reserve’s policies have allowed these and other retailers to continue to tap capital markets at reasonable interest rates, despite deteriorating financials and unsustainable business models. “They represent unintended consequences of our central bank’s QE program, which has essentially allowed the U.S. to defer, if not entirely skip, a normal default cycle in which troubled companies are culled from the marketplace,” she says.

Baha says these zombie retailers (and zombies in other industries) have “a significant ripple effect on the economy”, and can have a significant impact on investors’ portfolios. “Most individuals have exposure to fixed income through ETFs or bond index funds,” she says. “With these the most indebted issuers typically make up the largest slice. That’s troubling given that some of the sickest businesses have used QE as an opportunity to pile on debt. For corporate bond investors this means active management is probably the best course.”