The Great Capitulation

If you were to browse the virtual bookshelves of Amazon, some of the latest titles do not seem overly optimistic about the future. In Niall Ferguson’s The Great Degeneration, he examines why civil society is in complete “free fall”. Another recent “pick me up” entitled The Great Deformation, by former Reagan budget director David Stockman, discusses the negative impacts of Washington’s political dysfunction to our democracy. Although my sense of optimism may not be reflected in these aforementioned works, I would suggest the title The Great Capitulation to describe bond king Bill Gross’s recent prognostication of an end to the bond bull market. The PIMCO chief is not alone. Among others, David Rosenberg of Gluskin Sheff recently stated that his long-term love affair with bonds is ending in divorce. Even some bond funds seem to be distancing themselves from bonds. A recent WSJ report found that 352 mutual funds that categorize themselves as ‘income’ or ‘bond’ funds actually have some exposure to stocks.i For example, Loomis Sayles, a reputable fixed income manager, has increased their stock allocation in their $16 billion Strategic Income Fund “to more than 19%, from 5% in mid-2011.” ii The Co-portfolio manager stated that they “decided most bonds were so overpriced that it was worth taking on some stock risk to avoid pain in bonds.” iii Although these allocations may be within the limits of a fund’s mandate, it may come as a surprise to some investors. In addition to the changing view among managers, the U.S. government has “moved closer to issuing a new type of Treasury bond whose interest rates change over time,” (i.e. floating rate bonds).iv As these changes may come by the fourth quarter of 2013, this may be a sign that the Treasury is preparing “to fund itself when interest rates eventually rise from the current historic lows.”v

Despite these changing views of the bond market, sentiment in the equity markets is still sour. Although we are currently experiencing an equity rally, “the so-called “great rotation” has not occurred when bond funds are still getting flows” and “10-year Treasuries sit near their all-time low yields such that virtually no bond investors have lost money yet,” according to Citi analyst Tobias He adds that “portfolio managers are almost unwilling to hang on to positions as the fear of giving back their gains still outweigh the potential for stocks continuing to rally especially in the face of the old “Sell in May and Go Away” adage.” vii Essentially, we are still far away from bubble territory in the equity markets. Remember the four phases of a bubble pattern, as defined by MI2 Partners: “stealth, discovery, mania, and bust." viii During the first phase (stealth), the smart money enters. During the discovery phase, we typically see an influx of institutional money. The third phase (mania) begins when retail money piles in, and eventually leads to a parabolic shift upwards. We are nowhere near this phase. As the term “peak” continues to appear from the lexicon of the investing pundits, keep the bubble pattern in mind. Remember that the investing pundits are desperate for attention, as evidenced by the “imploding viewership” of CNBC, which just experienced “the lowest recorded viewership since mid-2005 and sliding.” ix As Anatole Kaletsky of GaveKal wrote, “This is not a peak: It’s a bull market.” x He claims that the recent rally may have marked an end to “the structural bear market” dating back to March 2000 when the internet bubble burst. “The first reason is simply the passage of time. When shares become overvalued, as they did in the boom of the late 1990s, they generally experience both a price and a time correction.” xi After 13 years, “growth in revenues and profits have finally caught up with exuberant expectations.” xii Furthermore, cyclical and political conditions are improving. Overall, GaveKal suggests that the U.S. market is undervalued by roughly two standard deviations. Regardless, many investors are still watching from the sidelines. Market strategist Barry Ritholtz believes that “there is an issue with those who philosophically cannot wrap their heads around equity markets going up.” xiii He cautions investors that the “methodology has to be more than cherry picking the worst headlines and positioning your portfolio for the next crash, year after year.”xiv In the meantime, I will continue to examine the entrails of the market and take advantage of the opportunities in equities, which may have finally woken some of the great “capitulators.”

Pamela Rosenau is Managing Director & Equity Market Strategist at HighTower; Co-Chair of the Steering Committee of HighTower Group Investment Solutions; and Chief Investment Officer of The Rosenau Group. Ms. Rosenau is a macro, visionary, non-consensus thinker that places an emphasis on risk minimization and misunderstood market moving signals. With over 25 years of experience in the financial industry, her tenure in investment management is best reflected in her core strategy which has historically outperformed the S&P 500 benchmark in down markets. Prior to joining HighTower she worked for various sell-side firms beginning her tenure with Wertheim & Co./Schroders Plc. She was recently ranked #15 in Barron’s 2012 Top 100 Women Financial Advisors, and was also chosen for Barron’s 2013 Top 1,000 Advisors list, ranking #42 out of all financial advisors in California.

This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower Advisors, LLC or any of its affiliates. In preparing these materials, we have relied upon and assumed without independent verifications, the accuracy and completeness of all information available from public and internal sources. HighTower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them.

This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. Carefully consider investment objectives, risk factors and charges and expenses before investing.


iLight, Joe. “Bond Funds Running Low on Bonds.” The Wall Street Journal. May 1, 2013.

ii Ibid.

iii Ibid.

iv Zeng, Min. “Treasury is Readying Floating-Rate Debt.” The Wall Street Journal. May 1, 2013.

v Ibid.

vi Tobias Levkovich. Citigroup. May 3, 2013.

vii Tobias Levkovich. Citigroup. May 8, 2013.

viii Macro Intelligence 2 Partners. May 1, 2013.

ix Zerohedge. Friendly Reminder: CNBC Viewership Plunges to Eight Year Lows. May 8, 2013.

x Gavekal Research. May 9, 2013.

xi Ibid.

xii Ibid.

xiii Barry Ritholtz. The Big Picture. May 9, 2013.

xiv Ibid.

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