Investing is Like Duck Hunting
HighTower Advisors
By Pamela Rosenau
September 12, 2012
The discussion of additional monetary easing by the Federal Reserve has been the topic du jour in recent weeks. As a result of potential additional monetary stimulus, the US dollar has experienced a decline. Also, after a weaker than expected jobs report last week, US treasuries initially rallied given an increased expectation of Fed action. However, as pointed out by the market commentators at Sober Look, the Treasury curve has begun to steepen with the “30-year bond and other longer dated treasuries steadily selling off.” The main reason for the curve steepening “has to do with market participants beginning to price in materially higher longer term inflation.” i Although the short-term rates have been less impacted, the five-year breakeven rate (the expectation for inflation based on Treasury inflation-protected securities) “at 2.81% is up 16 bps in a week, the most since August 2011.” ii As market strategist Dave Rosenberg suggests, the sell-off in Treasuries is “perhaps a signpost of an overall asset allocation shift taking place.” iii There are other factors that may signal a tipping point in Treasuries. For example, “in all of 2012, according to Treasury International Capital flow data, China has increased its Treasury holdings from $1,151.9 billion as of December 31, 2011 to just $1,164.3 billion,” based information from Zero Hedge. This increase of just $12.4 billion in six months is “the slowest run-rate since China started to recycle [its] budget surplus in US paper.” They add that, with China’s increased appetite for gold, “for the first time in history China has imported twice as much gold as it has "imported" US Treasuries.”iv Technical analyst Louise Yamada adds, “at some point, [if] the Fed currently buying 75% of the Treasuries issued were to cease, who would be left to buy? At that point the yields should be expected to rise.” v
BCA Research recently stated that “with the heavy inflows into bond mutual funds over the past two years we have at the back of our minds the type of dislocation that followed the inflows into equity funds in 2000.” vi This, coupled with potential ineffectiveness of additional monetary easing, may be an inflection point in the bond market. Recently, hedge fund manager Matt Grossman of Plural Investments decided to close the fund and return capital to investors, noting that “he sees investment opportunities with a strategy that has higher market exposure and return volatility and more concentrated positions than Plural’s current investment mandate.” More importantly he added, “I believe we are close to a tipping point with respect to the effectiveness of government intervention in the economy as well as investor preference for fixed income over equities.” vii Wolfe Trahan indicates that inflation trends are likely to pick up given the rise in homebuilding. They state that “the improvement in housing of late is a game changer” and “one that most recession-callers are underestimating.” viii More importantly, there is a lag effect where typically two years after homebuilder sentiment begins to rise, policy makers have to react to the strong growth and inflation trends. For this reason, Wolfe Trahan believes that the Fed may have to increase rates at some point in 2013, clearly a minority, market-moving viewpoint, in order to stem inflationary pressures that some in the market are currently anticipating. Looking back at the period of 1975 to 1980, which was a period of significant inflation in the U.S., bond returns were severely impacted. Per Strategas, over that five-year period, long-term government bonds were down 18 percent, while gold rallied by 96 percent, large cap stocks were up 36 percent and home prices were up 19 percent. ix I believe all of these indications lead to a significant decline in bonds in the coming years. Per the well-known investor John Mauldin, “Every hunter knows you don’t shoot where the duck is; you shoot where the duck is going to be. You’ve got to lead the duck.” x
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 2012 Top 1,000 Advisors list, ranking #46 out of all financial advisors in California.
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC, a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.
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.
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iSober Look - September 8, 2012.
iiThe Big Picture - September 11, 2012.
iiiGluskin Sheff - September 10, 2012.
ivZero Hedge - September 10, 2012.
vLouise Yamada, Technical Perspectives - September 2012.
viBCA Research - Global Asset Allocation, August 30, 2012.
viiReuters - August 22, 2012.
viiiWolfe Trahan, Portfolio Strategy – September 5, 2012.
ixStrategas Research Partners - August 27, 2012.
xJohn Mauldin, Bull’s Eye Investing (2004).
(c) HighTower Advisors
