AIMCo's Leo de Bever Calling the Top on Bonds?

Lee Brodie of CNBC reports, Rotation Underway:

As the CEO of Alberta Investment Management Corp., Leo de Bever is responsible for maintaining and growing over $70 billion in public sector employee pensions.

And although he's allocated the largest portion of his portfolio to bonds, in an interview on CNBC’s Fast Money he reveals that he thinks, “We're at the end of a 30-year bull market in bonds. It’s going to be more attractive to take risks in high quality stocks.”

That comment suggests a theme the Fast traders often talk about is getting underway – something called rotation or the reallocation of capital from the bond market into the stock market.

In this specific case, de Bever likes, “companies that have pricing power, that are defensive and have a good franchise. And (companies that) can increase prices in the face of inflation.”

Three specific names he recommends are Exxon (XOM), McDonald's (MCD) and IBM (IBM).

Taking that thesis a step further, if de Bever's changing attitudes toward stocks is indicative of changing attitudes among other big PMs, it would seem to confirm a thesis presented by famed market timer Doug Kass on April 25th.

“We may be seeing an important reallocation out of bonds and into stocks," Kass said at the time. "It could be very powerful."

In other words rotation could be a catalyst that drives the next leg higher.

Leo de Bever isn't the only one warning on bonds. A chorus of gurus have come out lately, including Pimco's Bill Gross and hedge fund manager David Einhorn who said Federal Reserve policy intended to stimulate the economy and create jobs is “no longer useful” because it risks inflation:

Investors including Pacific Investment Management Co.’s Bill Gross have said Fed policy makers may be adding the risk of future economic disruption. The central bank has kept interest rates near zero since late 2008.

Einhorn, whose hedge fund can bet on the rise or fall in equity prices, has been adjusting investments he oversees for Greenlight Capital Re Ltd. (GLRE), the Cayman Islands-based reinsurer where he is chairman. He boosted bullish bets in stocks last month as corporate profits improved and beat earnings expectations, he said on a conference call with investors today.

“This enthusiasm is tempered by our continued concern about the structural sovereign-debt problems in Europe and Japan, a slowing Chinese economy, and high oil prices and general inflation connected to the Fed’s continued insistence on maintaining an emergency zero percent interest-rate policy, which we believe is no longer useful or effective,” Einhorn said on the call.

Fed policymakers, led by Chairman Ben S. Bernanke, reiterated their view April 25 that conditions may warrant “exceptionally low levels” for rates through at least late 2014. The central bank has kept its target federal funds rate between zero and 0.25 percent since December 2008.

Investment Portfolio

Greenlight Re’s investment portfolio returned 6.5 percent in the first quarter, compared with a 3.4 percent loss in the year-earlier period, according to a statement from the reinsurer. The portfolio’s net-long position rose to 39 percent in April from 32 percent at the end of March, Einhorn said on the call. The hedge fund manager added short bets, in which he wagers that securities will decline, in the first three months of the year as the market rallied.

The reinsurer posted net income of $65.1 million in the first quarter, compared with a net loss of $43 million a year earlier, according to the statement.

Gross, who oversees the world’s largest bond fund, said in a monthly investment outlook posted on Newport Beach, California-based Pimco’s website today that Fed policies including debt purchases will cause “gradually higher rates of inflation.”

The “acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero-bound interest rates will limit the growth,” Gross wrote.

Einhorn and his hedge fund Greenlight Capital Inc. are known for shorting Lehman Brothers Holdings Inc. before it collapsed in September 2008.

Bill Gross's monthly letter, The Great Escape: Delivering in a Delevering World, is excellent, well worth reading. He recommends the following:

When interest rates cannot be dramatically lowered further or risk spreads significantly compressed, the momentum begins to shift, not necessarily suddenly, but gradually – yields moving mildly higher and spreads stabilizing or moving slightly wider.

In such a mildly reflating world, unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form.

We favor high quality, shorter duration and inflation-protected bonds; dividend paying stocks with a preference for developing over developed markets; and inflation-sensitive, supply-constrained commodity product

Will rotation out of bonds into stocks finally materialize? That all depends on confidence and jobs. This morning the ADP figures came out weaker than expected, sending futures lower. The perma-bears and short-selling gold shills over at Zero Hedge had an orgasm dissecting the figures.

But there is only one report that truly counts this week, it's the jobs report coming out Friday morning and after some March madness, wouldn't be surprised if it comes in better than expected. Even if it doesn't, there is little doubt the US recovery is well underway and that employment growth will pick up.

I've repeatedly stated that there is a cyclical bull market going on right now, driven in large part by unprecedented liquidity. Go back to read my weekend comments on the stay-liquid-and-wait strategy and the global game changer. The world is changing, adapting and it's not all doom & gloom.

Importantly, investors who fail to understand the implications of massive flows into hedge funds, private equity funds, real estate, infrastructure, commodities and timberland are going to severely underperform over the next decade.

But what about bonds? What does this mean for bonds? While I see a cyclical backup in bond yields, I am not ready to call the end of the bond bull market, not just yet. There are far too many structural problems in the global economy that are not being addressed, chief among them, the unemployment crisis gripping the developed world, especially youth unemployment.

Worse still, as Eurozone policymakers continue the lunacy of austerity, throwing their economies deeper into a depression, they're fanning the flames of deflation and political extremism. Austerity and and aging demographics are deflationary and very bullish for bonds.

Of course, it is possible we're heading into a 1970s style stagflation period (high inflation, low growth), but current policies are more likely to lead us into a 1990s style Japanese deflationary era where we keep propping up zombie banks and markets essentially go nowhere but with plenty of volatility to feed financial oligarchs.

Finally, earlier this week, Reuters reported that a number of hedge funds, asset managers and investment banks have launched vehicles dedicated to investing in the mortgage sector, often in securities backed by those loans, and sometimes focused on scooping up bargain-priced mortgages themselves:

The near-zero interest rate environment has investors starving for yield, and mortgage-related investments are seen as an attractive asset class with upside potential if the housing market picks up.

And even if home sales and prices don't recover, mortgage-backed securities still perform well as they provide higher yields relative to Treasuries and are appealing against a stable rate policy. A substantial risk would occur if interest rates rose abruptly and the U.S. economy weakened substantially, resulting in a spike in mortgage defaults.

A lot of smart asset managers are obviously betting that there won't be an abrupt rise in interest rates or a substantial weakening of the US economy. If they're wrong, these mortgage funds will get slaughtered.

Below, Leo De Bever, AIMCo CEO, discusses sector rotation and weighs in with some of his long-term value plays in high-quality stocks, corporate bonds and emerging markets.

Also, Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, talks about his "overweight" positions on stocks, commodities and property. He also discusses the European sovereign-debt crisis with Caroline Hyde on Bloomberg Television's "On the Move."