Bob -
Great Post.
In your breakdown of players among speculators, pros and the funds, where do you place the large pools of marginal money, such as hedge funds (Soros, etc.) and the large trading accounts of the various brokerages or investment banks (eg Goldman Sachs)?
I used to work as a pension consultant, providing primarily actuarial services to Corporate and Union (Taft-Hartley) defined benefit pension plans. I sat in on many meetings where investment managers presented their quarterly results (saw a lot of dancing!!).
Smaller funds ($10 to $30-$40 million) usually allocated 30% to 50% to bonds while the remainder went to equities. With few exceptions, there would be just one equity investment manager, with a large cap style highly correlated to S&P 500. In fact, almost all of the equity managers (for the smaller funds) used the S&P 500 as their performance bogey. Bond performance was usually tied to the Shearson-Lehmon Intermediate Bond index.
Larger pension funds ($50 to $1,000 million) that I was involved with had more equity managers, including small cap and international guys; but a big slug went to the Large Cap guy keying off of the S&P 500 index. Some large cap guys used an "Index Plus" approach, where they would run an index fund but try to pick up marginal performance by various techniques (e.g., underweighting the worst stocks in each sector).
So, there is a lot of passive money in the equity market. Besides the S&P 500 Index Funds themselves (both retail and institutional), there are Index Plus funds, closet indexers and many managers with the SPX as their bogey.
Asset allocation for these pension plans is reviewed quarterly; general policy is reviewed/changed anywhere form every 3 to 20 years. A pension fund can run with a specific allocation (eg, 35% large Cap, 15% small cap 10% international and 40% Bonds) for 2 to 4 years without touching the mix (although the funds are usually rebalanced periodically).
Bonds are not very appealing to a pension plan. Current funding (the actual cash the Plan sponsor must contribute to the plan) and pension expense (ie, the p&l charge) targets for a pension plan are keyed to an annual asset appreciation assumption ranging from 7.5% to 9.5%. In the current environment, bonds return maybe 6%, while equities are assumed to return 10% (long term SPX performance over 70 years?). You can't park very much in bonds if the plan's annual bogey is say 8.5%. And if bond yields rise from 6% to 6.25%, there isn't going to be much of a reaction in terms of asset allocation.
So, two thoughts: (1) who is going to sell stocks?, or phrased differently, where is the marginal money?; and (2) the S&P 500 stocks are sucking up an amazing portion of the available equity investment dollars due to the way the game is played.
Geez, this post is getting long.
I would guess that average retail investor (including all of the 401(k) and IRA money), through the use of mutual funds, and the pension funds are not going to leave the party first. They either have no choice or are true blue buy-the-dips and I'm in for the long haul (at least until something reaaalllly nasty happens). So, the marginal players (those that can leave or are forced to leave for other reasons) consist of?? foreign investors, hedge funds, trading house and other pros?
Tell me more about the foreign investors, and what will convince or force them to leave this equity market.
Sector rotation. Seems there used to be a 12-step program (Lisa or Slevin can provide the details) that a stock had to go through after rising dramatically and then disappointing - you know, stardom, disaster, shock and dismay, banishment, redemption, forgiveness and then repurchase, ranging over several quarters to a year or more. Now, seems like the cycle is reduced to weeks or, in some cases, to the 1 hour following the earnings conference call.
Rotation seems fast and furious. Almost like watching one of those Discover Wild Africa shows where, as the lions creep up upon the Wildebeasts, a whiff of panic races through the herd, and they start stampeding in circles.
uh, where was I? Oh well, I'll write chapter 2 some other night.
Looking forward to reading your views on the market.
Mike |
