Stocks | timiacono.com - Part 2

Risk Appetite Not What it Used to Be

In this item by Humble Student of the Market (i.e., fellow Seeking Alpha contributor Cam Hui), readers are alerted to a disconcerting topping pattern in one measure of the risk appetite for U.S. stocks, though it’s important to point out that a similar “risk off” development almost exactly a year ago did little to stop the fun that was had by all.

More specifically:

The recent carnage in the high flying Biotech and Social Media stocks are well-known, but the technical effects of the damage is likely to be long lasting. The chart below shows a composite index that I built based on an equally-weighted long position in the NASDAQ 100 and Russell 2000 (high beta risk-on index) minus an equally weighted short position in the defensive sectors of Consumer Staples, Telecom and Utilities (low beta risk-off index), where the composite Risk Appetite Index is set at 100 on December 31, 2011.

As the chart shows, the Risk Appetite Index has violated an uptrend and has started to roll over. This picture of fading risk appetite forms a negative divergence when compared to the SPX, which remains in an uptrend.

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It appears that the absence of an obvious catalyst for yesterday’s brutal stock market sell-off (that is, aside from the belated realization that prices have already risen too high) has a lot of people uncomfortably scratching their heads today about whether to buy or sell and this story and video segment below from USA Today captures the sentiment fairly well.

Admittedly, I try not to read too much about this sort of thing from the mainstream financial media (yes, CNBC trotted out Marc Faber again yesterday after stocks tumbled), but a cursory review of what was being offered revealed the distinct lack of one talking point that has been popular so far this year as stocks have struggled, namely, the thinking that we should “just get this correction out of the way”, presumably so that stocks can go on to achieve their full potential, preferably sooner rather than later.

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Bridgewater Warns on Pensions

Since the financial crisis, there haven’t been too many warnings about the dim prospects for pension funds living up to their long-term promises as a result of their overly optimistic assumptions about rate of return, however, Bridgewater reinvigorated the debate as recounted in this USA Today story today that might make some Holiday Inn Express patrons choking on their cinnamon rolls.

Influential and well-regarded hedge fund Bridgewater Associates Wednesday warns public pensions are likely to achieve 4% returns on their assets, or worse. If Bridgewater is right, that means 85% of public pension funds will be going bankrupt in three decades.

Bridgewater came to these conclusions by stress testing the nation’s public pension plans, much the way banks need to be evaluated on what could happen given a wide range out outcomes.

Public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades, Bridgewater says. An investment return of roughly 9% a year is needed to meet those onerous obligations.

This is just one more reason why the U.S. has a national imperative, ably assisted by the folks at the Federal Reserve,  to create bigger and bigger asset bubbles.

How else are pension funds going to pull this off?

Bloomberg editor-at-large and TV host Trish Regan shares some insight on what’s roiling the stock market these days in this commentary at USA Today that is full of contradiction that quickly becomes apparent in the first two paragraphs which, by themselves, may be enough to send investors scurrying back up to their hotel room to sell some tech stocks.

Use of the term “virtual” was prompted by the recent Facebook acquisition of Oculus, the virtual reality headset maker, however, it was probably ill-advised to combine virtual with insanity when referring to bubbly tech stocks.

The recent sell-off in names such as Amazon, Facebook and Netflix is spurring many to wonder whether investors are waking up to the virtual insanity that’s gripping the technology space.

It’s still too early to tell how this plays out; however, there are signs that suggest investors should proceed with caution.

Take the new term to describe a hot new tech company. Forget start-up or pre-revenue. Instead, try this: pre-product. It carries more cachet.

With U.S. markets opening just a short time ago, stocks are shrugging off their recent difficulties and the latest developments in Ukraine, but that may not last.

If it doesn’t and this becomes a much more serious decline for share prices, at least we’ll have those wonderful images of people wearing Oculus headsets.

It’s just too bad that we couldn’t get anyone wearing a virtual reality headset to ring the opening bell on some stock exchange – that would have been priceless.

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