Guest Post: Will Liquidity Steamroll Over Pensions?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

I want to follow-up on my previous post, Full Steam Ahead? I looked at what the trading experts I track have to say about this market.

Tim Knight of Slope of Hope writes that the market still seems very shortable. He also writes about his favorite ETFs these days.

David Spurr of Displaced EMA writes that everything is being driven by the U.S. dollar:

Look at the correlation on the various positions, R/E (SRS), Materials (SMN), Financials(FAZ), Energy(ERY) – It doesn’t matter – they’re all correlated the same – Take your pick.

Everything is being dictated by dollar movements. See correlations on UUP (long dollar).

The Financial Ninja writes that we are running out of volume:

The S&P 500 (SPX) is sitting on support around 930, but below the 200 day EMA (green line). Despite some days consolidating in this range, SPX is still overbought. Volume is also dropping off rather quickly.

Primary Market Total Volume (NYTV) is generally declining, even as the market rallies. The volume decline has now really started to accelerate. It would appear that the market is now rising on fumes… an example of which would be yesterday’s late day jam job. These are done on low volume and are all about fixing a closing price.

Yesterday’s candle is definite sign of indecision and is the fourth consecutive failure to close above the 200 day EMA. Until the Non-Farm Friday opening print high of 951 is cleared, it looks like this monstrous rally may finally be running out of steam.

The running out of volume argument, however, has a hitch. One of the strategist I respect the most told me that “people keep discrediting the market advance owing to the lack of volume but when leverage has been cut in half (deleveraging), a new normalized volume level has to be lower.”

I am also looking at the technicals, the weekly highs, lows, the close and volume, but I keep seeing them buy those dips – and aggressively. We are at an inflection point but do not be surprised if we keep heading higher.

Why? One of the portfolio managers I spoke with read my comment and agreed with me that most pension funds were massively underweight equities (relative to their benchmarks) going into 2009 and at the end of Q1.

Then a ferocious rally developed and portfolio managers at the big shops waited for a massive pullback that never materialized. Now they are suffering from performance anxiety and are stuck chasing equities higher.

The longer the rally goes on, the bigger the performance anxiety, and the stronger likelihood that they will keep chasing stocks up. Add to this that liquidity is beyond plentiful, and you have the makings of another bubble in some sectors and stocks (my bet is on alternative energy).

The fundamentals remain weak, but for now it is safe to say the worst is behind us. More ominously, massive liquidity is driving a lot of the speculative activity right now, bidding up commodities, high yield bonds, commodity currencies, and high beta stocks.

I have seen this liquidity steamroller before and the last thing you want to do is short it or underweight it. If you do, chances are it will steamroll right over you.

***Specific Recommendations***

Apart from energy (especially natural gas) and alternative energy (especially solar shares), keep an eye on the Powershares QQQ (QQQQ) and the Semiconductor Holders ETF (SMH). Some of the traders I speak with prefer playing the Ultra Semiconductor ProShares (USD) for a leveraged swing trade here. Reuters reports that the world’s top contract chip maker, Taiwan Semiconductor (TSM), booked its biggest monthly sales in seven months thanks to a pick-up in demand for chips used in computers and other consumer gadgets.


Watch how we close today after the dip and triple bottom . Also read these articles: Solar stocks rally on China support, oil prices and Short Sellers Confused in Alternative Energy Bets. My bet is that we are in the early stages of an alternative energy revolution and this sector is worth tracking and investing in for the long-run. Don’t be surprised if it’s the next bubble.

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  1. Brick

    Seems like your full steam ahead post yesterday despite being reasonably balanced stirred up a hornets nest. Leaving aside economy fundamentals which I will come back to in a minute I need to nit pick on one or two things. While largely I agree that the current rally could continue for exactly the reason you explain there are other reasons why it will continue hinted at in the financial Ninja post, when the late day jam job is mentioned. In other words there are parties interested in rigging the game which probably means you need a different short term strategy to long term.

    Coming back to fundamentals and looking a bit more closely at the TSM data you are right to point out the increase in sales but it is still down 15 percent from last year. What would concern me is that revenues are down over 40 percent. Delving into last quarters report we see an inventory build, some new technologies coming on line and the balance between china and the us as customer changing. Since TSM would be further down the supply chain than other manufacturers it could be argued that the pick up in sales are due to an earlier pick up in sales from manufacturers closer to the retailer. Charter International reported today for instance that after a quarter one acceptable start to the year, sales are on the down turn again. In other words businesses seem to be at different points in the inventory cycle depending on how close they are to the final retailer. Having said that, Charter are likely to suffer more from firm investment cut backs than final consumer demand. So it might be worth a gamble if you can afford to lose.

    Before anyone really lays into Leo they should at least read ALL the links he provides as there are some different view points to his own. Being open to different ideas is important even if you have strong views of your own.

  2. Hondo

    I am with a large pension (very large…one of the top 100 in the world). Two things to keep in mind, many pensions will not (us included) be rebalancing into equities (see calpers and calstrs announcement of reducing equity allocations) for many reasons. Think about risk and volatility. Volatility has doubled or tripled from 2007. If I has x percent of my fund in 2007 with a vol of y how much of my fund would need to be put at risk when vol is 2y or 3y? Most plans have risk budgets and are not going to be making the kinds of allocations your anticipating.

  3. Mista B

    I know of pensions only what I read, and I have little doubt that given the dropoff in equities that they're currently underweight in them with respect to their target allocations. If they think buying overpriced stocks is what they should do based on those target allocations, I say be my guest. But panic buying will lead to panic selling. It's the very definition of scared money. There are, imo, many good values out there. But these stocks have barely participated in the rally. They've been "left behind". (No, not that!) In reality, the junkiest and riskiest of junk have led this rally, which is what makes it very weak structurally. The same leaders from the past bull are now leading this rally. What does that say?

    There's certainly nothing wrong with trading for a profit. But one need only look at the Financials Index and see the huge 100% bounce off the bottom to know the air on which this market rests. The Fed pumped liquidity into the market, allowing banks to dilute their shareholders by selling shares at inflated prices, thus helping them raise capital. I imagine they've been dumping other positions as well. Lastly, why does such a large percentage of the daily action appear to be quant driven rather than driven by accumulation? Maybe big pensions are accumulating. I'd prefer to see the evidence in the action.

  4. anonymous

    Leo, in a post yesterday you made the following comment:

    "We can't say for sure that a new bull market has begun, but this looks to be a whole lot more than a bear market rally," says BMO Capital Markets, a Canadian firm that produces succinct valuable insights."

    for readers not familiar with BMO here is the latest from Dr. Sherry Cooper Executive Vice President,
    Chief Economist BMO.

    "Signs of improvement in the U.S. housing market, rising consumer confidence and a rally
    in financial stocks in the U.S. and Canada suggest that the economies are bottoming and
    the worst of the financial crisis is behind us. Indeed, the U.S. cut a net 345,000 jobs in
    May, the smallest loss in eight months…."

    Do you actually by this tripe?

  5. Leo Kolivakis

    I do not take Sherry Cooper or most pontificators seriously. i listen to them, take bits and pieces, and I move on. When i analyze the markets, I look at what the big hedgies are doing, Libor spreads, macro trends, and sector trends. I read the tape on the stock market, see if the dips are being bought, and I focus on where the risks lie.

    This isn't a science. A lot has to do with experience and intituition.



  6. ynot

    My first post this site….

    The situation today bears some awful similarities to last year around the same time: a market in near-euphoria, panic subsiding after March doldrums, commodities rocketing upwards, and a potential threat in non-prime mortgage defaults being ignored or talked down.

    This time, the bailout/TARP/TALF has solidly built up the inflation prospect for oil, materials and everything else, and the Alt-A's and Option ARMs are set to reset. And the market cares little about this.

    Recently I converted my bearish outlook to more bullish, and *just then* I had this eerie feeling.. didn't this happen to me last year around the same time????

    In general, I recall a bumbling start to the 2008, a bottom in March and by May the sub-prime mess was nearly over (albeit on a lesser scale than today's moves).

    Now, as the T2 presentation on mortgage risk is being blogged about heavily (, the market surges on dwindling volume, and the smart-money knows very well that the taxpayer has been frisked several times over since the meltdown… What is the take away?

    Leo, I understand your position.

    However, since your mantra seems to be one of understanding large scale systemic risk and its effects on big institutions, why do you feel that the risks in terms of mortgage default, and toxic assets are contained?

    The Treasury can not keep bankrolling losses, and as inflation notches up, and the real economy fails to outperform, do we expect the will of the people to allow this to continued propping up of institutions? If real estate in the US doesn't mount a massive turnaround then more losses will appear in toxic asset form, requiring more exotic government interventions and with an increasing disgruntled underemployed taxpayer grinding down his or her savings to pay for it.

    If we are to keep our heads here, we need a layman's description of the reason that default-risk has been contained. We need a pie-chart, a graph, something real that has not been trumped up (i.e. NOT something like this:

    Any ideas? Is the market mispricing risk.. again?

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