Tuesday, January 17, 2012

Back of the Napkin: Why are stocks being chased? US Stagnation is forcing risk into portfolios. The market will sell-off on good news

Back of the Napkin:  Why are stocks being chased?   US Stagnation is forcing risk into portfolios.  The market will sell-off on good news

Most folks are now in mild agreement that the US is looking a touch better internally and the best of crowd externally.  The demand for USD$ assets has continued and the money has poured right into risk assets, with financials benefiting the most.

So the large question remains in the face of 100$ earnings this year, why is the market expanding the multiple it’s ready to pay in a bad macro picture?  Last year, it was happy paying 12.5X and now paying 13X?  Answer - you have nowhere else to go.  Money earning interest in the bank will not cover a single expense with a society being forced to take on income targeting.  This manipulation is gearing portfolios into riskier assets.  Whatever the chase, dividends, corporate bonds or beaten up names, you have three choices depending on your cash pile. Keep in mind, people are going into the "blue chip multinational dividend stocks" while the other names are suffering a lack of selling. Just 20 stocks accounting for 40% of the SP500 index rise

1)Large Pile of Cash
Pick your spot on the UST curve

2)Medium Pile of Cash
½ in UST, ½ in Blue Chip Dividends

3)Small Pile of Cash
Stocks + Continuing Claims

Because most folks are in situation 2) or 3), stocks will continue to benefit from US economic stagnation.  Gold and Financials are up about 9% YTD, EM Risk Out-performance 2.3% and risky duration is still flat over UST -which confirms investor 1) and 2)

This is not the first time we have seen the risk of losing money < risk of missing making money takeover, but this is now being superceded by individuals being forced to adapt the following equation

Savings + risk = income targeting

So how does income targeting get replaced?  Job growth.  This will remove the pressure for additional risk into the equation and the markets should have a healthy sell-off.

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