From the August 01, 2010 issue of Futures Magazine • Subscribe!

Taking stock of the market

photoThe so-called “flash crash” unnerved the stock market. That, and the economy of course. Analysts are divided. Is it a bull taking a breather? Is it a bear getting its legs? Will it go up, possibly hitting new highs, or will it sink lower, wallowing in the muck of an economic largesse that no one seems to have a handle on?

This uncertainty is apparent in our market outlook, "Stock indexes: Up in the air," by Associate Editor Christine Birkner. Some analysts are optimistic, believing housing numbers will improve on low interest rates. They even see employment continuing to grow -- at a slow rate, but growing. That would mean a steady to higher stock market.

But others see leading economic indicators, such as housing, “decelerating,” and thus, economic growth slowing. One analyst called the early 2010 upswing a “historic sucker’s rally” that will end by September, when we will see hopes dashed and stock indexes crashing.

One bear told Christine, “we’ve never seen this kind of debt to GDP before. We have an economy that’s trying to come out of recession and grow at a time when debt is too high. Instead of the money creating credit to allow for more spending and more borrowing, the exact opposite has been happening. The growth is being used to pay down debt instead of [increasing] economic activity.”

This is also the view of our Futures Profile, Lee Partridge of Integrity Capital, the portfolio strategist for the multi-billion dollar San Diego County Employees Retirement Fund (see “A diversified approach to diversification," by Managing Editor Daniel P. Collins). When asked his views on the economy, Partridge sees the stock market running flat for the foreseeable future. He told Dan that “long term we are in a debt deflation economy where consumers are saving and not spending.” He says employment numbers are the true key because unless those numbers rise, he doesn’t believe there will be “a meaningful sustained rebound in consumer spending.” Part of the problem he notes is the banks aren’t spreading the wealth to the consumers. “You have to see unemployment go down and you have to see some real credit creation before this economy is going to have any sustained recovery. If it does, I’ll be the first person to come off my bearish views.”

Unlike many of Partridge’s peers, he brings a different -- and we believe smarter -- view to the pension world. Having started in the business as a bond trader, he looks at risk and asset classes through different glasses. He questions the age-old view of diversification of 60/40 stocks and bonds, believing in a more nuanced strategy, incorporating alternatives, and seeing skill -- trading skill -- as a key element to adding managers to his mix. As he told Dan, “Diversification really doesn’t come from the number of positions you have in the portfolio or the number of managers that you have. It really goes back to how many different return streams you have that are clustered together and how many of them are fundamentally different than one another...We look at each distinct return stream and [determine] how much volatility there is associated with that return stream and what fundamentally drives positive and negative returns....And what we found is generally the three key drivers are rate of growth in the global economy, the rate of inflation in the global economy and the level of investor risk aversion or appetite. What we want to do is diversify within that whole queue.”

Partridge is refreshing after years of pension managers blindly following archaic investment rules. With the danger so many pension funds are facing today, it’s a relief to know some asset allocators have not only a trading background, but trading acumen.

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