Oh Mr. Pension Fund Manager!


by Karl Denninger, Market Ticker:

It has to suck to be one of these guys.

Due to mechanical requirements in their asset allocation there has been about $60 billion outstanding in “required” buy-ins (really shifts between asset classes) toward stocks before December 31st.

I’m a bit unclear on whether its trade date or trade settlement date that matters here; I’d assume settlement, but I could be wrong.  As such 12/27, is likely the last day for such to take place.

Thus the really nice bear-market rally…..

Here’s the conundrum — historically speaking when you first realize you’re in a bear market (that is, 20% down from the top) you’re not near the bottom — you’re only half-way there!  That is, historically-speaking “buying the 20% decline” is dumb because you likely are buying 20% above the final bottom price.

It’s even more-stupid if you buy into a sharp 5% spike higher.

Now buying into the decline on a dollar-cost-average basis as the selloff deepens beyond that initial 20% has historically worked out well, except once — in the 1930s, when it didn’t work at all for a couple of decades.

Pension fund managers don’t get to choose when they get up against a rebalancing requirement that comes yearly.  They have to make the changes — by law.

I bet many of them would rather remain in bonds for the time being; while they may not make a lot on the interest at least they’re not going to lose 20% or more of their capital.

But that’s not a choice for them.

Will buying into this ramp work for you?  We’ll see.  Historically speaking the period from Christmas through the first five days of the New Year has proved to be a good period for the market with the caveat that you have to be very careful about sticking around, as there have been years that in the second week and beyond in January everything went straight down the toilet.

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