Cracks appear in the bull market facade

Is the five-and-a-half-year US bull market breaking down?

Nobody rings a bell when the market peaks, but this ageing bull is certainly tiring.

According to Bloomberg, nearly half (47 per cent) of Nasdaq stocks are already in bear markets, having fallen by more than 20 per cent.

Similarly, 41 per cent of stocks in the small-cap Russell 2000 are more than 20 per cent off their peaks.

The figures are striking, given the Nasdaq is up 10 per cent this year, driven by large-cap giants such as Apple and Microsoft.

Indeed, only one company in the S&P 100, which is comprised of the very biggest stocks, is in an individual bear market.

Bloomberg notes the same phenomenon played out in late 2007, when 45 per cent of technology and small-cap stocks had already declined by 20 per cent by the time the overall market peaked.

Now, just 6 per cent of S&P 500 stocks are in bear markets, compared to 18 per cent at the market peak in 2007.

Similarly, the proportion of Nasdaq companies in bear market territory has been above 40 per cent for most of the last six months.

However, the deterioration in breadth remains undeniable.

Recently, more Nasdaq companies traded at 52-week lows than 52-week highs.

Last week, even as indices touched all-time highs, more companies across all exchanges were trading at one-month lows than at one-month highs.

TraderFeed blogger Brett Steenbarger notes that while 73 per cent of large-cap stocks are above their 200-day averages, the figures are just 55 per cent and 39 per cent for mid-cap and small-cap stocks respectively.

The rally is thinning. If the market behemoths begin to falter, they will take down the indices with them.

Time to end hedge fund train Calpers, the largest US pension fund, hit the headlines last week after announcing it was ditching hedge funds.

It’s about time pension fund managers woke up.

They don’t need hedge funds to reduce risk; they can do so via an old-fashioned 60:40 equity/bonds portfolio.

This basic approach trounced average hedge fund returns over the last decade, and at a fraction of the cost.

Hedge fund fees – about 1.6 per cent in annual management fees as well as an 18 per cent performance fee – devastate returns. Hedge funds have earned about $95 billion (€74 billion) for public sector pension funds since 2008, estimates the Financial Times’ Alphaville blog, only to take $68 billion in fees.

That is, public sector pensions paid some 72 cents for every dollar of investment gain.

It’s a joke. Pension funds managers everywhere must follow the example of Calpers example, and stop frittering away their clients’ money.

Buying into bubbly Tesla Electric car-maker Tesla took a pounding last week, with a bearish analyst note triggering a double-digit percentage fall.

“Buying opportunity or bubble stock?” one headline read. Maybe both.

Yes, Tesla's $32 billion valuation is nuts – even chief executive Elon Musk (above) recently questioned it.

Money manager Charles Sizemore notes it trades for 13 times sales, whereas most car manufacturers trade on well below one times sales.

GM is being valued at $5,500 for every car sold, he says; Daimler, $56,000; Tesla, $914,000.

Clearly, investors should run a mile, but short-term traders might have a different view.

Bespoke Investment Group notes Tesla has suffered 13 one-day falls of more than 8 per cent since 2010; a month later, the stock’s median gain has been 14 per cent.

As for Elon Musk’s wariness, he expressed similar sentiments last year, but the stock has since doubled.

It’s crazy, but buying into bubbles can be a profitable – if very risky – business.

CEOs - greedy or just stupid? Financial illiteracy may be the reason why chief executives' pay packets soared in recent decades, a new study suggests.

Stock options give employees the right to buy shares at a certain price for a given period. If the share price rises, say 25 per cent, so does the value of the options package. That’s why the proper procedure is to first calculate the dollar value of the options package to be awarded, and use that to derive the number of options.

In the 1990s, however, the norm was for the same number of options to be awarded each year.

Soaring tech valuations saw a sixfold rise in the value of options packages, with chief executive compensation soaring from $2.9 million in 1992 to $9.3 million in 2001.

The study blames “number-rigidity”, “rule-of-thumb decision-making” and “extreme naiveté regarding options”. Yet surely such oversight was deliberate?

Maybe not. In many cases, executives received the same number of options even after 2-for-1 stock splits, not noticing their dollar value had thus been halved.

In other words, executives weren’t greedy – just stupid. See http://goo.gl/LWJ9DW