Illusions of cash?
It’s one of the biggest questions on Wall Street. What if the pile of cash many believe is waiting to hit the market doesn’t really exist?
Measuring the amount of sidelined money involves some tricky assumptiotns — that investors who yanked billions from stock funds are just waiting for the market to stabilize before jumping back in, or that investments in money market funds are a temporary resting place. Dumping this money back into the market would certainly lift stocks, but some experts fear it’s an illusion.
“I don’t understand all this talk about sidelined cash,” says Charles Biderman, chief executive of TrimTabs. “People are selling stocks to pay bills. Incomes are plunging, and there are huge amounts of joblessness.”
Other options could be more compelling than stocks. Friedman, Billings, Ramsey strategist David M. Khani says investors could buy corporate bonds instead, which he says are offering better returns and less risk than stocks. The analyst says banks are boosting yields to keep deposits, which gives investors less reason to turn back to stocks.
But Eric Bjorgen, a portfolio manager for Leuthold Group, has a different idea. He measured the amount of cash sitting in money market funds, bank reserves and similar places as a percentage of the total size of the stock market. This ratio, considered a good measure of sidelined cash, is at 75 percent, a level not seen since 1990.
Granted, this is partly because the market shrank from its big losses, but Bjorgen says it also reflects buying power. Many cash investments are offering yields of less than 1 percent, and Bjorgen says investors are going to want more once they get their nerves back. “When people get into a negative mindset … cash and money markets give a sense of security,” he says. “But the fact is, if the stock market begins to go up and the economy begins to improve, it probably wouldn’t take much to coax investors back in.”
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