cash is king, which ultimately could be bad news for the stock market and the economy, investors' experiences in 2008 called into question three underpinnings of investment management, buy and hold, diversification, and dividends
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get enough of it, which ultimately could be bad news for the stock
market and the economy, investors' experiences in 2008 called into
question three underpinnings of investment management, buy and hold,
diversification, and dividends
all sorts of myths falling these days, this certainly bodes ill for
the hyper-inflation mania.
the dividend myth that was supposed to lift stocks out of their
losses after the end of the great depression,
"Since 1955, the average has been 15 dividend increases for every
decrease. Now, it's five increases for every six decreases, according
to S&P", and of course buy & hold, and of course diversification.:)
ALL BUSINESS: Cash is king for investors
ALL BUSINESS: Investors choose cash as an asset class, which is bad
for stocks
• By Rachel Beck, AP Business Writer
• On Saturday July 4, 2009, 12:01 pm EDT
NEW YORK (AP) -- That old saying "cash is king" certainly rings true
these days. Investors can't seem to get enough of it, which ultimately
could be bad news for the stock market and the economy.
In the past, investors would cling to cash until the market's
prospects brightened and then money would pour back into stocks.
That's just what the bulls today are hoping will drive a surge on Wall
Street in the months ahead.
But the shock of the financial crisis -- which have made leverage and
risk-taking dirty words -- may be changing all that. Even with today's
minuscule returns, cash seems to have become a sought-after asset
class among investors who intend to keep it as a part of their
portfolios for the long term.
Watching this play out firsthand is Jack Ablin, chief investment
officer at Harris Private Bank in Chicago. In sizing up the outlook,
he has to balance what the past tells him about cash tending to move
back into the market and the cautionary tone that he's hearing from
the bank's clients .
Historical data he has crunched shows that whenever assets in money
market mutual funds -- which are low-risk, highly liquid investments
-- exceeded 25 percent of the market capitalization of the Standard &
Poor's 500 index, stocks have rallied over the following two years.
This ratio jumped to an almost-unheard of level of more than 60
percent on March 9, almost triple the median level in the early years
of this decade, for two reasons. Money market fund totals have surged
30 percent since the stock market peaked in October 2007, and by early
March the S&P 500's market cap had plunged 57 percent from its high
point in 2007.
Today, that ratio has narrowed to about 45 percent, primarily because
of a recent rebound in stocks. There is $3.7 trillion sitting in money
market mutual funds right now, and the market cap of the S&P 500 is
about $8 trillion, up from a March low of $5.9 trillion.
Ablin considers the 45 percent level still to be unusual -- and a
potential source of fuel for further stock gains if investors choose
to redeploy their low-yielding cash.
"If the stock market keeps trending higher and corporate earnings
numbers progress, some investors might feel left out and decide to buy
again," Ablin said. "That is driven by human nature."
But there is recent evidence from some big-name investors that argues
otherwise, at least on the margins. The California Public Employees'
Retirement System, also known as CalPERS, announced June 15 that it
had boosted the target cash exposure of its $183 billion investment
portfolio from zero to 2 percent.
That helps explain why Ablin is cautioning against counting on a
stampede out of cash and into stocks, especially after talking to his
banks' clients. They've been burned by the bear market and worry about
having enough cash -- especially those who invested in things like
auction-rate securities that turned out not to be as easily accessible
as they thought. Since credit markets remain tight, many are also
finding it harder to borrow or raise money.
So they are clinging to their cash, especially in plain-vanilla
accounts like money market funds, which now yield on average only 1.3
percent, according to Bankrate.com.
Ablin has started giving a presentation to clients titled "Cash is an
Asset Class." He discusses how investors' experiences in 2008 called
into question two underpinnings of investment management -- buy and
hold and diversification. As a result, he sees many investors viewing
cash as an important asset to have "in an environment where you need
to protect yourself."
Ablin's thinking jibes with what David Rosenberg, chief economist and
strategist at the Canadian wealth management firm Gluskin Sheff, has
been telling his clients.
Even though there is a mountain of cash on the sidelines, he says it
is being deployed tactically, "seeing as demand for liquidity is
running at very high rates at every level of the economy."
Rosenberg points to the record number of dividend cuts by S&P 500
companies over the last 12 months -- 1,043 of them, according to S&P.
That's evidence corporations are hoarding cash so that they can fund
operations, buy other companies or to ensure they can satisfy their
debt refinancing needs going forward.
The end result is that stock investors are seeing their cash flow
squeezed. Since 1955, the average has been 15 dividend increases for
every decrease. Now, it's five increases for every six decreases,
according to S&P.
Shifting investor sentiment is also reflected in the surge in the
personal savings rate, which was hovering near zero in early 2008 but
soared to 6.9 percent in May. That was the highest rate since 1993.
Even with the massive government stimulus program, Americans are
choosing to bolster their nest eggs rather than spend. According to
Rosenberg's calculations, the total stimulus from the Obama
administration came to $163 billion at an annual rate in May, but
consumer spending only increased at an annual rate of $25 billion.
So long as the cash just stays on the sidelines, there won't be much
fuel to propel stocks and the economy forward.
Rachel Beck is the national business columnist for The Associated
Press. Write to her at rbeck(at)ap.org
(This version CORRECTS spelling of executive's name to Ablin sted
Albin)
Stephen Blackpool
Three trillion dollars worth of MMMFs are guaranteed by the good old
US taxpayer until September of this year.
At some point the toxic products sitting in off balance sheet
entities, safely marked to fantasy, are going to need that cash to
back up their collapse. You can bet the bankers know what one dollar
is worth as well as they know what those assets are worth.