Infusion of Cash Could Boost Stock Market
Sunday August 28, 2:19 pm ET
By Ellen Simon, AP Business Writer
(Bottom line? Keep playing the pennies?)
"Which raises a final, philosophical question: Is it safer on the sidelines? Considering that a three-month Treasury bill now yields about 3.37 percent, a higher return than the Dow Jones industrial average, which is down for the year, much of the money on the sidelines may continue to stay out of the game."
Wall Street Still Waiting for That Infusion of Cash That Could Produce the Next Stock Boom
NEW YORK (AP) -- Is there a reservoir of cash waiting to gush into the stock market? If so, it could only help stocks, which rise with cash flows, as we saw in the go-go 1990's.
"You can't have go-go without flow-flow," said Edward Yardeni, chief investment strategist at Oak Associates. "It's always easy money that creates the speculative excesses in global booms."
Equity investors aren't looking for a boom -- they're looking for any gains, since major indexes are almost flat for the year. That's why one of the big questions of the day is whether there's enough cash on the sidelines to do the job.
The indicators are mixed. Some positive signs: Housing is too expensive for even some speculators, private equity funds are bloated with cash and corporations are briskly buying their own stock. But there are negatives, too: Corporations may have less cash on their balance sheets than we think and the percentage of U.S. equity funds kept in cash is low.
The lackluster return in the stock market over the last five years has caused investors to move to other asset classes in search of high returns, said Mitch Zacks, portfolio manager at Zacks Investment Management. "If those returns don't materialize, relative to the risk that's being borne, assets will return to equities," he said.
"The real money sitting on the sidelines is speculative money being put in real estate," Zacks said.
But real estate prices are becoming unaffordable, Yardeni said. "That could be bullish for the stock market if the household sector concludes that real estate is not the place for speculative gains any more."
A more liquid, and more eager, source of cash may be private equity funds, such as Kohlberg Kravis Roberts & Co. and The Carlyle Group. They cater to wealthy investors and pension funds, promising to put their money into high-growth picks.
Leon Cooperman, who runs the $4 billion-plus Omega Fund, estimated in an interview with CNBC that private equity funds have about $300 billion under management. Their buying power is more potent thanks to their borrowing power, which can hit a 4-to-1 ratio of borrowed money to actual assets. If private equity funds borrow as much as they can, Cooperman said they would have enough to buy about 8 percent of the public market value of U.S. traded companies.
"I hear from them every day that they have cash to invest," said Robert Hegarty, a securities market specialist at the Tower Group who follows the financial technology sector. "Back in the 1990s they couldn't raise enough cash because there were so many great investment opportunities in the market. Today, the problem is trying to invest the excess funds they've raised."
The market is already getting an influx of cash from stock buybacks, which totaled $209.9 billion in the first half of the year, up from $156.7 billion a year earlier, according to Carl Wittnebert, director of fund flow research at TrimTabs Investment Research.
Buybacks depend on corporations having lots of cash. While the conventional wisdom is that they do, Thomas McManus, chief investment strategist of Banc of America Securities, questioned that in a report released on Aug. 22.
Among non-financial companies in the Standard & Poor's 1500, just 10 companies -- Ford Motor Co., Microsoft Corp., General Motors Corp., Exxon Mobil Corp., WellPoint Inc, Aetna Inc., Intel Corp., Pfizer Inc., Hewlett Packard Co. and Chevron Corp. -- control 25 percent of cash, he wrote.
Then, there are the factors that can knock down a company's cash position, what he calls "hidden liabilities," such as underfunded pension funds, employee stock options, tax liabilities and legal settlements. Exxon's cash position, for instance, looks worse once its pension benefit obligation is factored in.
Another bad sign for a potential cash surge is the percentage of cash kept by mutual funds that invest in U.S. equities. At the end of June, that level was 3.8 percent, according to Wittnebert and the Investment Company Institute, the mutual fund industry's trade group. That's the lowest percentage of cash for any month in almost 15 years.
But low-cash levels don't mean mutual funds are more invested than usual in individual equities. Instead, they've plunged money into index funds, Hegarty said.
"Indexes haven't done anything this year, but they've grown tremendously in assets," he said.
Which raises a final, philosophical question: Is it safer on the sidelines? Considering that a three-month Treasury bill now yields about 3.37 percent, a higher return than the Dow Jones industrial average, which is down for the year, much of the money on the sidelines may continue to stay out of the game.
