Fastest Mutual Fund Cash Depletion Since 1991
“It’s not a red light, but it’s a flashing yellow light that the strongest part of the rally is probably over. There’s not as much buying power out there.”
-Jerome Dodson, president of Parnassus Investments
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This is a datapoint worth keeping an eye on:
“Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.
Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.”
I have no idea what the velocity of this drop means — the speed at which mutual fund cash drops is not something we’ve researched previously.
Any thoughts?
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Source:
S&P Rally Slowed by Fastest Cash Depletion Since 1991
Lynn Thomasson
Bloomberg, March 8 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPidmY6Nga30&
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March 8th, 2010 at 9:26 am
Being out of cash is a mere technicality in these times.BB merely prints them a few truckloads of big bills, gives them to Citi, Chase or whomever and they charfe the funds a delivery fee, a little vigorish for being middleman. BB has to keep this rally going until jobs and real estate comes back.
March 8th, 2010 at 9:28 am
Isn’t the flows into and out of money market funds more important?
March 8th, 2010 at 9:33 am
I think people are pulling money out for one of three main purposes: to meet current expenses, pay down debt, and/or refinance mortgages. The last two are the most benign uses (from an economic standpoint). If there is a heavy weighting into the first, it could be another sign of how troubled this jobless “recovery” is….
March 8th, 2010 at 9:41 am
One thing we do know is that all those money managers think(operative word) the market has no where to go but up. What it actually does is another story. The other thing I thought is that it does show a lot of confidence in Bernanke and Co. Is that confidence misplaced?
March 8th, 2010 at 9:56 am
Duh? You forgot that most ‘professionals’ who went through the last market collapse were still holding a lot of stocks that were worth a lot less than when they bought them. Those stocks and other investments didn’t magically turn to cash at the former prices last March. A lot of cash was tied up in crap that needed to rise a lot to recover.
The current rise was due to ZIRP, as you put it, in all forms. Including the Fed pump that coincidentally ended when the majority of the market rise stopped.
Of course they don’t have much cash. I suspect they never did, unless they sold junk at the bottom to buy something else. That’s not new money. It’s just re-balancing and only to chase the Fed’s prior market gaming. Even the FDIC wonders where cash is to be found. They are thinking of asking pension funds to buy stinking banks or stinking bank investments that the FDIC took over. There’s your new money. Pensions and 401k money.
Those of us with large amounts of cash (me included) would never consider putting one thin dime into the market today unless some new game started. And only until the game’s financing (such as QE2 with new direct debt monetization) was clearly understood so the exit point was known ahead of time. The only other thing that might pry some green loose would be effective regulation that shut down a significant number of crooks that now have free reign to plunder at will (fat chance). I suspect an economic recovery might also work, but that’s only the stuff of headline writers and sales pundits at this time.
March 8th, 2010 at 10:01 am
I said:
You forgot that most ‘professionals’ who went through the last market collapse were still holding a lot of stocks that were worth a lot less than when they bought them. Those stocks and other investments didn’t magically turn to cash at the former prices last March.
reply:
————
My bad. I forgot a lot of crap did turn back into real money. The Fed bought it and paid fantasy level prices for it. More pump money. That’s gone for now.
March 8th, 2010 at 10:01 am
This is happening because the smart money understands that we have long passed the Event Horizon. Its only a matter of how long the old system has left.
Given your talent, I’m surprised you cannot or will not see the writing on the wall. How many more obvious signs do you need?
Well, don’t worry I doubt you will have long to wait for more things to be puzzled over.
March 8th, 2010 at 10:02 am
I’m with jritzema. By itself, the fast cash reduction may not mean much. More importantly, tell me where the cash went — the direction of movement is what I think counts more. I know (hope) the cash itself doesn’t disappear…the value of that money…well, that’s a whole ‘nother thing…
March 8th, 2010 at 10:09 am
Barry, I wouldn’t read to much into this…
1) Mutual funds closest proxy is retail flows
2) Retail buying has not been a big part of the rally
I don’t know why now the “fastest depletion of funds” is happening now but if you pull back mutual fund flows from 2007 you’ll see that this has been a problem for a while
The growing populairity of ETFs is definitely a contributing factor as well
All in I wouldn’t change my opinion of the market, whatever it may be because of this info
souelle
March 8th, 2010 at 10:09 am
I think CardinalRam has it.
I’ll add: though the Feds can spend at will, state’s and local governments are cash-strapped beyond a normal recession. The combination of budget cuts and tax increases yet to come will leave Main St. very much feeling it’s in a depression. Should show in the mid-term elections!
March 8th, 2010 at 10:11 am
Weak data. Weak indicator.
I thought the point at the end of the story was best… stocks are at 14.6x 2010 EPS estimates, versus 16.6x long-term average. Thats 2-turns on eps upside, plus growth, plus potential to beat estimates, plus potential to overshoot LT average PEs.
March 8th, 2010 at 10:13 am
It looks like we’ve found out what mom and pop have been surviving on to supplement their unemployment benefits. I hope this is not the case but if it is then it is disturbing. Mutual funds are not smart money when the herd is exiting. I doesn’t matter how smart the guy at the top is if people are flooding out of the market. He is forced to sell and create a vicious circle. That drives the prices of stocks down and creates even more panic in the crowd.
This could very well be the beginning of the next downleg
I suggest folks keep an eye out for stories of funds limiting withdrawals
March 8th, 2010 at 10:19 am
Seems to me that the cash was probably burnt heavily during that March low and subsequent rocket recovery that we’ve had in stocks. Lots of buying going on, at historic lows. Wish I’d gotten in on some of that, but I was unemployed from late May until mid-August, so cash was something I thought might be necessary, not stocks.
I’m sure a lot of cash was moved out of mutual funds for distributions and rollovers, as all of those folks who lost their jobs rolled into IRA’s and didn’t buy buy back into the market. Still sitting in cash personally (money market).
What I’d like to see is the difference between institutional cash flows and individual investor money flows.
March 8th, 2010 at 10:23 am
On the subject of funds limiting withdrawals, I just received an IRA rollover about 4 weeks ago from money I requested out of a fund in my old employer’s 401k back last May. The old employer was a very large retirement plan administrator, and the fund in question was a real estate fund. Now, that fund owned hard assets, so massive cash withdrawals were always going to be an issue…
March 8th, 2010 at 10:58 am
Does the equity mutual fund managers cash balance say anything at all about the account owners’ cash balances?
I can easily see a situation where account owners maintain large money market balances, while the equity mutual funds go all-in for stocks.
I’m not sure that this statistic has anything to tell us.
March 8th, 2010 at 11:11 am
It’s down to fund flows. Despite the massive run-up in stocks, the flows into equity funds are barely positive over the past year (compare with the $400 billion that went into bond funds).
Your following post about the individual investor hating stocks despite the 65 percent run-up perfectly underscores this.
March 8th, 2010 at 11:27 am
Hillary, please elaborate on your point, perhaps in a font large enough to aid my understanding. ;-)
March 8th, 2010 at 11:30 am
It sure invites speculation, but without a sense of where that cash is going – into markets, if so which ones, or back to holders who are taking money out- nobody can say with any degree of confidence. Sometime next quarter it will become clear and whoever said the right thing will claim to have seen it so clearly. As long as there are buyers who are willing to pay successively higher prices, that’s what we will get, until there are holders who get spooked or nervous and are willing to sell at successively lower prices.
March 8th, 2010 at 12:04 pm
Everyone has bills, but not everyone still has a paycheck.
If you’re in that position, are you going to sell your car in order to be able to keep paying the kids’ tuitions, or instead lighten up on your mutual fund holdings?
March 8th, 2010 at 12:15 pm
[...] Barry Ritholtz of The Big Picture also comments on this. [...]
March 8th, 2010 at 12:18 pm
Barry, I watched the move “The Box” this weekend. The basic premise is the people involved are the experiment but don’t know it. Sometimes I feel that you use your blog this way. Propose a topic and then see that falls out and use this as data for your sentiment indicators (at least unofficially). I do know that sentiment is an important element to your investment strategy (at least I think I do).
Secondly, my assumption is that your point about the very low cash levels in equity mutual funds points to the funds having basically used up all their ammunition – their fully invested (or what may pass for that). I guess that could spell some trouble for the markets to continue in an upward trajectory. I can’t see how it’s not something to be paying attention to.
March 8th, 2010 at 12:19 pm
I was going to let this slide, but even Rosenberg is referencing this “data”.
There has been little change in cash; there has been a record run in stocks.
5.7% cash is $57/$1000. After the S&P soars from 700 to 1140, that $57 is equal to about 3.6% of the increased value of the portfolio. (57/(943*1.63)
There has been very little cash depletion at mutual funds. The Bloomberg piece is a non-story.
March 8th, 2010 at 2:56 pm
They had put cash aside for withdrawals I guess. No one is withdrawing anymore as people are gaining confidence.
But there’s nothing undervalued anymore on the markets (or so little). I’d rather have cash now and wait for the next crash.
March 8th, 2010 at 3:12 pm
The research is irrelevant because it would simply be some attempt at curve fitting. Everything fails eventually. Which is exactly why Wall Street is collapsing. They had mental midgets projecting past curve-fitting exercises to the future. What does this mean? It means everyone should put some underwear on so when they eventually shit their pants and the market drops to some incredibly low level, they won’t make a mess on the floor. It means just what it meant in the 1930s when the general population walked away for over a decade. It means the economy is not creating any sustainable cash flows to replenish the pump that many have called the Great Recession and the new bull market. It means people are using their savings to pay their bills. It means quantitative easing will be a complete failure because private banks aka Wall Street is hoarding money. It means Wall Street will most likely never return to its days of glory as new solutions are sought to concentrated access to capital which has destroyed our economy and the economic opportunity for millions over the last four decades. It means it’s time to get religion or buy a gun or both. It means Obama is due a wakeup call as are the mindless idiots called Republicans across the isle. What does it mean? It means countless people who do nothing more than push around paper (aka finance) aren’t going to have a job in the future. It means nothing good.
March 8th, 2010 at 7:06 pm
According to David Rosenberg’s data, it’s because the money is going into fixed income. The boomer generation is retiring and acn’t afford another equity wipe out like 2008.
March 8th, 2010 at 8:02 pm
Hillary Says:
This is happening because the smart money understands that we have long passed the Event Horizon. Its only a matter of how long the old system has left.
Given your talent, I’m surprised you cannot or will not see the writing on the wall. How many more obvious signs do you need?
Well, don’t worry I doubt you will have long to wait for more things to be puzzled over.
Hillary, did you watch 2012 last night? I didn’t see it but perhaps your right. Fund managers realize the end is near and were all living on borrowed time. Even Obamacare won’t save up from the rath of 2012.
March 9th, 2010 at 10:13 pm
I think equity mutual funds aren’t the only ones with low amounts of cash to invest in equities. I wonder why the Bloomberg article did not mention or check whether there are low amounts of cash in reserve with pension funds, hedge funds, and private equity funds. Checking the cash balances in total for all four types of funds might shed some brighter light as to whether there truly is some “buying power” left for investing in U.S. equities.