Posts tagged ‘Cash’

Dry Powder Piled High

Flour-Powder

Money goes where it is treated best. Sometimes idle cash contributes to the inflation of speculative bubbles, while sometimes that same capital gets buried in a bunker out of fear. The mood-swing pendulum is constantly changing; however with the Federal Funds Rate at record lows, some of the bunker money is becoming impatient. With the S&P 500 up +60% since the March lows, investors are getting antsy  to put some of the massive mounds of dry powder back to work – preferably in an investment vehicle returning more than 1%.

How much dry powder is sloshing around? A boatload. Bloomberg recently referenced data from ICI detailing money market accounts flush with a whopping $3.5 trillion. This elevated historical number comes despite a $439.5 million drop from the record highs experienced in January of this year.

From a broader perspective, if you include cash, money-market, and bank deposits, the nation’s cash hoard reached $9.55 trillion in September. What can $10 trillion dollars buy? According to Bloomberg, you could own the whole S&P 500 index, which registers in at a market capitalization price tag of about $9.39 trillion. The article further puts this measure in context:

“Since 1999, so-called money at zero maturity has on average accounted for 62 percent of the stock index’s worth. … Before the collapse of New York-based Lehman Brothers Holdings Inc. last year, the amount of cash never exceeded the value of U.S. equities.”

 

Cash levels remain high, but the 60% bounce from the March lows is slowly siphoning some money away. According to ICI data, $15.8 billion has been added to domestic-equity funds since March. Trigger shy fund managers, fearful of the macro-economic headlines, have been slow to put all their cash to work, as well. Jeffrey Saut, chief investment strategist at Raymond James & Associates adds “Many of the fund managers I talk to that have missed this rally or underplayed this rally are sitting with way too much cash.”

With so much cash on the sidelines, what do valuations look like since the March rebound?

“The index [S&P 500] trades for 2.18 times book value, or assets minus liabilities, 33 percent below its 15-year average, data compiled by Bloomberg show. The S&P 500 was never valued below 2 times net assets until the collapse of Lehman, data starting in 1994 show. The index fetches 1.15 times sales, 22 percent less than its average since 1993.”

 

On a trailing P/E basis (19x’s) the market is not cheap, but the Q4 earnings comparisons with last year are ridiculously easy and companies should be able to trip over expectations. The proof in the pudding comes in 2010 when growth in earnings is projected to come in at +34% (Source: Standard & Poor’s), which translates into a much more attractive multiple of 14 x’s earnings. Revenue growth is the missing ingredient that everyone is looking for – merely chopping an expense path to +34% earnings growth will be a challenging endeavor for corporate America.

Growth outside the U.S. has been the most dynamic and asset flows have followed. With some emerging markets up over +100% this year, the sustainability will ultimately depend on the shape of the global earnings recovery. At the end of the day, with piles of dry powder on the sidelines earning next to nothing, eventually that capital will operate as productive fuel to drive prices higher in the areas it is treated best.

Read the Complete Bloomberg Article Here.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

October 9, 2009 at 2:00 am 1 comment

Mountains of Cash Starting to Trickle Back

iStock_000004967333XSmall

The month of July was an interesting month because investors opened their 401k and investment statements for the first time in a long while to notice an unfamiliar trend… account values were actually up. Like a child that has burnt their hand on a stove, the wounds and memories are still too fresh – more time must pass before investors decide to get back into the market in full force.

As you can see from the charts below, as investors globally panicked throughout 2008 and early 2009, money earning next to nothing in CDs and Money Market accounts was stuffed under the mattress in droves. The fear factor of last fall has caused current liquid assets to stand near 10 year highs at a level near 120% of the S&P 500 total market capitalization (Thomson Reuters) and at more extreme levels last fall if you just look at Money Market assets (bottom chart) . Now that the Armageddon scenario has been temporarily put to rest, we’re starting to see some of that cash to trickle back into the market. The silver lining is that there is still plenty of dry powder left to drive the market higher – not overnight, but once sustained confidence returns. If the earnings outlook continues to improve, come the beginning of October when 3rd quarter statements arrive in the mail, the pain of not being in the market will overwhelm the fear of burning another hand on the stove like in 2008.

Cash as Pct of SNP500

It is funny how the sentiment pendulum can swing from the grips of despair a year ago. There is still headroom for the market to climb higher before the pendulum swings too far in the bullish direction – if you don’t believe me just look on the horizon at the mountain of cash.

Source: SentimenTrader.com (Fall 2008)

Source: SentimenTrader.com (Fall 2008)

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 6, 2009 at 4:00 am 1 comment

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