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We’ve touched on the epic amounts of cash that are sitting on the sidelines in money market funds. There is some debate about how positive this is for the market so let’s take a closer look by going over a few details from both sides of the argument.
Money Market Levels
Now that we have stepped away from the precipice (or so it would seem), it may be difficult to imagine the magnitude of fear that drove the vast majority into the safety of cash. At its zenith, we had almost half the capitalization of the total US stock market sitting in money market funds.
Here’s a chart of the aggregate US equity market capitalization compared to the total assets held in money market funds (click to see full size chart):
And at the March 2009 low, for the first time in 16 years, US money market funds had more assets than US equity mutual funds: Tsunami of Cash Waiting to be Invested. Since March 9, the value of U.S. equities, measured by the Wilshire 5000, has increased by $4.4 trillion. And from its high the level of total mutual fund cash has fallen by $341 billion.
However, before you get excited and start to think this means we are about to embark on a wild bull market, consider the astute point made by Gestalt: that the increase in money market assets may be a mirage as corporations have shifted short term liquid assets from commercial paper to institutional money market funds.
Mutual Fund Cash Levels
Jason Goepfert wrote an award winning research report in 2004 regarding the signal value of the level of cash held by mutual funds. You can get a copy of the research report from the free trading resource section (Charles H. Dow Awards folder).
As you can imagine, it is an important point in all this is that nominal interest rates are negligible. This means there is little incentive to park assets in cash. But then again, if you follow the strong indications of deflation, the real interest rate is 6.5% - which is actually a significant incentive to just let your money grow (albeit slowly) with near zero risk.
Unfortunately, Goepfert’s research report does not take into consideration inflation or deflation but simply adjusts the level of mutual fund cash levels according to the 90 day T-Bill rate. I’ve sent him a message about this so hopefully when he’s back from vacation he can update it with this new twist thrown in (here it is: Mutual Fund Cash Levels - Adjusted for Inflation).
In any case, right now, this ‘rate adjusted’ model is smack dab in neutral territory. Not helpful at all. It was moderately bullish at the spring low but since then, as the market has improved and as sentiment has thawed, this indicator has backed off into ‘no man’s land’.
NYSE Free Credits
You’re probably familiar with Margin Debt levels, which measure the level of liability in brokerage accounts. Free Credit statistics in contrast, reflect the available, free and clear cash that investors are holding in their trading accounts. This data is released regularly by the NYSE and shows how much liquid assets are held in aggregate by clearing firms overseen by the NYSE.
Speaking of Goepfert’s excellent research, here’s a very long term chart of the NYSE Free Credits, courtesy of SentimenTrader:
This month was the first increase in NYSE free credit in 6 months (you can’t really see it but the most recent data point was a tiny uptick). But on a year to year basis, the shrinkage in free credits was on par with the 1929 crash!
Surprisingly, such sudden drying up of liquidity - after a spike higher - has not been historically a detriment to the stock market over the following 12 months.
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