Yesterday's Buzz on Cash Levels
Thx for sharing!
A spirited banter evolved on yesterday's Buzz regarding mutual fund cash levels. As not all Minyans Buzz, I thought it might be helpful to share the conversation on today's News & Views. Enjoy!
Scott Reamer 1:34
Earlier this week we posted a note about the relative ourperformance of the Nasdaq vs. the NYSE and suggested that this outperformance was getting long in the tooth. Just to illustrate the point another way, note that, at the August lows, the DOW was down 8.8% from its Q1:04 peaks while the NDX was down a full 17.1%. At current prices, the DOW is down about the same, 8.8% from the Q1:04 peaks while the NDX is down only 6.2%.
An 830 basis point underperformance YTD has turned into a 260 basis point outperformance in the span of 70 days. Either the Nasdaq is saying the DOW is going to rip higher very soon or the DOW is the one that is "telling". The bullish sentiment picture hardly suggests the former.
Scott Reamer 1:53
Wanted to pass along some interesting data points from the good folks on CSFB's trading desk regarding how fully invested fund managers are. To wit, based on their analysis, average cash balances at growth funds are below 4%, thus fully invested, with over-weights in software and hardware sectors. Large cap value managers have cash at 3.2%, again fully invested.
There are lots of ways at looking at sentiment across multiple time frames. But don't let anyone tell you that fund managers aren't bullish on net. These cash levels are at historic extremes: their portfolios are fully invested because they believe stocks are going up. When you see these types of figures, just keep in mind the statistic from Ibbottson: 85% of fund managers fail to beat the major averages.
Being bullish at tops and bearish at bottoms is the principal reason why.
Bernie Schaeffer 2:10
Scott's comment about fund managers being invested up to their under performing eyeballs leads me to another thought.
With 18 consecutive months (last time I looked) of positive mutual fund inflows and fund managers putting this cash to work as fast as they rake it in, what's the market's excuse for going nowhere this year?
Or perhaps a better question: Who has been selling into this?
To answer your question, I'll ask another--foreigners?
A view from a Bull (dressed as Tony Dwyer) in referrence to Bernie and Scott respectfully...
"SPX index may be flat suggesting all buying is being met by selling, but almost any unweighted index is at an all time high. In addition, while mutual fund cash remains low, according to Jason Goepfert, NYSE available cash (Free Cash minus margin debt in clearing firm's accounts) remains a net positive number for 3rd year running. Before the bubble collapse, there hasn't been a net positive month since the 50's (which was followed by a huge up move)."
David Miller 2:40
I'll chime in on who is on the other side. Short interest on the NASDAQ is at record highs and climbing pretty steadily since February on the NYSE. I've written previously about a short-side bubble, though I will freely admit there are a multitude of reasons besides rampant Boo-ism for why short interest is as high as it is.
Bernie Schaeffer 3:07
Re: "the question" thread
David - My understanding is that the inflows have been concentrated in "value" funds - the kind that wouldn't bite on tech except perhaps a Microsoft (MSFT: NYSE). So I'd go a step further and ask: Who is on the other side of the short tech trade?
Tony - I'm familiar with "the unweighted indices are at all-time highs so what's your problem?" argument, a prominent proponent of which is Paul Desmond. Back in the bubble, the bulls - when confronted with the fact that the big caps were hogging all the gains and the broad market was going nowhere - responded with "that's the way the indices are constructed, so what's your problem?" So I guess the bulls are happy either way. Bottom line, it comes down to whether the generals are going to lead the troops or vice-versa. I'm with the generals here.
Jason Goepfert 3:09
Regarding mutual fund cash levels...yes, they are at historic lows on an absolute basis, and I won't argue the fact that an absolute level of cash is an important point.
However, there is an extremely high correlation between cash levels and short-term interest rates. After all, what's the incentive to hold cash when it's yielding 1.5%? When adjusting cash levels for short-term rates, current fund cash levels are low, but not extreme and nowhere near where they were at most important tops over the past 50+ years.
Bernie Schaeffer 3:23
Good point about the economic incentive to hold cash being a function of interest rates. On the other hand, fear is also a major incentive to hold cash, even if returns are minuscule or negative (see "1930's").
In any event, my original question did not relate to the "low" cash levels as a sentiment indicator or whether or not they were extreme, it related to the fact that big inflows + low cash levels have not powered the market higher this year.
Again, at the risk of sounding simplistic, could foreigners be selling into the reaching public hands?
Jason Goepfert 3:32
Bernie...I see your point. My post was more in reference to Scott's idea that fund managers are overly optimistic. When one takes into account short-term rates, and the simple fact that stocks have risen on balance over the past year and a half (another large contributing factor to low cash levels), we should expect cash as a percentage of total assets to be low. I would rather become invested when fund managers are fearful, and that is not the case now, but I have to respectfully disagree with the thought that they are excessively optimistic based on cash levels.
Bernie Schaeffer 3:37
Points well taken.
In fact, I've often had to remind myself that bullish sentiment in a bull market is to be expected and is not a contrarian indicator unless it is at an off the charts extreme.
Jason Roney 3:41
The last time the Dow Jones Industrial Average posted at least a 30 day low on the same day the Nasdaq 100 posted at least a 30 day high was....are you ready?
March 7, 2000. Enough said!
Scott Reamer 3:42
I would note relative to the mutual fund cash levels vs interest rates thread that low cash levels are important for two reasons in my view, only one of which is "affected" by low interest rates: (1) low cash levels indicate optimism about future equity returns irrespective of what the risk-free alternative return is and (2) low cash levels mean that there is necessarily less fuel to purchase more shares.
Yes, mutual fund PMs and retail investors could dip into margin to create more buying fuel. And yes a low yield on cash might mean less optimism about future equity returns than when cash yields are high, but those are distinctions without a difference. The main points regarding mutual fund cash levels are existing optimism and less buying power.
No one would/shoud use cash levels as any sort of trigger/catalyst, but as another metric to determine if we are nearer a peak or a trough, this statistic is unambiguous.
John Succo 3:42
I have a stupid question Bernie and Jason (and anyone else).
Are the low cash levels a sign that mutual fund managers are really bullish?
If they were secretly not bullish, do you really think their cash levels would be higher?
I would put it this way. Mutual fund managers know that if they have any cash at all and the market moves higher, they will be seriously criticized. If they have no cash and the market moves lower, they are just part of the crowd.
So my rhetorical question is really about fiduciary responsibility.
This circles back to the conversation we had at dinner last night with Shobin, Roque, Santoli, etc--the simple truth is that fund managers HATE underperformance. That's the imbedded psychology. They are "safer" losing 5% if everyone else loses 10% than they are making 5% when everyone else makes 10%.
And...as Sean Mueller just said, I'm not certain that they would be taking as much risk if it were their money instead of OPM (other people's money).
(This is Tony Dwyer--I've secretly snuck into Toddo's turret to add this vibe to an already excellent give and take):
"Bernie, i did an interesting study just now. The generals (market cap of greater than $50 billion) are up 0.9% ytd, while stocks under $50 bill are up 4.2% ytd. The troops have led the generals by a wide margin thus far. That info is from Baseline. Thanks!"
John Succo 4:00
Sean's point was what I was after. Fiduciary responsibility requires that personal implications do not preclude one from properly representing your client.
The phenomenon of "running other peoples money" unfortunately has had the effect over time of taking too much risk for clients.
David Miller 4:04
I've always found the OPM phenomenon odd. People with this affliction take more risk than appropriate in order to keep the client's money under management. There's an oxymoron in there somewhere, particularly from the client's perspective.
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