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What To Make of Available Cash


Our professors weigh in.


Editor's note: The following took place on the Buzz & Banter this morning and is reprinted here for the benefit of the Minyanville readership.

Comments from Snoop Tony Dwyer of FTN Midwest Securities:

Based on NYSE Available Cash, which is double any period in history (see the chart), most are positioned for weakness. In order to have a significant and sustainable drop – there needs to be trapped longs. That isn't the case in those areas.

Click to enlarge
Source: / FTN Midwest

Minyan Peter:

My take on available cash is "hoarding" rather than "waiting to go into the market." I know many technicians are using the MZM growth rate as sign of strength. In recessionary times, I would be careful with that assumption. If you look at Tony's graph, the big boosts in available cash, they align closely with recessionary periods. Further, as the 2000-2003 period shows, lots of available cash did nothing to prevent the market decline.

Mr. Practical:

I agree totally. What also escapes bulls is 1) that cash is there but offset by massive debt in the economy at all levels and 2) hoarding may be synonymous with "needing it to pay bills."

Snoop Tony Dwyer:

As you know, debt has been massive for decades at a new all time high nearly every month for the past 30 years. Where the massive debt crushes society is when interest rates go up at the same time all other expenses are.

There is no question in my mind the bears have already been right… to the point where it actually WAS 1929 if the Federal Reserve didn't exist. My firm was negative in January for the first time since 2002 because of it. The point we have now is that interest rates have not spiked and remain historically low, the fed has injected huge liquidity into the financial system, and everyone in the country knows the negative issues.

I take my hat off to my friends John Succo and Todd Harrison as they saw it WAY ahead of time, which ultimately helped me over recent quarters.

In 2000-02, individuals were still buying stocks on weakness. Remember the post 9/11 buy America trade. Individual investors have been net sellers of U.S. equities to a historic degree over the past 15 months. There's no question in my mind with good reason. If they were building cash to pay bills, by definition, they wouldn't be building cash.

The bears want a financial collapse as a sign... I guess the global financial system wasn't enough.

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Prof. Goepfert:

That chart is made by subtracting brokerage firm customers' liabilities (i.e. margin debt) from free credits (i.e. cash). If the number is positive, then it means there's more cash available for withdrawal than there is debt to be paid. It's then expressed as a percentage of the market cap of US equities so that we can compare the current reading to historical ones.

The chart looks similar to one created by looking at assets in domestic money market funds. The amount of cash in there now is equal to just under 25% of the market value of the S&P 500. In other words, if all the money sitting in money markets suddenly found its way into stocks, it could buy up 25% of the S&P index.

There are two ways to look at that... it's either a sign of cash hoarding, which is bad, or it's a sign of excessive risk aversion, which could be good. It all depends on what's done with the cash.

Historically when cash levels reached this type of extreme, it was a sign of too much uncertainty and we saw that cash start to migrate back into riskier assets. And those assets usually rose, at least in part because of the fresh demand.

But I believe the bears do have a valid argument that this time is different. That can be a very dangerous suggestion, but the negative economic cocktail noted by Chairman Bernanke this morning could mean that some, or much, of this cash is not gong to be used to buy stocks. Rather it'll be used to help pay off debts and everyday expenses, or will simply sit there as consumers feel they need an emergency cushion.

I'm not sure which is the right answer, so for right now my opinion is that it's a potential positive, but we need to start seeing the cash stop piling up, and start making its way into stocks.

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