Mutual Fund Cash Depletion Highest Since 1991

In what can best be described as a contrarian indicator with an uncertain timing trigger, Mutual Fund Cash Depletion Highest Since 1991.

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.

Stocks will rally this year as the prospect of higher interest rates lures cash from fixed-income securities to equity accounts, says Mark Bronzo at Security Global Investors. Data from ICI, the Washington-based lobbying group for professional money managers, show investors have pumped $369 billion into bond funds since March 2009 versus $23.4 billion for equities.

�There�s so much money in the fixed-income market and there�s so much money in money-market instruments paying almost nothing,� said Bronzo, whose firm oversees $21 billion, in an interview from Irvington, New York. �If that money shifts to stock funds, it�s going to be very bullish.�

Equities may be boosted by investors deploying some of the $3.17 trillion held in money-market funds tracked by ICI. While $754.3 billion has moved from the accounts in 14 months for the fastest decline on record, Bronzo says more cash will be withdrawn as investors gain confidence in the economy.

It gets tiring pointing this out, but the only time money can move into the equity market is at IPO time or other offerings. Otherwise it is impossible for sideline cash to move into equities. For every buyer there is a seller. At the end of any normal equity transaction, there is as much cash on the sidelines as before.

So many misunderstand the simple mathematical function of buying and selling, that I feel obliged to make corrections.

Sentiment, Not Sideline Cash, Is The Driving Force

Share prices do not move up because sideline cash comes in (as noted above it cannot happen in the first place). Share prices rise or fall because buyers or sellers are more aggressive in what they are willing to do. In other words shares are repriced and sentiment is the driving force.

For those who want a second opinion, John Hussman has written about sideline cash on several occasions. Please consider There's No Such Thing as Idle Cash on the Sidelines.

Moreover, it's important not to confuse money with debt. Sideline cash is really sideline credit. There is actually very little real cash available relative to total debt and what is needed to service that debt.

Suggestions to "Buy the Dip" based on sideline cash not only shows a lack of understanding about how markets work, they also show a lack of understanding about how extreme sentiment is among fund managers.

Please note that Insider Selling Hits New 2010 High in March. So while mutual funds are loading up, insiders who likely know much more about business fundamentals are selling hand over fist.

Risk is not high, it is extreme. When it all matters is anyone's guess.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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