Wednesday, June 10, 2009

Sidelined cash is huge, but is it antsy to go somewhere?

Besides the apparently moderating recession, what gets Wall Street bulls excited these days is talking about the mountain of cash sitting on the sidelines -- particularly in money market mutual funds.

Money fund assets have risen dramatically in the last three years, to the current $3.7 trillion from $2 trillion in mid-2006.

Sooner or later, bulls surmise, investors will grow weary of tiny yields on money funds -- now averaging a record low 0.15% on taxable funds -- and will funnel a chunk of that cash into the stock market, providing more fuel for an extended bull run.

In a research report on Monday, Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said that whenever money market assets have exceeded 25% of the capitalization of the Standard & Poor’s 500 index, stocks have rallied over the following two years. That number currently is 43% after having peaked at 58% in mid-December.

There’s no doubt that some fickle money-fund cash will flow into stocks; indeed, after peaking in early January, money fund assets have edged lower as the stock market has surged.

But money funds might not provide as much juice as the bulls expect.

For one thing, much of the cash flow into money funds over the past two years had little to do with the collapsing stock market, said Peter Crane, chief executive of research firm Crane Data.

Corporations, which account for two-thirds of money-fund assets, have built up funds for purposes ranging from emergency reserves to bankrolling mergers, and are unlikely to put that cash into stocks, Crane said.

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