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Cash Holdings Could Easily Fund a Rally--Question Is, Will They?

September 02, 1998|Tom Petruno

The cash is there. Now will investors put it to work?

Amid Tuesday's powerful rebound on Wall Street, some investment pros were focusing less on the day's activity than on what might come next.

Impressive as the Dow industrials' 3.8% rise may have been, it recouped just a little more than half of Monday's 6.4% dive.

That was a less robust rebound than what the Dow experienced after its 7.2% plunge last Oct. 27, when it followed the next day with a 4.7% rally, recouping more than 60% of the previous day's decline.

Still, the market's breadth was better this time around: The ratio of rising stocks to falling stocks on the Big Board on Tuesday was 1.65, versus 1.37 last Oct. 28.

Market technicians pore over stats like these for clues to whether the sell-off, and subsequent rebound, suggest the market has reached at least a near-term bottom, or whether the selling has further to run.

But one of the most important numbers now may be this one: $1.23 trillion.

That was the record sum in money market mutual funds, including taxable and tax-free funds, as of last week. It's a big chunk of change, and it's potential fodder for another surge in stock prices--if investors begin to feel better about the market.

Money market fund assets ballooned by $45.4 billion in the four weeks through Aug. 25, a 3.8% jump, as many investors either pulled money from stock funds or opted to put new savings into money funds rather than buy stocks in a dicey market.

The $1.23 trillion in money funds now is about half as much as the $2.4 trillion in U.S. stock funds. In other words, for every dollar in stock funds, investors have about 50 cents sitting in money funds.

The market's optimists might salivate over the possibilities implied by that hefty cash figure, but the numbers aren't as bullish as they might appear. While it's true that money fund assets represent a lot of potential buying power for stocks, history suggests that the vast majority of those money fund dollars don't budge.

Even as stocks have rocketed since 1994, money fund assets have mushroomed by $457 billion. So as eager as investors have been to buy stocks, many also have continued to build a cash cushion.

What's more, the current $1.23 trillion in the money funds isn't all individual-investor money. More than a third is institutional money.

Still, there's no question that individuals have stashed a lot of cash in money funds. Many of those dollars may never be removed from those funds. But some significant chunk of the money undoubtedly is merely "parked" in money funds, waiting for a better opportunity--in the stock market, or in some other investment.

Because many investors can shift their money fund dollars into stock funds in the same fund family with just a phone call, the stock market could benefit in a hurry if collective psychology changes from the current apprehensiveness to a got-to-get-in-now mentality.

That's not a prediction. But it's worth remembering that while mutual fund managers have been perhaps overly aggressive in buying stocks in recent years--lowering their fund cash-reserve levels to the lowest readings in 20 years--many individual investors have been building up their cash buffers.

Just what it will take to move some of that cash into stocks is anyone's guess.

But if just $100 billion moved into stocks--just 8.1% of the money fund total--the fireworks could be spectacular.

Meanwhile, in another part of the fixed-income market, high-yield corporate junk bond investors relearned in August that high yield means high risk.

Merrill Lynch's junk bond total return index lost a painful 5% for the month as bond prices sank--the worst performance since 1986, when the index was created.

That decline was even worse than the biggest monthly loss in 1990 (4.5%, in August of that year), when the junk market was seriously on the rocks amid soaring default rates and the economy's slide into recession.

Unlike the Treasury bond market, where yields have been tumbling amid the global flight to safety, junk bond yields have soared since July as investors factor in the risk of an economic slowdown (with a potential surge in defaults) and a continuing stock market swoon (which would make it tougher for many junk-issuing companies to raise needed capital).

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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