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Strategies & Market Trends : Waiting for the big Kahuna
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To: James F. Hopkins who wrote (17663)4/30/1998 9:19:00 AM
From: Tommaso  Read Replies (1) of 94695
 
In the Wall Street Journal today, section C, is a regular report on mutual fund activity. There continue to be strong inflows.

I never seem to see in one place all the different figures for mutual funds.

Apparently the total for everything is about 5 trillion dollars right now--about 5,000 billion--and I think that means everything: equity, bonds, and cash. Maybe foreign funds as well.

If money continues to go into the funds at about 180 billion dollars a year, that is about 3.6% of the total. In other words something like 4% increase (I don't know what it was for 1994-1996) seems enough to cause a 15-20% rise in equity values (all very rough guesses). The total equity fund cash position is probably less than half that (since equity funds are only part of that whole 5 trillion.

So if equity funds committed every last remaining penny of their cash reserves it could only push the market maybe 8-10% higher.

In the other direction, an attempt by equity fund holders to withdraw 10% of their money could cause an immediate fall of 20% or more in the equity markets. And that would be if there was orderly liquidation of the positions. An attempt to withdraw another 10% could cause an additional much larger decline, perhaps taking the markets down to a level 50% below their peak.

If a real panic set in and mutual fund holders tried to convert even larger percentages of their positions into cash, the decline could be a lot greater. What I have suggested so far only involves a cash-out of 20% of current NAV.

I welcome comments on these estimates, and especially links to sites where more complete information on mutual fund allocations may be found.
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