<<Investors Rolling in Cash, Avoid Stocks
Sat May 25, 7:17 AM ET
By Pierre Belec
NEW YORK (Reuters) - Wasting away, waiting for idle cash to find its way back into the stock market. It's the story that has been heard on Wall Street for the last two years.
By some estimates, more than $2 trillion is sitting on the sidelines. It's a mountain of unused money that could power the next bull market.
But the betting is the cash may not be put to work any time soon because corporate earnings are still not exciting after crashing by 31 percent last year. The economic recovery is not assured because business investment, which slumped and pulled the economy into recession last year, is still flat. Investment in computers and other high-tech stuff drove the 1990s boom. And in order for the economy to get back on its feet, businesses need to start spending again.
While interest rates have fallen precipitously to 40-year lows, people holding cash are sleeping as soundly as babies at night. They may get a single-digit return, but it's better than being left holding a bag of money-losing stocks.
Yet Wall Street analysts continue to comment on financial talk shows that this huge pile of sidelined money will soon return to the stock market because the returns on such things as riskless U.S. Treasury bills are so unappealing. (LOL! these be the same blokes that have been saying the same thing every fricking day for at least 18months--they are wind up toys that speak from "a get them to buy-stocks" programming--max )
Alan Newman, editor of Crosscurrents, a financial letter, says the Street is clamoring as never before for more money to jump back into the market even though stocks have clearly been the second-best investment after Treasuries.
"In the last 50 months since the Standard & Poor's 500 first traded at today's levels, approximately $706 billion in new cash has entered equity mutual funds,"( that's the smart-money going out, trusting average investor putting money in--max ) he says. "Strangely, with all of this fresh cash, prices are no higher now than they were then."
What's happening, he says, is the supply of stocks has finally overtaken demand. The reality is that in order for the market to mount a sustained rally, investors' demand for stocks will need to at least equal the outstanding supply of stocks. It's simply the law of supply and demand.
There's more. For stocks to rise, the market must be priced to deliver an attractive rate of return.
P/E RATIOS STILL IN ORBIT
But the problem is the price-to-earnings ratio of the S&P 500 for the next 12 months is out of this world, hovering at a record 40, which leaves little room on the upside for further market appreciation. (!!!--max:) ) Stocks have traditionally recovered from recessions only after P/E ratios have sunk to extremely depressed levels. Rallies come more easily from lows. It just makes sense.
According to a Merrill Lynch survey in early April, global fund managers thought stock markets were fully priced. A month earlier, they estimated the markets were just 2 percent above fair value. But what was significant about the new sampling: 62 percent of big money people now think U.S. stocks are the most overvalued.
"Market psychology has come full circle regarding the economic recovery and these lowered expectations are hitting stocks and aiding bonds," says Kent Engelke, capital market strategist for Anderson & Strudwick Inc.
Engelke says bonds may outperform stocks for the third straight year, which is something that hasn't happened since 1938-41.
The second-quarter earnings of the 500 companies in the Standard & Poor's 500 index are now expected to increase by only 1 percent after declining for the last five quarters. Early in the year, second-quarter earnings had been forecast to increase by nearly 10 percent, which shows the extent of the Street's optimism just a few months ago.
ABOUT $5 TRILLION UP IN SMOKE
In the 1990s boom when stocks were on a moonshot ascent, only ultra-conservative investors were parked in cash. But the colossal investment bust after March 2000 pulverized 401(k) retirement accounts and forced a lot of investors to seek safety.
Indeed, the character of the stock market has changed. What the market needs to get investors back into play is good news every day, which is a pretty tall order.
In the meantime, smart money people are patiently waiting on the sidelines, wiser than they were two years ago. There's a reluctance to get back into stocks because of the risk the market could be brought down by an unexpected event such as a major flare-up in the oil-rich Middle East.
By some estimates, $5 trillion has gone up in flames since March 2000, a ton of money equal to half of the total U.S. gross domestic product of $10 trillion. So it's easy to understand why investors have developed a "once burned, twice shy" mentality.
Newman says investors made a big mistake during the 1990s. Looking back at how investors profited from the Great Bull Market, he found the public bought stocks at or near the top. Many people were left holding the bag when the market crashed.
"The average annualized gain for all investors for the S&P 500 comes to an insignificant 1.18 percent," he says. "If we add on dividend returns, that probably averaged about 1.8 percent, and the total average annualized return for investors since October 1990 is now less than 3 percent."
PLENTY OF REASONS TO WORRY
Investors are also dealing with messy issues. A record number of corporate bankruptcies surfaced in the first quarter of 2002, including the headline-grabbing implosions of Enron Corp. and Global Crossing Ltd.
The risk is more companies may bite the dust as the cost of doing business -- i.e., borrowing -- rises for the walking wounded. Banks are already toughening up their standards amid deteriorating credit quality.
The mounting credit problems could be a drag on the economy and give the stock market a hangover this year.
****Another danger signal: Corporate insiders last month sold stocks by a wide 5-to-1 margin over insiders who bought, suggesting the executives who track the business climate are still pessimistic about the economy's health.******
For the week, the tech-driven Nasdaq composite index <.IXIC> fell 79.90 points, or 4.6 percent, to finish Friday at 1,661.49, according to the latest available figures. The blue-chip Dow Jones industrial average <.DJI> lost 248.82 points, or 2.4 percent, to end the week at 10,104.26, while the broad Standard & Poor's 500 index <.SPX> slipped 22.77 points, or 2 percent, to wrap up the week at 1,083.82.
(The Stocks View column runs weekly. The opinions expressed in this column are strictly those of Mr. Pierre Belec, who is a free-lance writer)>>> story.news.yahoo.com |
