Are Investors Tapped Out?

How much cash is really sitting on the sidelines? The good news is that markets have held up well in the past week in the face of higher Treasury yields. The bad news is that there seems to be little buying interest; are investors tapped out?

Bulls have argued that despite a 35 percent rise in the S&P since the March bottom, there is still oceans of cash available to go into stocks.

But is there? Charles Biderman at TrimTabs.comis not so sure.

Here's his thinking: the market value of all U.S. stocks peaked in October 2007 at $22.4 trillion, dropped to $9.4 trillion March 9th, and is now $13.5 trillion.

That's an increase of $4 trillion--in two months! He notes that historically money coming into the market can be leveraged 10-15 times. Assuming that holds, it would take at least $250 billion in inflows to get the market to advance $4 trillion in market cap (that's 16x leverage, the high end of the average).

Biderman note that companies have recently sold about $100 billion in new offerings, so at least $350 billion had to come in.

Did it come from companies? Unlikely. Corporate buybacks remain weak (despite a recent Wal-Mart announcement), and insider buying also remains poor.

The only possible sources are institutions (pension funds), hedge funds, and trading houses (there has been little sideline cash inflow from mutual funds, according to Biderman).

We do not know how much available cash these sources had, but Biderman is assuming that the $350 billion is a significant part of their available cash balance.

In other words, Biderman believes that the "there's an ocean of cash on the sidelines" was right a few months ago, but is no longer.



Questions? Comments?