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Cash on sidelines now 74% of stocks' value; 18-year high

December 29, 2008 | 10:13 am

If and when investors decide that they want to buy stocks again, they won’t lack for dry powder.

Bloomberg News and Leuthold Group crunched the numbers and tallied $8.85 trillion now in cash, bank deposits and money market mutual funds.

More striking is that the cash total is equal to 74% of the entire market value of U.S. companies, the highest ratio since 1990, according to Bloomberg:

"There is a store of cash out there that is able to take the market higher," said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. "The same dollar you had last year buys you twice as much S&P 500 as it did a year ago."

Leuthold Group, whose Grizzly Short Fund returned 83% in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer "one of the great buying opportunities of your lifetime."

The historical data on cash holdings versus market capitalization shows how quickly stocks can rise when money begins to flow back in, Bloomberg notes:

Cash holdings peaked one month before equities began to recover during the two longest recessions since World War II -- in 1982 and 1974.

In July 1982, money of zero maturity as a percentage of the U.S. stock market’s value rose to 95% before a 20-month bear market ended and the S&P 500 began a six-month, 36% advance.

Cash on hand reached $604.5 billion in September 1974, representing a record 1.21 times U.S. stock capitalization. That preceded a 31% gain in equities between October 1974 and March 1975.

"If history tends to repeat itself, we’re in the exact same scenario," said Neil Hennessy, who oversees $650 million as president of Hennessy Advisors in Novato, Calif. "Once the money starts to come back into the market, buying is going to beget more buying. People don’t want to be left behind."

But note that the current cash-to-market-capitalization ratio, at 74%, still is below the peaks in 1982 and 1974. If we have to go back to either of those peaks, stocks have to fall further or cash totals have to get bigger, or both.

-- Tom Petruno

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