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Sidelined cash is huge, but is it antsy to go somewhere?

June 10, 2009 |  7:00 am

Besides the apparently moderating recession, what gets Wall Street bulls excited these days is talking about the mountain of cash sitting on the sidelines -- particularly in money market mutual funds.

Money fund assets have risen dramatically in the last three years, to the current $3.7 trillion from $2 trillion in mid-2006.

Sooner or later, bulls surmise, investors will grow weary of tiny yields on money funds -- now averaging a record low 0.15% on taxable funds -- and will funnel a chunk of that cash into the stock market, providing more fuel for an extended bull run.

In a research report on Monday, Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said that whenever money market assets have exceeded 25% of the capitalization of the Standard & Poor’s 500 index, stocks have rallied over the following two years. That number currently is 43% after having peaked at 58% in mid-December.

Fi-cash9-2 There’s no doubt that some fickle money-fund cash will flow into stocks; indeed, after peaking in early January, money fund assets have edged lower as the stock market has surged.

But money funds might not provide as much juice as the bulls expect.

For one thing, much of the cash flow into money funds over the past two years had little to do with the collapsing stock market, said Peter Crane, chief executive of research firm Crane Data.

Corporations, which account for two-thirds of money-fund assets, have built up funds for purposes ranging from emergency reserves to bankrolling mergers, and are unlikely to put that cash into stocks, Crane said.

That’s a big reason why overall money-fund assets are down only 4% from their mid-January peak despite the torrid market rally since early March.

"Money is trickling back in off the sidelines, but the thought that this wall of cash will come pouring back into the market overnight is ridiculous," Crane said. "If it were going to do that, it already would have."

So-called retail money funds -- those used by individual investors as opposed to institutional investors -- have been losing assets at a faster clip this year. Retail fund assets are down 8.2% from their January peak.

But the build-up of cash in those funds in 2008 was due in part to dissatisfaction with fixed-income investments that went awry, such as exploding auction-rate securities and some surprisingly risky short-term bond funds, Crane said. So some of that money now may be heading back into other income-oriented investments -- including corporate-bond funds, which have seen hefty inflows this year, and bank accounts -- rather than into stocks.

Still, bulls believe that a significant amount of the cash on the sidelines will eventually find its way into equities once bear-market scars fade a bit more (and assuming there isn’t another market bomb on the horizon).

"It’s like donuts," Ablin said of the stock market. "You swear them off. You’re never going to have them again. Then you try them and slowly you get back into them again."

-- Walter Hamilton

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