Money on the sidelines

With credit markets stabilizing and some recession already priced into stocks (arguably), we have a feeling the worst may be behind us.

It doesn’t mean we can’t go any lower, but unless the recession turns out very nasty and/or very long-lasting, we think we are pretty close to the bottom. Much depends on hedge funds. If they keep liquidating, stocks will go lower (and there is always the chance of some nasty surprise), but on the other hand, there is a lot of money waiting on the sidelines..

Record Rush to Money Markets

  • Investors dumped a record amount of cash into money market funds in the week ended Oct. 15, in a desperate search for safety, data from Boston-based fund tracker EPFR Global showed on Friday.
  • In the latest reporting period, a time when the benchmark Standard & Poor’s 500 stock index .SPX fell 7.82 percent, investors pumped a record $44.5 billion into money market funds tracked by EPFR on a weekly basis since 2001.
  • There remains a huge amount of cash sitting on the sidelines in money market funds. The net inflows this year so far are over $200 billion among the money market funds we track, which collectively hold $2.3 trillion,” said Cameron Brandt, global markets analyst at EPFR.
  • And in a bullish sign, he said, even though equity funds by and large still had outflows of cash, they did not suffer another huge rush of redemptions when compared to the selling of the prior week.
  • “In a week following where Latin American funds lost a third of their value and other funds 20 percent or so, you would have expected more money to head out the door. … The main sign is the fact that the outflows were not bigger,” he said.
  • Financial sector stock funds took in a net $1.553 billion, mostly into exchange traded funds, and consumer goods funds had net cash inflows of $246.3 million.
  • Western European funds took in a net $2.167 billion in cash, the first positive week out of the last 11.
  • But that is where most of the good news stopped.
  • Latin American funds, which last week lost nearly a third of their market value, had a net outflow of $399 million in the latest reporting period, marking 19 straight weeks of net redemptions.
  • U.S. stock funds had a net $6.454 billion in cash pulled out while international funds had a net outflow of $7.471 billion.
  • Asia ex-Japan funds lost $1.48 billion to redemptions while Japanese funds had outflows of $210.1 million.
  • Long-only dedicated emerging market stocks had $2.36 billion in outflows.
  • Bond markets also suffered from redemptions in the latest week when U.S. Treasury yields rose 30 basis points and the yield spread between JPMorgan’s emerging market sovereign bond index (EMBI+) and U.S. Treasuries widened by 47 basis points 11EMJ.
  • “I do think the drops last week triggered new rounds of margin calls and the money had to come from somewhere. For investors the question was, Do you want to lock in a loss of 20-40 percent in your stocks or booking a smaller loss from bonds?” said Brandt.
  • U.S. bond funds overall had $3.46 billion in net outflows, split between U.S. municipal bond fund redemptions of $1.42 billion and other U.S. bond fund redemptions of $2.04 billion.
  • Net redemptions from global bond funds were $3.37 billion while high-yield funds had $938 million pulled out.
  • Emerging market bond funds in total had a net $1.7 billion pulled from them in the latest week. In a rare occurrence, local currency bonds funds had more removed than U.S. dollar-denominated funds, $738.6 million versus $663.5 million, respectively. Blended funds had $316 million in net outflows.
  • “EM bond funds had their second worst week since the beginning of 2006. As a result of falling asset prices and fund outflows, EM bond funds’ assets under management fell to less than $54 billion from over $72 billion in the beginning of September,” Dresdner Kleinwort said in a research note.