Monday, December 15, 2008

Liquidity: Too Much or Too Little

Cash is piling up for investors and companies at incredible rates. We are far from having a liquidity issue-at least a lack of it. Liquidity is so great relative to investment opportunities I feel like I could dive in it and have a quick swim. What we are facing is a fear and uncertainty issue. Merger and Acquisition (M&A) activity is at 9/2001 lows. Because of the delays/absence of M&A activity, S&P 500 companies alone have hoarded nearly $650 billion in cash, a record amount.

Some (possibly 100+/-) US companies are trading at prices under their cash value per share. This makes no sense unless there is a huge amount of fear priced in.
The money supply figures came out yesterday. M2 (currency, demand deposits, savings, money market) has grown consistently this year, and is getting closer and closer to triple the size of the Dow Jones market capitalization ($8.6 trillion). That’s right, our cash and liquid holdings are 3 times larger than the worth of our most coveted stock index.

I didn’t crunch the numbers, but a reliable source yesterday told me that our M2 was actually greater than the market capitalization of the S&P 500 (that includes 500 of our biggest companies).

Money market funds have also seen record net inflows. $57.5 billion came in last week alone (Tuesday to Tuesday). The seven-day simple yield on all taxable money market funds fell from 1.04% to .94% during this time. Money isn’t coming in because of attractive yields; it is coming in because of fear and uncertainty.

The point I am trying to get across is this: there are mounds and mounds of cash out there. With yields on government bonds pushing closer and closer to 0 (or negative in some cases), it is only a matter of time before the gauntlet opens and investors start buying equities and buyers of long term U.S. Treasuries lose major amounts of money.

Aaron Konen

No comments: