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ALL BUSINESS: Cash is king for investors

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By RACHEL BECK, The Associated Press 6:46 PM Thursday, July 2, 2009

NEW YORK — That old saying "cash is king" certainly rings true these days. Investors can't seem to get enough of it, which ultimately could be bad news for the stock market and the economy.

In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead.

But the shock of the financial crisis — which have made leverage and risk-taking dirty words — may be changing all that. Even with today's minuscule returns, cash seems to have become a sought-after asset class among investors who intend to keep it as a part of their portfolios for the long term.

Watching this play out firsthand is Jack Albin, chief investment officer at Harris Private Bank in Chicago. In sizing up the outlook, he has to balance what the past tells him about cash tending to move back into the market and the cautionary tone that he's hearing from the bank's clients .

Historical data he has crunched shows that whenever assets in money market mutual funds — which are low-risk, highly liquid investments — exceeded 25 percent of the market capitalization of the Standard&Poor's 500 index, stocks have rallied over the following two years.

This ratio jumped to an almost-unheard of level of more than 60 percent on March 9, almost triple the median level in the early years of this decade, for two reasons. Money market fund totals have surged 30 percent since the stock market peaked in October 2007, and by early March the S&P 500's market cap had plunged 57 percent from its high point in 2007.

Today, that ratio has narrowed to about 45 percent, primarily because of a recent rebound in stocks. There is $3.7 trillion sitting in money market mutual funds right now, and the market cap of the S&P 500 is about $8 trillion, up from a March low of $5.9 trillion.

Albin considers the 45 percent level still to be unusual — and a potential source of fuel for further stock gains if investors choose to redeploy their low-yielding cash.

"If the stock market keeps trending higher and corporate earnings numbers progress, some investors might feel left out and decide to buy again," Albin said. "That is driven by human nature."

But there is recent evidence from some big-name investors that argues otherwise, at least on the margins. The California Public Employees' Retirement System, also known as CalPERS, announced June 15 that it had boosted the target cash exposure of its $183 billion investment portfolio from zero to 2 percent.

That helps explain why Albin is cautioning against counting on a stampede out of cash and into stocks, especially after talking to his banks' clients. They've been burned by the bear market and worry about having enough cash — especially those who invested in things like auction-rate securities that turned out not to be as easily accessible as they thought. Since credit markets remain tight, many are also finding it harder to borrow or raise money.

So they are clinging to their cash, especially in plain-vanilla accounts like money market funds, which now yield on average only 1.3 percent, according to Bankrate.com.

Albin has started giving a presentation to clients titled "Cash is an Asset Class." He discusses how investors' experiences in 2008 called into question two underpinnings of investment management — buy and hold and diversification. As a result, he sees many investors viewing cash as an important asset to have "in an environment where you need to protect yourself."

Albin's thinking jibes with what David Rosenberg, chief economist and strategist at the Canadian wealth management firm Gluskin Sheff, has been telling his clients.

Even though there is a mountain of cash on the sidelines, he says it is being deployed tactically, "seeing as demand for liquidity is running at very high rates at every level of the economy."

Rosenberg points to the record number of dividend cuts by S&P 500 companies over the last 12 months — 1,043 of them, according to S&P. That's evidence corporations are hoarding cash so that they can fund operations, buy other companies or to ensure they can satisfy their debt refinancing needs going forward.

The end result is that stock investors are seeingtheir cash flow squeezed. Since 1955, the average has been 15 dividend increases for every decrease. Now, it's five increases for every six decreases, according to S&P.

Shifting investor sentiment is also reflected in the surge in the personal savings rate, which was hovering near zero in early 2008 but soared to 6.9 percent in May. That was the highest rate since 1993.

Even with the massive government stimulus program, Americans are choosing to bolster their nest eggs rather than spend. According to Rosenberg's calculations, the total stimulus from the Obama administration came to $163 billion at an annual rate in May, but consumer spending only increased at an annual rate of $25 billion.

So long as the cash just stays on the sidelines, there won't be much fuel to propel stocks and the economy forward.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

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July 02, 2009 10:43 PM EDT

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