Thursday, March 11, 2010

What's in Your Wallet?

Based on surveys by the American Association of Individual Investors (AAII) and the Investment Company Institute (ICI) the answer to the above question is either, still a little, or not much. The AAII surveys individual investors who have been less convinced that the coast is clear or are still licking their wounds from 2008. That group is currently sitting with a liquidity stash that is just about in the middle of the range as far as % allocation to cash. In other words neither dramatically excessively liquid or illiquid. As each uptick pains the remaining cash off the sidelines the upside is limited as is the downside risk at the moment. My concern with the data is that the time frame is again limited to the period beginning only with the 1980's when a new secular bull market was evolving

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On the institutional side of things, as surveyed by the ICI tells a slightly different story, but consistent with the theme of the past year of institutions in the market and individuals out. Portfolio managers have been so worried about missing up moves in the market and thereby lagging their benchmarks they have decreased cash holdings to less than 4% from nearly 6% last year. This is the largest decline in 19 years. It does beg the question of how much the thumb of government was on the scale in 2009. This cash level ties for the lowest level of cash in twenty years, matching the levels of 2007 before the markets turned southward. Conversely corporate bond fund managers are holding cash positions at the high end of the range of the past two decades.

Government liquidity goosed the market last year in 2009. Where will liquidity come from this year as the government faces strong resistance to further deficit spending?

John Barnyak