About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, April 15, 2010

Stock Market & Financial Liquidity

Comparisons between stock market trends and money market
fund holdings did not prove very rewarding for a long while. During
the great bull market from 1982 - 2000, money market funds
experienced dramatic growth as well. There was sizable growth
in total financial system liquidity in the early part of the past
decade, but the stock market languished for a fair part of that
period. That is the main reason I demoted system liquidity
measures as a market tool after 2003.

But, interestingly enough, money market funds -- retail + instit'l --
did reach such a mass size in the past decade, that a positive
correlation between fund flows and and stock market trends has
developed. Money fund outflows were a far better guide to the bull
market that started in late 2002 / early 2003 than were much
broader measures of liquidity.

During the recent bear market, mm-funds increased from $2.3
tril. to $3.5 tril. over the 5/07 - 3/09 interval. That jump rated
out at +52%. Since 3/09, when a new cyclical bull market got
underway, combined mm-funds fell from $3.5 tril. back down to
$2.8 tril. currently. So, about 58% of the cash cushion that was
established over the mid-2007 - early 2009 period has been
drawn down.

Now, it is the stock market that calls the tune here and not the
mm-funds flows. Moreover, the mm-fund data is reported with a
lag, so using this data to time the market will not prove helpful.
We can say that mm-fund outflows are supporting the market
and we can speculate that the well is not yet dry.

I plan to play around with the data in the months ahead, as there
may be some interesting relationships here nonetheless. Here
is a link to the Fed's mm-fund database.

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