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The Unbridled Idiocy Of "Cash On The Sidelines"

Tyler Durden's picture




 

Among Cliff Asness' top peeves are commonly held and oft-repeated beliefs that are wrong or misleading and can potentially hurt investors. The asset manager politely requests people stop saying - "There is a lot of cash on the sidelines." Everyone should pay attention...

 

Via Cliff Asness,

Every time someone says, “There is a lot of cash on the sidelines,” a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.

If you want to save those who say this, I can think of two ways.

First, they really just mean that sentiment is negative but people are waiting to buy. If sentiment turns, it won’t move any cash off the sidelines because, again, that just can’t happen, but it can mean prices will rise because more people will be trying to get off the nonexistent sidelines than on.

 

Second, over the long term, there really are sidelines in the sense that new shares can be created or destroyed (net issuance), and that may well be a function of investor sentiment.

 

But even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines.

There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite.

Add us all up and there are no sidelines.

 

Now where's Maria Bartiromo?

 

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Tue, 12/03/2013 - 20:42 | 4212152 ncdirtdigger
ncdirtdigger's picture

Is the author too stupid to understand that companies often repurchase their own stock and thus there is a withdrawl of outside capital from the market? Geez Louis, where do you find these fools?

Tue, 12/03/2013 - 20:59 | 4212211 BigJim
BigJim's picture

Geez Louise, the companies are just transferring their cash to people who are selling == no change in the amount of 'cash on the sidelines'... because the people who sold are now holding that same cash.

A more salient point is that if the stock market goes up in value overall, as a percentage of where investors' cash has been spent its overall value increases relative to everything else... but that's a different point.

Tue, 12/03/2013 - 21:11 | 4212246 Enslavethechild...
EnslavethechildrenforBen's picture

Does this guy even understand that 99.99% of the stock certificates out there are counterfeit?...

Wed, 12/04/2013 - 02:06 | 4212894 e_goldstein
e_goldstein's picture

and the real ones are owned by the DTCC.

Wed, 12/04/2013 - 07:16 | 4213130 negative rates
negative rates's picture

The asset manager rang the night clerk, he said "send me up a report" Now the night clerk said it's sunday night man, wait a minute, let me think. There a little place outside of of town, might still have a report, the manager said forget it, can I have an out sideline of cash.

Tue, 12/03/2013 - 21:02 | 4212220 Save_America1st
Save_America1st's picture

I almost thought your screenname was ncdirtnigger there for a second...sometimes the eyes see what they want to before it clears up, lol...that woulda been a classic screenname.  lol

Tue, 12/03/2013 - 22:44 | 4212501 stacking12321
stacking12321's picture

is nc a racist state?

Wed, 12/04/2013 - 00:00 | 4212688 Clowns on Acid
Clowns on Acid's picture

no but you are in a racist state

Tue, 12/03/2013 - 22:34 | 4212472 DaddyO
DaddyO's picture

Nice, the NASA salute...

DaddyO

Tue, 12/03/2013 - 23:51 | 4212669 rbg81
rbg81's picture

That and the sidelines are very REAL to the person who decides to sell, wait and see.

Wed, 12/04/2013 - 05:44 | 4213083 CHX
CHX's picture

More often than not, they do the buy-backs so that management can exert their options at relatively high valuations without crashing the stock. Stock market is in large parts an insider's game, and has often less to do with "capital" than is being said ("funds for management" would probably be a better description, than capital for the company). In the 08/09 crash the market cap of many companies did not fall nearly as much as did the price of shares. 1+1 =   ?  

Tue, 12/03/2013 - 21:20 | 4212154 Occident Mortal
Occident Mortal's picture

This guy Asness(?) is wrong because we live in a world of leveraged ownership.

Let's assume company X trades at $100 and has 1,000,000 stock in issue.

And people can buy stock in Company X at 50% margin.

Let's say I buy 1 unit for $110.

Suddenly all 1,000,000 stock rise by $10, my $110 purchase has created an extra $10,000,000 of equity.

In a world of 50% margin the owners of Company X now have an extra $5,000,000 of purchasing power (they previously had $50m on deposit, now they have $60m and only need to maintain $55m) they can withdraw this $5m capital and spend this money however they like, they don't even need to sell any stock at all, and as long as the market does not fall below $110... All is well.

This is a form of good old fashioned M2 money creation. YES MONEY CAN BE CREATED BY PEOPLE OUTSIDE OF THE FED. Anytime you get a loan or raise a debt you create new money. It is NOT zero sum.

This is what happens when a thinly traded market represents a much larger asset base. It is why banks manipulate certain illiquid markets such as some credit markets.

Tue, 12/03/2013 - 22:05 | 4212392 BigJim
BigJim's picture

According to your analysis, there's more cash 'on the sidelines' after someone buys shares, if they buy them at a higher price.

Anyway (and I'm sure someone will jump down my throat here if I'm mistaken), doesn't 'buying shares on margin' just mean that you are borrowing a percentage (often a high as 90%) of the money to buy the shares? So, in your example, even if we accept that the price has gone up 10% from $100 to $110 on your purchase of one share, the holder of the other shares can't somehow capitalise on that additional $10 per share unless he sells... or lends possession of his shares to a bank who then use it somehow as collateral for a loan?

Tue, 12/03/2013 - 23:11 | 4212576 Occident Mortal
Occident Mortal's picture

So it appears you have never owned stock on margin?

It is as I describe.

For a 50% margin. The broker will finance 50% of the ownership and you must maintain the remainder on deposit.

If the stock price rises you can withdraw money without having to sell anything, if it falls you must deposit more money.

Yes sometimes you can get margins of 90% or more. In this instance my single $110 transaction would mean that everyone on 90% margin would have doubled the capital on their trading account.

e.g. If you bought $100,000 worth you would need to deposit just $10,000. As the price rises to $110 the value increases to $110,000 the required deposit is now $11,000 yet your account will show you have $10,000 plus a $10,000 gain.

Therefore you will be able to withdraw $9,000 without having to sell any stock whatsoever. You just need to maintain the margin requirement.

So yes, in times of cheap credit and high margins offered rising prices create huge amounts of money on the side. And no this money is not taken from anyone it is new money (M2 to be precise) created as an expanding credit line. All new debt is new money.

Before 2008 most new money was created by commercial bank lending and not central banks. Central Banks exits to crush interest rates at times of high sovereign deficit spending. They do this by creating enough money to supply the deficit.

Wed, 12/04/2013 - 07:24 | 4213135 negative rates
negative rates's picture

And who decides the margin percentile? Mr Ponzi of course. 

Wed, 12/04/2013 - 09:22 | 4213311 Randoom Thought
Randoom Thought's picture

In other words ... saying there is cash on the sidelines is equivalent to saying there is underutilized fiat created from debt and debt capacity on the sidelines.

For every dollar of cash, one dollar of debt (plus interest due) has been created.

Wed, 12/04/2013 - 10:14 | 4213452 BigJim
BigJim's picture

 Therefore you will be able to withdraw $9,000 without having to sell any stock whatsoever. You just need to maintain the margin requirement.

Ah, I see your point now - a bit like people using their houses as ATMs when the price rises... but even more dangerous because stocks are more volatile and the positions are marked-to-market in real time.

So, if you've extracted equity from your house, and then the price falls, as long as you can meet the interest payments, the 'loss' in your position is carried.

But if you've 'extracted equity' from a share position bought on margin... and the price falls... you get a margin call.

Thanks for clarifying.

Does anyone know what percentage of M2 is money lent to stock buyers?

Tue, 12/03/2013 - 22:56 | 4212527 Bunga Bunga
Bunga Bunga's picture

If money gets created, when shares are bought on margin, money gets destroyed when these shares are sold. But it is wrong anyway, since margin credit comes from existing money, it just changes hands. Only commercial banks can create credit, if they expand their balance sheet and take collateral on their books.

Tue, 12/03/2013 - 23:19 | 4212594 Occident Mortal
Occident Mortal's picture

The collateral for the new money is covered by the rising equity.

In my example a single $110 purchase is able to create $20,000,000 of new money. Whilst such an illiquid market is unlikely this does illustrate how it works.

Yes you are correct also that this money does get destroyed when the shares are sold... HOWEVER you can withdraw the money and spend it without selling any shares.

Also, you don't have to buy shares to receive this new money... You just have to own shares that are rising in price. The further they rise the more money you can take and you don't need to sell anything to get it. It's just an expanding credit line tied to the equity value.

All new credit/debt is new money that's what money is... Somebodies IOU.
All money was created by a loan. And not necessarily involving a central bank.

Anyone can create new money simply by using their credit card.

Wed, 12/04/2013 - 01:13 | 4212829 socalbeach
socalbeach's picture

What you're saying is accurate.

However, when most people talk about all the "money on the sidelines" being bullish for stocks, they mean that once people buy stocks with their money on the sidelines, not only will stocks go up, but also there will be less money on the sidelines than before. It's as if they think that money moves from the sidelines to the playing field, and it's being put to work. Otherwise why use the sidelines analogy.

What you've described is the opposite: people buying stocks with "money on the sidelines" creating the possibility of more "money on the sidelines" through margin loans.

Wed, 12/04/2013 - 00:02 | 4212698 o2sd
o2sd's picture

Very true, however that means that there is credit on the sidelines, not cash. Unless you call the deposits created by loans 'cash'. Cash is a word that was once well defined, but now, not so much. Strictly speaking, there is no longer any cash. Those notes in your wallet are convertible overnight bonds. They can only be redeemed with the issuer for another note. Fortunately, merchants selling real goods and services will trade you for them.

 

Tue, 12/03/2013 - 20:42 | 4212156 nmewn
nmewn's picture

Vhat eeez dis extra cash on sidelines ju speak of?

Tue, 12/03/2013 - 21:02 | 4212218 Stuck on Zero
Stuck on Zero's picture

Answer: Corporations are storing hundreds of billions in hundred dollar bills in mattresses and loose change in jars on the top shelf.

 

Tue, 12/03/2013 - 20:44 | 4212157 q99x2
q99x2's picture

Thar's infinite cash in the FED's computers and the money changers got hold of the printing presses.

Tue, 12/03/2013 - 20:43 | 4212158 666
666's picture

My sideline is pimping.

Tue, 12/03/2013 - 20:46 | 4212172 NoDebt
NoDebt's picture

And as we all know, pimpin' ain't easy.

Tue, 12/03/2013 - 20:55 | 4212199 Chump
Chump's picture

But it is necessary.

Tue, 12/03/2013 - 22:51 | 4212515 TheMerryPrankster
TheMerryPrankster's picture

Ho's won't sell themselves. Unless they's named Barrack.

Pumpin and Dumpin and Pimpin, anybody seen the other 4 dwarfs?

Tue, 12/03/2013 - 22:52 | 4212521 Harbanger
Harbanger's picture

Sad but true.  Why is there a $market and a middle man to something so natural?

Tue, 12/03/2013 - 20:46 | 4212161 NoDebt
NoDebt's picture

I've been hearing that phrase my whole career and I still don't know what the hell it means.

IN OTHER NEWS.... Obama's uncle, who has been in the US illegally for decades, gets to stay becuase he's of "upstanding moral character."  Or so said his family at his DUI hearing:

http://www.huffingtonpost.com/2013/12/03/obama-uncle_n_4379575.html

Don't give me shit for the Huff-Po link.  It was a click-through from another website.

Tue, 12/03/2013 - 20:47 | 4212166 Derf Scratch
Derf Scratch's picture

but that's CNBS favorite brain-dead exclamation when faced with any bearish guest... must be true? 

if they start saying "there's really very little cash on the sidelines" that will be my cue to sell...

 

Tue, 12/03/2013 - 21:47 | 4212339 asteroids
asteroids's picture

The sheeple are broke, they won't go back into the market. Everyone else is margined to the hilt. There ain't no cash in the sidelines.

Tue, 12/03/2013 - 20:46 | 4212169 BandGap
BandGap's picture

Wow, what great insight.

Here, try this - I'm taking my fucking money and putting it in a drawer at home. PS - fuck you (that's what I really meant to say).

What assholes.

Tue, 12/03/2013 - 20:51 | 4212181 Cdad
Cdad's picture

Ummm....well....five years of BlowHorn [CNBC] programing just flamed out on that one.  

I suppose next someone will explain to BlowHorn folk that, yes, there are other places to put your money....and also that...yes, cash is an asset.  

And after that, maybe someone from some toxic bank will disclose a new term...the "Head and shoulders base" maybe....and BlowHorn folk will just run with it, or something.

Good grief...how vapid must folks in the US financial services industry become...before they're all pulled over to "the sidelines" to be told just what a bunch of douche bags they truly are?  And who the heck needs to lose his job over at Comcast...for letting such unbridled idiocy loose...and for such a long period of time...that the network likely never recovers?

More shopping stories for all Americans...chop chop.

Tue, 12/03/2013 - 20:51 | 4212185 Nue
Nue's picture

The Sidelines= Mainstreet investors. The big money needs to trade cash for trash before they blow up the market and then use the cash to blow up another asset class. Like Ice-T said "Pumping and Dumping ain't easy." or something like that......

Tue, 12/03/2013 - 20:54 | 4212190 CrashisOptimistic
CrashisOptimistic's picture

The cash on the sidelines is waiting to buy bonds and rental properties.

Ever notice how wall street doesn't want to talk about farmland?

Tue, 12/03/2013 - 20:57 | 4212205 FreedomGuy
FreedomGuy's picture

I am investing in sidelines. Lot of money there, I hear.

Tue, 12/03/2013 - 21:11 | 4212252 Seeking Aphids
Seeking Aphids's picture

I am hedging my 'sideline' investments with 'sideburns'.....well, not really hedging, more like shaving actually. Not only a good investment but an interesting and progressive (almost Keynsian) look....

Tue, 12/03/2013 - 21:23 | 4212279 FreedomGuy
FreedomGuy's picture

Sideburns are making a bigger comeback than the housing market.

Tue, 12/03/2013 - 22:45 | 4212503 stacking12321
stacking12321's picture

corduroy pillows are making headlines!

Wed, 12/04/2013 - 01:22 | 4212841 StychoKiller
StychoKiller's picture

Hmm, they'll certainly leave an impression on you!  :>D

Tue, 12/03/2013 - 21:00 | 4212212 Stuck on Zero
Stuck on Zero's picture

I will rank "cash on the sidelines" right up there with another media statement about a down market: "heavy selling drove prices lower."  Gee.  Wasn't there a buyer for every seller?

 

Tue, 12/03/2013 - 21:06 | 4212228 ebworthen
ebworthen's picture

Yeah, people who learned a lesson and got hurt in 2008 are keeping cash and not trusting the Casino markets.

The big boys who made a mint off other people's money in 2008 learned a lesson and will be selling at the top.

Players on the sidelines don't get taken off the field on a stretcher.

Tue, 12/03/2013 - 21:06 | 4212232 Aknownymouse
Aknownymouse's picture

Who cares. Just BTFATH

Tue, 12/03/2013 - 21:25 | 4212287 Downtoolong
Downtoolong's picture

Now where's Maria Bartiromo?

She's been sidelined to Fox.

Tue, 12/03/2013 - 21:41 | 4212325 Derf Scratch
Derf Scratch's picture

Yes she was always the biggest proponent of the "cash on the sshidelinesssh" ... what a dumb whore 

Tue, 12/03/2013 - 21:33 | 4212308 djsmps
djsmps's picture

I'm a sideler..

Tue, 12/03/2013 - 21:49 | 4212346 eddiebe
eddiebe's picture

When I read this article a little part of my soul died.

Tue, 12/03/2013 - 22:00 | 4212372 starman
starman's picture

How's this I sold my second home for a 1250k that I bought in 09 for 750k.
I got shit loads of dough on the side. When this shit circus comes crashing down I'll buy something of realistic value again . Love you all!

Tue, 12/03/2013 - 22:11 | 4212391 sixsigma cygnus...
sixsigma cygnusatratus's picture

I think the term "cash on the sidelines" has come to mean income from the years 2014 through 2099. But only if it's someone else's income.  Bankerspeak, you see...

Tue, 12/03/2013 - 22:24 | 4212449 1984
1984's picture

Money on the sidelines == unused leverage.

Tue, 12/03/2013 - 23:04 | 4212550 Bunga Bunga
Bunga Bunga's picture

And that can implode overnight, if cost of leverage is spiking.

Tue, 12/03/2013 - 22:35 | 4212475 Longing for the...
Longing for the old America's picture

When equity mutual fund owners are net redeemers of shares, which is not uncommon, money moves from stocks to 'the sidelines' of non-stocks for those investors. The absolute size of the mutual fund portfolios really does shrink. 

Tue, 12/03/2013 - 23:07 | 4212567 Joe_in_Indiana
Joe_in_Indiana's picture

Money Honey can stay lost for all I care.

Tue, 12/03/2013 - 23:21 | 4212596 walküre
walküre's picture

I'm sitting on the sidelines but don't ask me for any cash. I gots none.

Tue, 12/03/2013 - 23:56 | 4212681 Clowns on Acid
Clowns on Acid's picture

if you like your cash , you can keep it.

Wed, 12/04/2013 - 00:03 | 4212699 Oldwood
Oldwood's picture

Is the "sideline" another name for the FED? I mean afterall they are pumping more money into the markets than any chicken investor would.

Wed, 12/04/2013 - 00:52 | 4212797 pondview28
pondview28's picture

A better statement for scorn is when stocks are said to drop on profit-taking. And stocks therefore go up when people take losses?***

*** Of course I am aware that the usual suspects will argue that this is really true to show how smart they are as much as they have with the author's simple and obvious statement.
IDNRTRR (I do not return to read responses)

Wed, 12/04/2013 - 06:39 | 4213118 orangegeek
orangegeek's picture

Here's the balancing act

 

public sells

 

central banks buy all

 

central banks print MOAR

Wed, 12/04/2013 - 08:34 | 4213219 Racer
Racer's picture

Wall street bwanksters like to perpetuate these sort of myths, just like 'beat earnings estimates' bars that unsurprisingly get lower and lower the nearer they are to actual earnings, which in themselves are just fiddled and manipulated anyway.

smoke and mirrors, three card con game is all it is

Wed, 12/04/2013 - 09:09 | 4213270 overmedicatedun...
overmedicatedundersexed's picture

naked shorts, no no not in the rules for you suckers, only us big guys can do it..how obvious does the rigged game need to be for ave investors to back away? too many it seems for cnbc and the fed. restoring faith in markets for the ave guy is what has been the game plan ..after the preprogramed take down in 08. as congressman kanjorski said half a trillion bucks left money markets in One day.(.mom and pop investors no doubt.) with no SEC oversight thank you mr Cox, you cock. to this day we do not know who or what hit the markets in the fall of 08. corzine was the cherry on top.

Wed, 12/04/2013 - 09:29 | 4213322 wiesenda
wiesenda's picture

There are two more lifelines you can throw these people:

Third, margin debt can be seen as the inverse of cash along the sidelines. Snice it has recently been increasing, that means that cash along the sidelines is actually decreasing. More generally, you can count all categories of cash allocated to investing in this category. So if consumer investors dissave or pay down debt, that means less money along the sidelines.

Fourth and more relevant than the above, it can be an unfitting image for the velocity of money. A lot of money along the sidelines = low velocity of money. This we certainly observe. The correlation of velocity of moeny and prices is however less obvious than mostly assumed.

Wed, 12/04/2013 - 11:14 | 4213637 withglee
withglee's picture

With a properly managed Medium of Exchange (MOE), the velocity of money, impact of savings on the economy, the effect of hoarding, money on the sidelines, the time value of money, and many other issues have no relevance. INFLATION is known to be zero and new money is always in free supply to responsible traders.

In a properly managed MOE, money, which is "a promise to complete a trade" is created by traders making trading promises. It is extinguished by those same traders delivering on their promises. This guarantees there is always a perfect balance between supply and demand for the MOE. DEFAULTED money left by traders failing to deliver (and governments rolling over debt) is recovered by like amount of INTEREST collections. This guarantees zero INFLATION all the time everywhere by the relation INFLATION = DEFAULT - INTEREST.

Todd Marshall
Plantersville, TX

Wed, 12/04/2013 - 10:08 | 4213435 Mi Naem
Mi Naem's picture

Pardon me for being slow here, but I thought keeping cash in a money market fund that "pays" .01% or something IS cash on the sidelines. 

Investing that cash by moving it from the money market to equities, commodities, bonds, etc. would be taking it off of the sidelines. 

Apparently everybody here but me knows that the statements above are incorrect, but I don't see a meaningful explanation of it in the author's post. 

Help?

Wed, 12/04/2013 - 11:51 | 4213758 el Gallinazo
el Gallinazo's picture

The author is just saying the obvious.  Yeah, you can look at MMF as a sideline, but for every dude who takes his money from MMF to invest in stocks, there is the dude who sold the stocks to him, and put the money back on the sidelines.  What he is really saying is that the net change of the virtual money "on the sidelines" is zip everytime a stock buy/sell takes place.  As mentioned, this is really obvious.  But then again, The Flat Earth Society is still increasing its membership.

Thu, 12/05/2013 - 02:27 | 4216733 andrewp111
andrewp111's picture

The net change isn't zip if you consider the taxman's cut from the capital gain. And in a rising market, most sales produce capital gains.

Wed, 12/04/2013 - 11:03 | 4213615 NoTTD
NoTTD's picture

Final warning.  Stop using my avatar.  

 

Don't make me have to come over there.

Thu, 12/05/2013 - 02:24 | 4216729 andrewp111
andrewp111's picture

It is true that when stock is purchased from money "on the sidelines", it is purely an asset swap and someone else gets the cash. But in a rising market, a good chunk of that cash is a capital gain, and 20-40% of that gain goes to the IRS. So, as cash is put into a rising market, the total amount of cash in the hands of investors steadily goes down and the amount in the government's hands goes up. This means the cash on the sidelines slowly disappears and ends up in the Treasury, and is then paid out in military spending, SNAP. Medicare and ObamaCare.

Thu, 12/05/2013 - 03:12 | 4216765 slvrizgold
slvrizgold's picture

Gold, and especially silver.  There's the correct currency to sit on the sidelines with.

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