3 Charts On The "Money On The Sidelines"
We hear a lot of the impending flood of money on the sidelines that will avalanche into the equity market to take us to Dow 20000 as retail sells low and buys high. Besides the arguments over the generally nonsensical argument of where the money comes from, who sold so you could buy stocks and who bought your 'safe' vehicle so that you could use that cash for 'risky' instruments, we note three interesting charts from Nomura today on recent fund flows and technicals that suggest perhaps we should not all be holding our breath for the proverbial money-flow (especially as we see outflows in the last week or so from some of the real high-beta darlings of the rally such as high-yield bond ETFs).
1) US money market fund holdings are low - especially for retail. Whether joe-sixpack has been using this 'cash' to buy iPads or fill his car with gas, there doesn't seem to be much left in that be able to juice US equities. Institutional money remains down but has room to go - but this is the smart money right? The speed of the drop in institutional holdings of 'cash' appears to be decelerating - not exactly bullish for all that money on the sidelines flushing into stocks anytime soon.
2) Net purchases of US equity mutual funds are near extremes of 'exuberance' suggesting retail has already played its card here. On a z-score basis, net flows into US equity mutual funds are near their empirical highs - a level that has signaled relative turning points in the past. So it appears the money is in from the sidelines for now...
and 3) Global equity buybacks have outpaced issuance notably in the last six months but are now stalling. This pure supply and demand perspective on the equity market shows that the use of low cost funding to purchase back corporation's shares has indeed enabled significant rallies over the course of the last decade. The upper pane is Nomura's relative measure of this flow globally as a percentage of global market cap (a drop in the red line means that buybacks are dominating issuance). There are periods of exogenous shock or old-school Fed rate hikes which will remove some of the incentive but in recent years, this flow has been clearly positive. We note the inflection point very recently in the trend as perhaps CEOs start to question the value of using their cash-pile within the context of growth questions and equity value.
So while not exactly scientific, we see cash on the sidelines is actually low, money has already flowed into equities and moved to a somewhat exuberant level, and one of the most fundamental drivers of demand for stocks (buybacks net of issuance) appears to be inflecting.
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