Trump Fails To Convince Investors To Place $3.4 Trillion Into Stocks (#GotBitcoin?)
Assets in money-market accounts are at a decade high, a bullish sign for some investors. Trump Fails To Convince Investors To Place $3.4 Trillion Into Stocks (#GotBitcoin?)
Nervous investors have socked $3.4 trillion away in cash. But stocks are rising and their nerves are calming, leading bulls to view the huge cash pile as fuel that could drive markets higher still.
Assets in money-market funds have grown by $1 trillion over the last three years to their highest level in around a decade, according to Lipper data. A variety of factors are fueling the flows, from higher money-market rates to concerns over the health of the 10-year economic expansion and an aging bull market.
Yet some analysts say the heap of cash shows that investors haven’t grown excessively exuberant despite markets’ double-digit gains this year, and have plenty of money available to buy when lower prices prevail. That is a comforting message to those concerned about an economic slowdown yet wary of betting against a market that has punished doubters during its 10-year run.
“Cash always makes me feel good, both having it and seeing it on the sidelines,” said Michael Farr, president of the money-management firm Farr, Miller & Washington, which is holding twice as much cash as usual. “It keeps things a little bit safer.”
Investors said the rising cash reserves reflect several worries that have become prevalent among money managers over recent months, as flare-ups in the trade war with China and uneven U.S. data sparked bouts of volatility in markets.
Many are concerned that stock prices have climbed to unsustainable levels relative to companies’ earnings at a time when the U.S. economy is slowing. A popular metric pioneered by Nobel Prize-winning economist Robert Shiller shows that valuations remain near two-decade highs, though they have retreated from their heights of early 2018.
Sandy Villere, portfolio manager at the $2 billion Villere Balanced Fund, is keeping 17% of his portfolio as cash, up from the usual 10%. Mr. Villere believes valuations have become stretched and prefers to wait for another dip before jumping in again.
“We don’t have to swing at every pitch,” said Mr. Villere, who added two new stockholdings to his portfolio when markets slid last December. “Right now, we’re struggling to find high quality at reasonable prices.”
Rising yields in money markets have been another key factor. Money-market funds through October offered an average annual return of around 1.6% this year, up from 0.02% in 2011, according to Crane Data. Sweep accounts at brokerages, the main reservoir where these firms hold clients’ cash, paid about 0.2% on average through September.
When interest rates fell in the years after the financial crisis, bank deposits gained market share from money-market funds because the gap between the yields on both had narrowed so much, said Peter Crane, president and publisher of Crane Data.
Money-market rates rose in response to the Fed’s nine interest rate increases since 2015 and have declined in recent months to reflect the central bank’s rate reductions this year.
Higher rates, together with a comparatively high degree of liquidity, has increased money markets’ allure for investors looking to park their cash for a comparatively short period.
Some fund managers have warned investors against being overly cautious in a market that has shrugged off a range of economic and geopolitical worries over the past decade and continues to edge higher. A UBS Global Wealth Management survey of 4,600 wealthy entrepreneurs and investors showed that more than a third raised their cash allocations in the past quarter in response to flaring trade worries.
In total, cash holdings rose a percentage point to 27% of survey respondents’ portfolios at the end of the third quarter from the previous quarter, even as a growing number said they were increasingly optimistic on the global economy and stock performance. The cash allocation is much higher than the percentage recommended by the firm.
“There is a dichotomy in sentiment—investors are holding large cash balances in a wait-and-see mode, even though nearly 50% anticipate higher stock market returns in the next six months,” said Paula Polito, UBS Global Wealth Management’s client strategy officer, in a recent report.
The difference between combined flows into cash and bond funds relative to stocks over the past year is the greatest since 2012, after adjusting for assets under management, according to Goldman Sachs.
In a historical context, however, stock allocations remain large. The firm estimates that investors have about 12% of their portfolios in cash, ranking in just the fifth percentile going back to 1990. By contrast, stock allocations are at roughly 44%—equivalent to the 81st percentile going back the past three decades.
Analysts at Bank of America Merrill Lynch, meanwhile, see the cash pile as an indication that markets have plenty of fuel for more gains.
The bank’s proprietary Cash Rule Indicator, which gives a buy signal on stocks when investors’ cash balances are above their long-term averages, has been in bullish territory for the last 20 months. Fund managers polled in the bank’s latest survey said they are holding an average of 5% of their portfolios in cash. That compares with a 10-year average of 4.6%.
“We take it as an incredibly positive sign on a contrarian basis,” said Jared Woodard, investment strategist at the bank.
Private-Equity Cash Piles Up As Takeover Targets Get Pricier
Buyout activity in the U.S. is down sharply even as firms’ unspent cash allocated for North American deals hits record $771.5 billion.
U.S. private-equity firms, armed with a record amount of cash, are struggling to find ways to spend it.
A year ago, fears of an economic slowdown and worries about trade tensions with China sent a tremor through markets and put some leveraged buyouts on hold. But while stocks rebounded in the new year, buyout activity never fully recovered.
The aggregate value of U.S. buyouts fell 25% year to date through October, compared with the same period a year earlier, according to data provider Preqin. Deals totaled $155.2 billion during the first 10 months of the year—the lowest since 2014.
Private-equity firms traditionally seek to buy up companies they see as undervalued, cut costs or spruce them up to spur growth and sell them or take them public a few years later. With U.S. equity markets surging, already expensive takeover candidates have gotten even pricier, making many of them too rich for even the most optimistic private-equity buyer. Meanwhile, would-be corporate acquirers whose stock prices have run up this year can use their shares as a deal currency, giving them an edge over financial buyers in most auction processes.
The restraint buyout firms are showing suggests a level of discipline that wasn’t present during the last market peak in 2007, when they struck $365.9 billion worth of deals in the U.S. Many of the companies they bought then struggled during the ensuing global financial crisis, and a number have filed for bankruptcy protection.
The drop in deal activity comes as private-equity firms’ unspent cash dedicated to North American buyouts reaches a record $771.5 billion, up nearly 24% since the end of last year and more than double where it stood at the end of 2014, Preqin data show.
A potential buyout of Walgreens Boots Alliance Inc. that KKR & Co. had considered in recent months shows some of the challenges facing private-equity firms. Financing such a deal would always have been tough given Walgreens’ market value of more than $50 billion, but the math has become even more difficult as loan buyers have begun pushing back on what terms they are willing to accept. The parties haven’t been in the same ballpark on valuation, and no deal appears imminent, people familiar with the matter said.
Investors such as pension funds, sovereign-wealth funds and insurance companies have poured money into private markets in hopes of achieving higher returns than those offered by traditional stocks and bonds in an era of low interest rates. Private-equity firms will need to invest that money to satisfy their investors and to begin earning lucrative management fees on it.
U.S. buyout volume may not bounce back next year either, even if the stock market cools off. With an election looming, private-equity investors say uncertainty around monetary, fiscal and regulatory policy—as well as already heightened scrutiny of their industry from Democratic presidential candidates—will cause them to tread carefully.
Some firms have found unique ways to navigate high prices. Blackstone Group Inc. has focused its deal making around investment themes where it is particularly bullish. These include the growth of e-commerce, which has driven its massive purchases of warehouse portfolios, and the ongoing value of live entertainment as more activities move online, motivating its deal for theme-park operator Great Wolf Resorts Inc. Apollo Global Management Inc. has been buying public companies it thinks the market has undervalued by favoring those with faster growth.
Not all areas of the buyout market have slowed. Globally, deal volume is pacing roughly where it was last year. And certain pockets of the U.S. market remain robust. Firms that invest in business software, for example, have kept up their deal-making pace, thanks in part to the proliferation of targets.
“In our space, given that many companies lack profitability, they can be highly volatile,” Orlando Bravo, founder and managing partner of software-focused firm Thoma Bravo LLC said in an interview. “So when their revenue growth slows or they miss numbers, that can provide opportunities.”
The buyout malaise has spread to banks, whose revenue from leveraged finance fell nearly 19% year over year in the first three quarters of the year, according to Dealogic. New issuance of leveraged loans—commonly used to finance buyouts—have tumbled. High-yield bond issuance, another source of deal financing, has climbed, but bankers say much of that has been driven by less remunerative refinancing activity.
Making things more difficult for private-equity firms, the financing market has tightened in recent months. As interest rates have fallen, there have been big outflows from mutual funds that purchase buyout loans that banks carve up and sell. That has made deal financing more dependent on collateralized loan obligations, or CLOs—complex vehicles that buy bundles of below-investment-grade corporate loans.
CLOs, which have historically constituted about 60% to 65% of the market for buyout loans, now represent 72% of the allocations for newly issued leveraged loans, according to a recent report by analysts at Goldman Sachs Group Inc. Creation of new CLOs is also trailing 2018 by 9.5%, the analysts wrote.
That becomes an issue because CLOs, which are typically issued by the credit arms of private-equity firms and banks, have limits on the number of low-rated loans they can own. After years of steadily filling up their tanks with buyout loans, they are now pushing back on the loose credit agreements and borrower friendly terms they once accepted amid worries about rising loan downgrades.
In some cases, that has left banks holding the bag and has raised borrowing costs for private-equity firms, forcing them to lower their return expectations for deals.
Banks in October struggled to sell about $2 billion in debt to fund Apollo’s purchase of online-photo service Shutterfly Inc. and ended up agreeing to buy up to $280 million themselves, The Wall Street Journal reported.
Investors Bail On Stock Market Rally, Fleeing Funds At Record Pace
In what may be the best year for stocks since 2013, investors have exited in droves.
The S&P 500 is having its best run in six years, but individual investors are fleeing stock funds at the fastest pace in decades.
That is potentially a good sign for the long-running bull market.
Investors have pulled $135.5 billion from U.S. stock-focused mutual funds and exchange-traded funds so far this year, the biggest withdrawals on record, according to data provider Refinitiv Lipper, which tracked the data going back to 1992.
Analysts say the trend highlights investors’ apprehension toward a stock market buffeted by the long-running U.S.-China trade war and lingering worries about a potential recession. Stock funds have bled money over seven consecutive quarters, dating to the second quarter of 2018—when trade tensions between the U.S. and China ratcheted higher.
The outflows are also a sign that investors aren’t chasing the stock market’s strong performance, either. This suggests major indexes like the S&P 500 still have plenty of room to run after a decadelong rally.
Investors have shifted hundreds of billions of dollars into bonds and money-market funds, areas considered to be harbors from volatility. A trade deal could pull some of that money back into stocks—many of which are trading at relatively reasonable valuations and offer dividends that top yields on U.S. Treasury bonds. For the week ended Dec. 4, for example, investors put nearly $5 billion back into U.S. stock funds—the biggest weekly inflows in three months—on trade optimism, to help somewhat stem the tide of withdrawals.
“There’s not a lot of faith in this market,” said Scott Wren, a senior global equity strategist at Wells Fargo Investment Institute. “There’s no chasing going on. Usually before you hit the top in a cycle, there’s a lot of chasing and fund flows are higher.”
Mutual funds account for most of the outflows. Roughly $220.8 billion has been pulled from stock-focused mutual funds this year, mostly actively managed strategies that have struggled over the past 10 years, according to Refinitiv. Meanwhile, $85.3 billion has flowed into equity ETFs, but those flows are at an eight-year low.
The outflows haven’t hindered the stock market’s run: The S&P 500 has risen 25% this year, on pace for its strongest gain since 2013. This is a reminder that individual investors are just one component of demand, and one that has grown less significant in recent years as corporate share buybacks have grown more important, analysts said. Fund flow figures also don’t account for investors’ individual stock purchases.
Companies themselves have been the biggest buyers of stock through share repurchases in recent years. After taking into account any stock compensation passed on to employees, net corporate purchases of U.S. stocks are expected to total $480 billion this year, according to Goldman Sachs.
The heavy spending on share buybacks has helped the stock market hit fresh highs and avoid deeper pullbacks over the past two years, despite lackluster demand from households, pension funds and foreigners.
But analysts say companies can’t sustain the pace of those buybacks, leaving the market potentially vulnerable if other investors don’t pick up the slack. Corporate demand for equities is already down 20% from last year, Goldman said, as tepid earnings growth, along with trade and political uncertainty, have led companies to trim their spending. The slowdown is expected to stretch into next year, Goldman adds, knocking net corporate stock purchases down an additional 2% to $470 billion.
ndividual investors also appear to be less bullish. The weekly investor sentiment survey by the American Association of Individual Investors shows the eight-week moving average of bullish investors at 36% of those surveyed for the week ended Dec. 5. That is up from a low of 27% in July, but below a peak of 50% in early 2018 as investors digested a U.S. corporate tax cut.
In the first quarter of 2018, roughly $68.6 billion flowed into U.S. stock funds, according to Refinitiv.
Analysts say the recent exodus from U.S. equity funds reflects investors’ wariness toward stocks at a time when the market is susceptible to sharp swings on trade-related headlines or weakening economic figures. Just last week, the stock market’s tranquility was punctured after President Trump signaled tensions with China could stretch well into next year. His comments sent the Dow Jones Industrial Average down 280 points, its worst day since early October.
Investors have sought to insulate themselves from those shocks. Wells Fargo’s Mr. Wren says clients of the bank’s wealth-management arm have been holding more of their assets in cash and bonds.
Brokerage firm TD Ameritrade Holding Corp. says its clients have mostly sold stocks over four of the past five months through October and bought fixed-income products. Apple, which is up 72% this year, counted as one of investors’ most sold stocks at the firm in October, along with Tesla Inc. and Netflix Inc.
That aligns with broader market moves. Investors have put roughly $277.2 billion into U.S. bond funds so far this year, the third biggest sum over the past decade, while $482.8 billion has flowed into money-market funds, an 11-year high, according to Refinitiv.
Those more conservative investment stances have also hampered investors’ returns relative to the S&P 500’s rise this year.
The Running (Away) of the Bulls
Many investors continue to harbor doubts about the durability of this year’s rally, according to the American Association of Individual Investors’ weekly survey.
Ted Darling, a 56-year-old investor in Cape Elizabeth, Maine, said he hasn’t been bullish on stocks this year. He has moved more of his money into Treasury inflation-protected securities, bond funds like the Vanguard Total Bond Market ETF and other assets, such as gold and silver.
His view: Inflation will eventually move higher, while economic growth will further slow, crimping corporate profits.
His diversified portfolio has returned roughly 11% through November, and he acknowledged his positioning is conservative compared with financial advisers’ typical recommendations that investors split their assets 60%/40% across stocks and bonds.
“I forewent a lot of opportunities,” Mr. Darling said, referring to the fact that he hadn’t fully enjoyed the stock market’s run up this year. “But I’m being really cautious.”
The World’s Cash Is Disappearing. Bankers Aren’t Sure Where It’s Going!
Socking those bills away provides some protection against economic turmoil in the US and especially in countries with a record of instability in their own financial systems, the paper said.
Following the money trail can often mean encountering a motley cast of characters that wouldn’t look out of place in a detective novel.
Dollar bills are often vital grease for criminal gangs and tax cheats. They are also popular with collectors who worry about a future collapse of the financial system.
Demand for high-denomination bank notes tends to rise when interest rates are low, households feel distrustful of the banking system or people want to make transactions anonymously.
Bankers aren’t just hunting down cash to satisfy their own curiosity. If central banks don’t know how much cash is out there, they could print too much currency and risk inflation.
Construction workers recently dug up an estimated $140,000 buried in packages at a site on Australia’s Gold Coast, prompting a police search to find the trove’s owner.
In September, a court in Germany ruled on a case brought by a man who stuffed more than 500,000 euros in a faulty boiler only to see it incinerated when a friend made a fix on a cold day while he was on vacation. The man sued his friend for the value of the lost bank notes plus interest. He lost.
“People hide their money everywhere,” said Sven Bertelmann, head of the Bundesbank’s National Analysis Centre in Mainz, Germany. Sometimes bank notes are buried in the garden, where they start decomposing, or hidden in attics, where they are used by mice for building nests.
“It happens again and again that people keep money in an envelope and then they shred it by mistake,” Mr. Bertelmann said. “We pick up the bank notes with tweezers and then start to put them together, like a jigsaw puzzle.”
Check your pockets. Society is increasingly going cashless, but banknotes are more in demand. Bankers search for clues.
Some Australians are burying it. The Swiss might be hiding it. The Germans are probably hoarding.
Banks are issuing more notes than ever and yet they seem to be disappearing off the face of the earth. Central banks don’t know where they have gone, or why, and are playing detective, trying to crack the same mystery.
The puzzle is especially perplexing since societies and companies are going cashless, given the boom in payments by cards and cellphone apps.
The value of U.S. dollars in circulation hit about $1.7 trillion last year ($12.4 billion of it in $1 bills; $1.3 trillion of it in $100 bills) according to the U.S. Federal Reserve. That is up from $1.2 trillion in 2013.
A Federal Reserve economist, Ruth Judson, wrote in a 2017 paper that about 60% of all U.S. currency, and about 75% of $100 bills, had left the country by the end of 2016—for a total of about $900 billion in U.S. dollars kept overseas.
In Australia, the stock of Australian bank notes on issue relative to the size of the economy is near the highest it has been in 50 years, said Philip Lowe, governor of Australia’s central bank. He showed off newly printed bank notes to diners at a recent event in Melbourne and estimated that about $2,000 in printed bills exists for every Australian.
“I, for one, don’t have anywhere near that amount” on hand, Mr. Lowe said.
The Bundesbank thinks more than 150 billion euros are being hoarded in Germany.
The Reserve Bank of Australia’s Note Issue Department decided to take an unusual approach: could fire-damaged bank notes help to determine how much money is being hoarded? Analysts even devised an equation based on the value of claims submitted by households for new bank notes to replace those that had been damaged by fires.
It didn’t work.
“Our estimates are only reliable if our assumptions are reasonable, which we believe is probably not the case,” lamented analysts at Australia’s central bank.
For one thing, they found wealthier people are less likely to suffer a fire because they live in cities near emergency services and have working fire alarms. That skewed results toward rural farmhouses built with wood.
The European Central Bank, and others, tried asking the public for help.
“Everyone says that they are not hoarding cash but the money is clearly somewhere,” said Henk Esselink, head of the issue and circulation section in the ECB’s currency management division.
Australia’s central bank says its best guess is that only around a quarter of the bank notes in circulation are used for everyday transactions. Up to 8% of cash is used in the shadow economy—tax avoidance or illegal payments—while as much as 10% could have been lost. That is $7.6 billion Australian dollars ($5.2 billion) missing at the beach or in couch cushions.
The biggest use of cash is as a store of wealth “in safes, under beds and at the back of cupboards, both here in Australia and elsewhere around the world,” Mr. Lowe, the RBA governor, said.
Officials at the Swiss National Bank ran with another theory: hoarded bank notes should wear out less because they aren’t being used for everyday transactions.
Generally, SNB officials found that hoarding of Swiss francs jumped around the year 2000, likely motivated by fear of the Y2K bug infecting computer systems, the bursting of the dot-com bubble, the September 11 terrorist attacks and introduction of the euro. The financial crisis that began in 2007 encouraged people to stash even more.
Around a third of New Zealand’s new bank notes headed overseas in 2017, up from 6% four years earlier. That happened around the time that tourism overtook dairy as the country’s main export money-spinner, leading officials to speculate on the role played by currency exchanges, especially in Asia.
The trail mostly ran cold after that. The bank could only identify the whereabouts of around 25% of New Zealand’s cash.
“Our sense is that we’re in the same boat as a lot of other central banks out there,” said Christian Hawkesby, assistant governor at the RBNZ. “We can’t fully explain why holdings of cash are rising and where they are going.”
High-Net-Worth Investors Are Increasing Their Cash Holdings
Wealthy investors who are members of TIGER 21, a New York-based peer-to-peer learning platform, had increased their cashing holdings amid concerns about an economic downturn.
Members of TIGER 21, short for The Investment Group for Enhanced Results in the 21 Century, on average had 12% cash holdings in their portfolio in the third quarter of 2019, the highest percentage since the first quarter of 2013, according to the company’s quarterly report published earlier this month.
The company, founded in 1999 by real estate developer and investor Michael Sonnenfeldt, currently has 770 members across five countries. Most of the members are successful business owners and investors who have at least $10 million in investable assets. Their average asset is close to $100 million, and they pay $30,000 annually to become a member.
“Our members have been continuing to increase their allocation to cash, which suggests that they want to avoid being forced to liquidate core holdings at discounted prices in a downturn,” Sonnenfeldt says.
With plenty of cash on hand, wealthy investors also want to make sure they can buy or invest in business opportunities when they arise, Sonnenfeldt says.
Additionally, TIGER 21 members had 29% of assets allocated in real estate, according to the report. Private equity, at 23%, remains more popular than public equity, at 21%. Meanwhile, hedge fund allocations remain at 4%, its lowest share in nearly a decade.
TIGER 21 began compiling a quarterly report 10 years ago to gauge members’ investment interest and identify trends and opportunities.
The primary industries members of TIGER 21 think are likely to grow fastest in 2020 are technology (37%), healthcare (32%), real estate (15%), and energy (11%), according to the report.
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