April 3, 2008 6:28AM

Cash in the Wings

By Alexis Glick

On Tuesday morning I wrote a pretty bullish blog about the market. It was the first day of the second quarter and the overseas banks were reacting very favorably to record writedowns and needs to raise further cash. As a journalist, I have to walk a fine line. I cannot and don’t want to pump the market. It is merely my responsibility to state the facts. Some will add to my argument and some will not. I did some homework and enlisted the help of some of my favorite colleagues, including Mr. Charles Payne.

My bullish tone or suggestion that 2Q may be the bottom for the stock market is predicated on several facts: valuations are at or near multi-year lows, the first quarter was a blood bath, the DJIA and S&P 500 tend to historically post healthy returns year over year with or without a recession or bubble bursting, and there is a record level of cash sitting on the sidelines. Take a look at some of these statistics.

In the end of the first quarter the Dow Jones Wilshire U.S. Financials Index was down 12.85%. That’s a composite index. If you looked at the BKX, the Philadelphia Bank Index, which is also a composite index but just for commercial banks or the XBD, the Broker Dealer Index, which is a composite index of only broker dealers, you would see even bigger losses.

The Dow Jones Wilshire U.S. Technology Index was down 16.08% in the first quarter after being up 14.54% last year.

The Dow Jones Wilshire U.S. Health Care Index was down 11.65% in the first quarter after being up 6.27% last year.

The Dow Jones Wilshire U.S. Utilities Index was down 10.43% in the first quarter after being up 14.12% last year.

What does this suggest? That the carnage in markets in the first quarter was widespread and performance for just about everyone was terrible. Remember the Dow was down 7.5% in 1Q, the S&P was down a little less than 10% and Nasdaq was down 14%.

When this happens to this degree, in my past experiences on Wall Street, fund managers —  either mutual, pension or hedge fund managers — have to look for opportunities or new ideas to make up for such poor performance out of the gate, particularly when it happens in the first quarter. Many of them likely had exposure in the run up in commodities like gold or oil but those trades are heavily saturated and the VIG, or opportunity to get big returns in that one area of the market alone, is dangerous.

Take a look at this chart below. This paints a picture. This is a chart dating back to 1996 and accurately describes what is going on in the money market mutual fund business. Fear has led to the unwinding of trades both for individuals and institutions but cash is still king and there is A LOT of it. According to this chart, record numbers!!!!! Some now say this number is even approaching $3.5 trillion. What does this suggest to me? Two things. One, money will be put to work and when it is, it will be huge. Two, money market accounts were thought to be cash accounts but what we learned or what many individual investors have learned over the past six months is that many money market accounts buy monthly paper to get a small return and with the fear and panic so many requests have come in to redeem that cash and the banks, in one specific case, UBS, cannot return that “cash” as agressively as it’s investors would like to have it.

So yes, there is money out there and it is big and it will get invested but how quickly can individuals access it. If the market begins to rally will they choose to redeem it and put it in a savings account that makes little to no return or will they rotate it into growth or value funds. That’s the 64,000 dollar question :)!!!!

                                                                                                           Source: http://www.ici.org/funds/abt/faqs_money_funds.html