Analysis: Investors cling to cash to guard against euro fallout
(Reuters) - Cash isn't just king. For some money managers, it has become jack, queen and ace, too.
With the Greek election failing to eliminate fears about the euro zone's stability and the Chinese and U.S. economies providing little reason for greater optimism, some major investors and their advisers have decided there is only one place to be - cash.
Charles Biderman, founder and CEO of independent research provider TrimTabs Investment Research, has been advising big institutional clients, including hedge funds, to be exposed "100 percent in cash" since June 11.
"These days, a stock market decline of a few percentage points is enough to trigger calls for more 'accommodation, easing, firepower, and stimulus.' We are amazed at how many investors still believe additional liquidity will make the euro zone's debt problems go away," Biderman said.
Biderman said he doesn't believe that throwing money at a solvency problem will work in the long run. He is not alone in his assessment.
David Kotok, chief investment officer of Cumberland Advisors in Sarasota, Florida, said his firm has a "temporary" cash position. Kotok said the range of cash holdings for the firm's 1,500 separate accounts that it manages for its clients is between 10 percent and 20 percent.
In comparison, average cash levels in June stood at their highest since the start of the euro-zone debt crisis at 5.3 percent of portfolios, compared with 4.7 percent in May, according to a monthly global survey of 260 investors from Bank of America/Merrill Lynch.
"We've been fully invested since October, but we see evolving risks related to Europe," Kotok said. "That caused us to have some cash reserves."
Since the financial crisis of 2008, investors have had to navigate the global financial markets' manic mood swings. The volatility has fallen into a pattern. The fiscal or banking crisis gets worse in some parts of the world, usually Europe or the United States, sending markets into a tailspin. In response, governments and central banks launch bailouts and flood the markets with money. Once the euphoria has given way to a realization that the underlying problems haven't been solved, there is another selloff, and the process begins again.
For example, in early June, Federal Reserve Chairman Ben Bernanke said the U.S. central bank was closely monitoring "significant risks" to the U.S. recovery from Europe's debt crisis. There are now some expectations that the Fed might take some further action to increase the markets' liquidity as early as this Wednesday. The Federal Open Market Committee will wrap up a two-day policy meeting on Wednesday.
But Biderman of TrimTabs wonders: "What happens when market manipulation by global central bankers no longer works?"
Of course, not all investors are giving up on equities entirely.
Erik Weisman, global bond portfolio manager at Boston-based MFS Investment Management, which oversees $268 billion in assets, said equities still look cheap relative to bonds in the longer run ,but there is a danger now of "getting in too early."
Weisman isn't shying away from cash.
"Holding cash is not the worst thing in the world right now because if you are in doubt, there are a lot worse places to be."
Donald Gimbel, senior managing director of New York-based Carret Asset Management LLC, was encouraged by Sunday's election results, when the Greek pro-bailout parties gained a narrow victory over the radical leftist anti-austerity SYRIZA movement. Gimbel said it sends a signal that the Greeks haven't given up on capitalism.
A couple of weeks ago, Gimbel lifted the cash position of his firm's $1.6 billion in funds under management to 15 percent - the highest since 2008. Last week, he took the cash position down to 12 percent after perceiving some stocks were trading at bargain levels in Asia.
He expects to keep the cash allocation at that level for the next few months as he waits to see how things play out in Europe, as well as with the U.S. elections and recent economic developments in China.
"I'm basically optimistic, but I fall back on being patient," Gimbel said.
Like investors, corporate America is also practicing patience and an aversion to risk-taking.
Lee Pinkowitz, an associate professor of finance at Georgetown University and a co-author of a recent study released by the National Bureau of Economic Research, said American companies had "abnormal" cash holdings of 1.86 percent of assets on average during 2009-2010, compared with zero in 1998-2000.
Pinkowitz said firms' high cash holdings began in the middle of the last decade. But he added that the combination of the 2008 financial crisis and the euro zone's troubles "exacerbates and doesn't help the situation for decision-making. You can see that corporations want to hold on to a bigger 'rainy day' fund."
The problem for the Main Street economy, though, is that companies holding onto abnormally high levels of cash are not investing it in new factories, offices and products - which also means they are less likely to be hiring.
Overall, "people are traumatized by 2008" and don't want to lose money, said Jeffrey Gundlach, chief executive officer at DoubleLine Capital, which oversees $35 billion.
In 2008, the value of global financial assets, including stocks, bonds and currencies, fell by more than $50 trillion in the wake of Lehman Brothers' bankruptcy and the ensuing crisis.
"It's getting very late for people to be setting up for the outcome in Europe," Gundlach said. "The time is almost here, and it's almost time for the situation to be resolving itself."
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