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The Tapeworm in the Stock Market

Posted by: David Henry on May 27

A plate full of nutritious food has been put before the stock market the last couple of months in the form of $200 billion of new cash. But many of the dollars probably won’t make investors any better off than they are today.

The $200 billion is roughly the sum of new money coming into stocks from pension funds and hedge funds, according to Charles Biderman, CEO of Trim Tabs Investment Research. His firm, which is owned in-part by Goldman Sachs, counts some of the biggest hedge funds among its clients for data and analysis. Biderman believes pension funds have been acquiring stocks to restore balance to their portfolios. The stock market’s plunge since September left their diminished portfolios tipping to one side with bonds, so it follows that they would have to buy stocks to meet their asset-allocation targets. Biderman figures that’s worth about $140 billion or so to U.S. stocks.

Hedge funds, meanwhile, have started buying shares with cash they had stockpiled to pay investors who were selling out because of the Panic of 2008. The new hedge fund buying is worth about $50 billion, according to TrimTabs. Call the total from the two groups about $200 billion. The money is most likely a big reason why the S&P 500 stock index climbed 33% from its 13-year-low on March 9.

But since that big bounce, the S&P has gone nowhere. It is where it was at the start of May. The reason may well be that much of that new pension and hedge fund money has been absorbed already, particularly by new follow-on stock offerings from existing corporations, especially bank holding companies. Through the end of last week, corporations had sold more than $83 billion of stock since March. By the time the quarter ends June 30, Biderman figures that the corporate take from selling new shares will mount to $125 billion, the highest in his records.

By then, you might think their appetite for cash would be satisfied. Then any new money could go toward pushing up stock prices for investors already in the market. But don’t count on it. Biderman says his readings of federal tax data show that incomes and the economy are weaker than many people believe. He sees unemployment continuing to rise, which will cost the banks more losses than expected on consumer loans and residential mortgages. The banks may well have to replace that capital, too. Corporations in other industries covet cash, too, as shown by the fact that announced stock buybacks are at a multi-decade low. “There will be a need to sell more stock as long as the economy keeps slumping,” says Biderman. That means corporations could remain in a parasitic mode, absorbing cash from their stock market hosts. Maybe this time they won’t waste the money.

Reader Comments

Ray Allen

May 27, 2009 05:45 PM

Good piece!!

Agree with the crux of your argument and I think there is a "perfect storm"brewing that could send stocks plunging by the late Fall. Toxic mortgages still have another 2-4 years to weed its way down. The smart investors are staying out for now, or using any rally to sell into the rally, thus the reason you have $200M of new money, not even making a dent.
Ray auto insurance quotes


May 27, 2009 10:04 PM

I like this story. Why? It reminds me of all the old adages buy stock and hold it, buy real estate it goes up over time. And many more. I'll add one for the current reality, buy US savings bonds and put your money into multiple FDIC insured bank CD's below the insured limt. You might not keep up with inflation as the expert always spout off, but you'll do better than you would have listening to the experts.

Thank you for your interest. This blog is no longer active.



BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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