Sponsored Link: Own Gold For Less than A Penny-Per-Ounce

Current Stock Prices: Why Trillions of Dollars on the Sidelines Maybe A Good Thing

by Alexander Green, Oxford Club Investment Director
Thursday, February 5, 2009: Issue #929

You can’t blame most market investors for being nervous…

  • The stock market has done a belly flop.
  • Real estate keeps tumbling.
  • The economy remains weak.
  • Jobless claims recently hit a 26-year high.

Investors have pulled tens of billions of dollars out of stocks and plunked it in the bank.

We are optimistic, nonetheless. Why? Because the bad news is already reflected in current stock prices.

Valuations are attractive. Negative sentiment is a bullish signal, not a bearish one. And all that cash sitting on the sidelines is actually a good thing.

This month we’ll look at why.

We’ll also highlight a world-class biotech firm that will allow you to take advantage of one of the most attractive buying opportunities in almost two decades.

The Worst Year For The Stock Market

Last year was the worst year for the stock market since 1931.

In the second half, investors yanked tens of billions of dollars out of equity mutual funds and squirreled them away in cash accounts paying 1% – or less.

Some analysts see this as a big negative. It’s not.

Today there is more money available to buy shares than at any time in almost two decades. The $8.85 trillion held in cash, bank deposits and money market funds is equal to 74% of the market value of U.S. companies, the highest ratio since 1990, according to the Federal Reserve.

What has happened in the past when cash reached these levels?

  • In September 1974, cash on hand reached $604.5 billion, representing a record 1.21 times the U.S. stock market’s capitalization. That preceded a 31% gain in equities between October 1974 and March 1975.
  • In July 1982, just as a 20-month bear market was ending, cash as a percentage of the U.S. stock market’s value rose to 95%. The S&P 500 began a six-month, 36% advance.

According to Bloomberg, the eight previous times that cash peaked compared with the market’s capitalization, the S&P 500 rose an average 24% in six months.

There are no guarantees, but this is a very positive near-term signal for the market.

Understanding the Significance of High Cash Levels

Smart investors – even bearish ones – understand the significance of high cash levels. For example, Leuthold Group, whose Grizzly Short Fund returned 83% in 2008 thanks to bets against equities, recently put out a bulletin calling stocks “one of the great buying opportunities of your lifetime.”

The report pointed out that the ratio of cash on hand to U.S. market capitalization jumped 86% in the first 11 months of last year. That’s the biggest increase since the Fed began keeping records in 1959.

In other words, the powder is there. All we need is a match – and stocks could blast much higher.

And it probably won’t take long. After all, cash is earning a negative real return right now. Investors will get itchy eventually. And when they do, that money will return to the market.

Investor psychology was badly scarred over the past 15 months, however. So I believe the early money streaming back will seek a home in big, safe, blue-chip stocks.

Good investing,

Alex

Editor’s Note: Alex recommended a company to members with just these qualities – “A fine company with a solid balance sheet, a recession-proof business and excellent growth prospects.” To get this and the rest of Alex’s blue chip safety plays, find out more about The Oxford Club.

If you’re already a member, you can sign in here.

Today’s Investment U Crib Sheet

As part of our continued improvements at Investment U, we’ve been providing our expert stock insight through our “Stock of the Day” Here are some of this week’s hot stocks.

In addition, if you haven’t already, take a look at our daily IU Blackboard. Here are the last three:

Louis Basenese looked at General Electric earlier last week. In fact, if you’re an income investor in GE you might want to read why “GE Is A Dog at Any Price.” He explains why, and what you can do about it.

Related Investment U Articles:

Sign Up now and receive this Free report:

Collect 122% in the Next 12 Months From Gold's Surge.




Could you use an extra $600 - or more - each month?

If so, you’ll want to check out the details of an overlooked government-backed program in THIS REPORT.

It shows you why the government is set to distribute $457 million to a small group of recipients, how to get your name on the list and the exact deadline you must meet in order to qualify.

Share Investment U:
  • email
  • Print
  • Digg
  • Sphinn
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • Propeller
  • StumbleUpon
  • Technorati
  • Yahoo! Buzz
  • Reddit
  • NewsVine
  • SphereIt
  • Twitter

Comments

**By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.

Check out our selection of daily Investment Research:

IU Blackboard IU Archives




We Respect Your Privacy



What is Investment U?

Since 1999, Investment U has provided impartial, no-nonsense investment advice on how to build long-lasting wealth.



Recent Articles

 

Search Investment U


 

Platinum Services

Oxford Club
The Oxford Club
is an exclusive, global network of investors, who collectively participate in the pursuit of prosperity and wealth. The Club is renowned for its market-beating, tried-and-true investment principles.

White Cap The White Cap Report exclusively identifies companies, White Caps, which - by being among the earliest to gain traction - have secured dominant positions within untapped, billion-dollar markets.

XPR With an elite trading team at the helm, the Xcelerated Profits Report shows any investor how to "invest like a pro," using high-level, yet easy-to-execute strategies that "xcelerate" profits while minimizing risk.




What Readers Are Saying...

"Always enjoy what you have to say, and learn something new (and useful) almost every time. Thanks again for your outstanding work." Jeff K.

"I just want to say a quick thank you to Alexander Green for not only his sage advise, but his reassuring words of encouragement that we all need right now." Bryan W.