Thoughtful piece by that title in the WSJ, 3/16-17/2024. One bullish argument for stocks is that there's an ocean of cash "on the sidelines" that might flood the market in the face of a dip.
Telis Demos, writing for the Journal, argues "not so much." Two reasons. First, while money is pouring into money market funds, it seems mostly to be moving from savings or checking accounts with negative real returns (the average yield on sweep accounts is 0.05% he claims, while my credit union is doling out a rich 0.01% on savings) to liquidity fund that are yielding 5% or so.
Second, when the money flows back out of money market funds, it usually flows into income investments rather than equity investments.
(I also suspect that the folks most desperate to buy Nvidia or DJT on a dip are not necessarily folks which huge cash reserves and vice versa, the folks like me who structure a 50% income sleeve into their portfolios are not apt to suddenly become memesters.)
Money markets hold $6.5 trillion currently, up $150 billion in two months. "[A]nalysts at Barclays estimate that ... what appears poised to possibly move into riskier assets is about $400 billion to $600 billion," including both equity and income investments. JP Morgan Chase strategists report that "companies with huge cash piles are still opting to be weighted toward money funds ... S&P 500 nonfinancial companies' cash investment portfolios hit a historical high of57% allocated to cash" at the end of 2023.
See "Market Bulls Won't Get a 'Wall of Cash,'" March 16-17, 2024, p.B12. The article is
online but behind a paywall.
Palm Valley Capital Fund continues to putt along with about 80% cash and short bonds which implies that its microcap value stocks have been returning something like 15% a year for the past three years. (I'm assuming a 2% annual returns on the cash portion of the portfolio.) Stocks in the only microcap ETF (First Trust Dow Jones Select MicroCap ETF FDM), which is also value-oriented, 2.92% annually for the same period. Translation: the fully invested microcap ETF returned 2.9% while Palm Valley, with only 20% invested, returned 4.3%.
Comments
"Since 1950, there have been 30 five-month streaks in the S&P 500, including the most recent one, along with another streak that ended last July. In all but two of the prior 28 cases, the S&P 500 was higher 12 months later, with an average gain of 12.5% and a 93% win rate. This compares to a 9.0% average one-year return with a 74% win rate.
The bullish advantage decreases over shorter time frames, but critically, it doesn't disappear."
As regards PVCMX, it's interesting how they try to time the market..... and how they have done more with less (invested). That ~80% cash position is hurting them YTD. I will be adding a small position at some point. But for right now, the market just wants to climb.
To be clear, Mr. Cinnamond doesn't "time" and doesn't change. Not in decades. He's among the most rigid of the absolute value guys. He's got his standards for what's worth owning. If there is not a single stock that meets those standards, he would sit at 100% cash (more recently, short-term bonds and cash) until something presents itself. (Or until he liquidates because he hates charging an equity e.r. for a money market fund. We've talked about it.) If there are only five stocks that meet his standard, he will invest in five stocks, not bet the farm on any of them, and wait.
I have no way of charting his returns from Evergreen in the 90s through Aston/River Road, Intrepid and Palm Valley but the pattern at each of the individual funds he's run has been the same: he's got a steady upward incline with remarkably little variation while the market soars and dives around him like a swallow.
Investors love him when the swallow dives, tolerate him for a bit, and denounce his dinosaur-like behavior when the swallow soars. For what I can tell, he structures his firm or team in anticipation of those vagaries.
Hopefully Mr. Cinnamond can continue to impress with his small value picks and his patience.
Also, it would interesting to see if bond fund gurus in this forum could not beat PVCMX TR just with bond funds and with lower volatility.
The stock sleeve just happens to be in SCV. The bonds are in T-Bills, and then there is a MMF and some gold and silver. So it came through 2022 in the green. For my money, so did IYK and FSUTX.
If standard deviation is your thing, PVCMX rocks at 3.26 for the last three years. RSIVX has outperformed it with an SD of 2.72. But you would have lost money in 2022.
Investors have assiduously weeded out virtually every absolute value investor. Search the main MFO site for "dry powder" or "absolute value" to see some of our earlier articles on the subject. For a retail investor, FPA is about the biggest you'll find and even then their flagship Crescent fund is less than half the size it once was.
The short version is that current market valuations are decoupled from historic norms. Our recent bear market lows have seen valuations higher than previous bull market highs. Absolute value guys are left with three choices: (1) find somewhere else to play, as Cook & Bynum seem to have and as Leuthold's models sort of enforce; (2) rewrite the rules that have worked for you to accommodate "a new normal" or (3) liquidate as assets flee. A few managers of small funds hold on, but big firms - excepting perhaps GMO - have never accepted the business risks of absolute value investing.
For what interest that holds.
Bottom of the bear market is likely to have the worst valuation. I learned the lesson the hard way in 2009 by not investing more aggressively - a once in a lifetime opportunity lost. Then there is the value trap.
I guess every thing in moderation …
Thanks for the replies.
Turns out that DCF is the formula behind absolute value investing.
Does any other fund employ DCF analysis? MOAT does, for one: If PVCMX helps people sleep better at night, I'm all for it. It just seems to me that the peace of mind it affords has more to do with asset allocation than stock analysis.