"Stock market rally under President Barack Obama will continue through the end of the year. "

Re-read the SUBJECT line..."RALLY UNDER PRES Obama", what part of that
do you not understand?
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By Lynn Thomasson and Michael Tsang

Sept. 28 (Bloomberg) -- Americans holding $3.5 trillion in cash are
giving money managers increasing confidence that the stock market
rally under President Barack Obama will continue through the end of
the year.

Even after reducing money-market accounts by 11 percent this year,
investors have cash equal to 73 percent of Standard & Poor’s 500 Index
companies’ net assets, according to data compiled by the Investment
Company Institute and Bloomberg. At the peak of the bull market in
2007, the measure of buying power was 62 percent.

The S&P 500 climbed 54 percent since March 9 as the U.S. government
and Federal Reserve lent, spent or guaranteed $11.6 trillion and the
central bank held interest rates near zero to fight the longest
recession in seven decades. Now, the benchmark gauge for U.S. equities
may extend the advance as investors who kept their money in cash
become convinced the gains will last, said Jack Ablin, who helps
oversee $60 billion as chief investment officer at Harris Private Bank
in Chicago.

“There’s an enormous stockpile of liquidity on the sidelines,” Ablin
said in a telephone interview on Sept. 23. “The reinvestment of cash
could help fuel the market.”

No new president since Franklin Roosevelt has seen a bigger rally than
Obama. The S&P 500 climbed 30 percent since he was sworn in as
economists lifted estimates for third-quarter growth almost sixfold to
2.9 percent. Forecasts for next year’s gross domestic product rose to
2.4 percent from an average estimate of 2.1 percent on Inauguration
Day, according to Bloomberg data.

Saving Money

Investors placed $1.45 trillion in U.S. money-market funds in 2007 and
2008 during the worst financial crisis since the Great Depression,
based on data from Washington-based ICI. The amount has dropped $439.5
billion since reaching a record $3.92 trillion in the week ended Jan.
14.

A broader measure of reserves that includes cash, bank deposits and
money-market funds has climbed to $9.55 trillion this month, based on
data compiled by the Fed. That’s enough to buy all of the companies in
the S&P 500, which have a combined market value of $9.22 trillion,
Bloomberg data show. Since 1999, so-called money at zero maturity has
on average accounted for 62 percent of the stock index’s worth.

“There is a wall of cash,” said Yves Carpentier, a Paris- based
manager at Cap West, who oversees $118 million in three U.S. stock
funds that have gained more than 32 percent this year, beating at
least 87 percent of their competitors. “Stocks will be the investment
of choice in the coming months.”

Never Before

The S&P 500 plunged 38 percent last year, the biggest drop since 1937,
as crashing real-estate prices spurred $1.6 trillion in writedowns and
credit losses at global financial companies and led to the most bank
failures since the savings-and-loan crisis of the early 1990s. Before
the collapse of New York-based Lehman Brothers Holdings Inc. last
year, the amount of cash never exceeded the value of U.S. equities.

Futures on the S&P 500 slipped 0.3 percent at 8:49 a.m. in London
today as a drop in metal prices dimmed the earnings outlook for raw-
material producers.

Stocks rebounded this year, trimming the S&P 500’s decline since its
Oct. 9, 2007, record to 33 percent, as the U.S. government pumped cash
into the country’s largest lenders and the economy stabilized. More
than 72 percent of S&P 500 companies beat analysts’ second-quarter
earnings estimates.

Investors are returning to stocks faster than in the last bull market.
They’ve added $15.8 billion to domestic-equity funds since March,
compared with outflows of $18.6 billion during the first five months
of the bull market that began in October 2002, data from ICI shows.

Money Yields

Should inflation exceed returns on money-market accounts, that may
cause more investors to buy equities. The 100 largest taxable U.S.
funds returned an annualized 0.12 percent during the past week,
according to data compiled by Westborough, Massachusetts-based Crane
Data LLC.

The Fed said on Sept. 23 that it anticipates keeping the benchmark
interest rate “exceptionally low” for an “extended time.” Labor
Department reports this month showed prices of goods imported into the
U.S. tumbled 15 percent in August from a year earlier and consumer
prices dropped 1.5 percent.

“Many of the fund managers I talk to that have missed this rally or
underplayed this rally are sitting with way too much cash,” said
Jeffrey Saut, chief investment strategist at Raymond James &
Associates in St. Petersburg, Florida, which manages $214 billion.

Rising Concern

Yields on U.S. inflation-protected debt show increasing concern about
consumer prices eroding the value of fixed payments. The difference in
rates on 10-year notes and Treasury Inflation Protected Securities, or
TIPS, which reflects the outlook among traders for consumer prices
over the life of the securities, is 1.76 percentage points. That’s up
from minus 0.02 points in November, though below the average of 2.06
points during the past decade, data compiled by Bloomberg show.

John Paulson, the New York-based hedge-fund manager who earned $2.5
billion in 2008 betting against a recovery in U.S. housing, and Warren
Buffett, the world’s second-richest person, still expect inflation to
climb.

Paulson & Co.’s biggest holding is the SPDR Gold Trust that buys
bullion. Buffett, chairman and chief executive officer of Omaha,
Nebraska-based Berkshire Hathaway Inc., said in June that government
spending to ease the financial crisis may increase inflation.

Bigger Returns

“Stocks can easily go higher,” Marc Faber, publisher of the Gloom,
Boom & Doom report, said in a Sept. 22 Bloomberg Television interview
from New York. “If you print the money, they can go anywhere.”

While the S&P 500 is valued at the highest level since 2004 based on
reported operating earnings from the past year, Jeffrey Coons at
Manning & Napier Advisors Inc. says the index is still cheap relative
to the net assets and sales of its companies.

The index trades for 2.14 times book value, or assets minus
liabilities, 34 percent below its 15-year average, data compiled by
Bloomberg show. The S&P 500 was never valued below 2 times net assets
until the collapse of Lehman, data starting in 1994 show. The index
fetches 1.13 times sales, 23 percent less than its average since
1993.

“Nobody, nobody, nobody knows what the E is in P/E coming off a severe
recession,” said Coons, co-director of research at Manning & Napier,
which oversees $21 billion in Fairport, New York. “One of the best
measures in an environment like today is price-to-sales,” he added.
“When we look at the stocks in our portfolio, the valuations of stocks
in it, a lot are 25 percent to 30 percent away from their fair
values.”

‘Not Getting Worse’

Stock gains will be limited should the economic recovery stall,
according to Eric Cinnamond, manager of the $239 million Intrepid
Small Cap Fund that has gained 32 percent this year.

“Things have stabilized and are not getting worse, but they’re not
necessarily getting better,” said Cinnamond, who has 18 percent of his
assets in cash. “We’re actually getting more defensive.”

Sales of existing U.S. homes unexpectedly fell last month for the
first time since March, according to a Sept. 24 report from the
National Association of Realtors. The global economic recovery will
probably be “sluggish,” International Monetary Fund Managing Director
Dominique Strauss-Kahn said in an interview in Washington before last
week’s Group of 20 nations summit.

Price-to-earnings ratios using a decade of data show stocks aren’t
cheap. Equities trade close to 19 times profit, above the 16.3 average
for the past 128 years, according to Yale University’s Robert Shiller.
The professor uses 10 years of earnings to smooth out short-term
fluctuations.

Quarterly Returns

The MSCI World Index of stocks in 23 developed nations has returned 16
percent this quarter including the reinvested dividends of its 1,660
companies. Treasuries have gained 1.3 percent, according to Merrill
Lynch & Co. Oil has slipped 5.5 percent in New York, while the Reuters/
Jefferies CRB Index of 19 industrial and agricultural commodities
added 0.2 percent.

Higher valuations reflect greater confidence among investors that the
economy will rebound and spur a revival in earnings growth and
consumer spending, according to James Paulsen, chief investment
strategist at Wells Capital Management in Minneapolis, which oversees
$375 billion. Combined with the amount of cash still available to buy
shares, Paulsen says equities are a good bet.

“There’s a huge amount of dry powder on the sidelines that could
become a big catalyst for both the economy and the stock market,”
Paulsen said. “As confidence grows in the sustainability of this
recovery, more cash is going to find itself into economic or
investment pursuits. Considerable buying power could be reallocated
into stocks.”

To contact the reporters on this story: Lynn Thomasson in New York at
lthomasson@xxxxxxxxxxxxx; Michael Tsang in New York at
mtsang1@xxxxxxxxxxxxxx

Last Updated: September 28, 2009 03:54 EDT

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