Cash on the Sidelines

Photo Credit: theblackdog2071 || Remember, if some from the sidelines come onto the field, an equal number of others have to leave.

Anytime you hear a bull or bear argument about cash on the sidelines, understand that it is bogus. Ordinary trading does not add or subtract cash on the sidelines, excluding commissions.

If bulls are more motivated to buy, then stock prices go up as they buy, and cash moves into the hands of those they bought from, who were less bullish. If bears are more motivated to sell, then stock prices go down as they sell, and they receive cash from those they bought from, who were less bearish.

In both cases, the amount of cash on the sidelines does not change. Cash moves the opposite direction of shares.

So, when does cash enter the market?

  • IPOs
  • Rights offerings
  • Employee stock options plans are tricky as shares are potentially created, and sometimes some cash comes back to the corporation.
  • Employee stock purchase plans or grants are also tricky. Shares are issued, and sometimes cash come back to the corporation.

With the employee benefits, note that the employees may get slightly lower wages than if the benefit was not there.

When does cash exit the market?

  • Buybacks
  • Acquisitions of companies where cash is a component of the transaction

When cash enters the market, shares are created and cash goes into corporate coffers. When cash exits the market. shares are bought into corporate coffers, and cash exits the corporations.

As such, don’t listen to cash on the sidelines arguments. There is always cash on the sidelines. The question is whether new companies are being created, and whether companies are being consumed, and what the relative profitability levels are.

Note to readers: after the initial publication, I modified the lists to take out dividends, as no stock gets issued. I added in employee benefits, as the stock share count often rises as a result.

6 thoughts on “Cash on the Sidelines

  1. Is the dividend and buyback money flowing out of the market though? They flow from companies’ pockets to investors accounts, adding to the cash on the sidelines without really exiting the market. New money also adds to the cash on the sidelines, and will inflate markets when they are put to use. In particular, the buyback money should not affect the market size but only the value of individual holdings not only directly buy also indirectly by increasing the investor’s purchasing power.

    Does that make sense?

    1. I should not have included dividends, because they don’t reduce the share count. But yes, buybacks take cash out of corporations and put it in the hands of some shareholders. At the same time, those shareholders give up their shares, and they go into the Treasury of the companies.

  2. Yes, but… per “Estimating the future returns” model, a declining stock market increases the relative size of cash as a percentage of all financial assets.

  3. Seems to me if I sell stock and use he proceeds to buy treasury bonds, cash has left the market. When the government spends that money it may find its way back to the market, or it may simply add to the money supply sloshing around. Of course the current Fed repo program, I.e. QE by another name, means that that money has likely found its way back to the market fairly quickly, which I think is a big reason for the current market level.

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