Mutual Fund Managers Move Into Cash as Prices Swing Wildly

Mutual funds are selling stocks and hoarding cash just as trading surges to a record and prices grow more volatile than at any time since the Great Depression.

Forty-three percent of managers surveyed this month by Merrill Lynch moved more money into cash than their funds stipulated, the highest percentage since the New York firm began compiling the data in April 2001. Their cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions.

Investors who usually "buy and hold" are selling as price fluctuations get larger and less predictable. The swings are confounding valuation measures based on earnings after $200 billion of credit losses caused analysts to overestimate bank profits by more than 50 percentage points last quarter.

"If you've been out there playing in traffic, trying to trade in this, you'll run out of money before the market runs out of time," said James Dunigan, 55, the chief investment officer at PNC Wealth Management, which oversees $78 billion.

Daily changes of 1 percent or more in the Standard & Poor's 500-stock index, the benchmark index for American equities, have occurred on 54 percent of trading days this year, according to S&P. That's the most since 1938, as hedge funds and other speculators use borrowed money to magnify returns from rapid-fire trading.

One consequence is that volume on the New York Stock Exchange has ballooned to an average 1.75 billion shares a day, the highest on record and 11 percent above last year's figure. More than half of the 10 busiest days in U.S. options markets have occurred in 2008, fueled by strategies designed to profit from rising volatility.

The Chicago Board Options Exchange Volatility Index, a benchmark of price swings used to value options, is averaging 26.15 percent this year, its highest since 2002. Price swings in a gauge of bank stocks in the S&P surged to the highest since at least 1989, based on 10-day historical volatility, data compiled by Bloomberg show.

Lehman Brothers Holdings, the world's fourth-largest securities firm, lost almost half its market value during trading on March 17 before surging by a record 46 percent the next day. The market value of Bear Stearns, the second-largest underwriter of mortgage bonds, tumbled 84 percent to $655 million last week when J.P. Morgan Chase agreed to buy it after a Federal Reserve-led bailout. Bear Stearns rose 89 percent after J.P. Morgan quadrupled its offer.

"Trading financial stocks on a daily basis is a very difficult, if not foolhardy thing to do," said Edgar Peters, Boston-based chief investment officer at PanAgora Asset Management, which manages $25 billion. Peters, 55, said the firm's asset-allocation strategies have boosted cash to 10 percent of their holdings from zero at the end of last year. The last time the firm held so much cash was in March 1997, when the S&P 500 tumbled 9.3 percent in about a month.

Citigroup, which has fallen 20 percent since reporting the biggest quarterly loss in its 196-year history, may have write-downs of $15 billion in the first quarter, according to Merrill Lynch. That would add to the $22 billion that Citigroup already lost because of the worst housing slump since the Depression. Citigroup, Bear and Lehman are based in New York.

Last week, Citigroup traded at 0.82 times its stated net assets of $113.6 billion, the cheapest since at least 1998. That suggests the biggest U.S. bank would be worth more if shareholders fired management and liquidated it.

Citigroup's book value exceeds its market price only if the bank's $133.4 billion in so-called Level 3 assets is being accurately priced. That includes loans, asset-backed securities and derivatives for which market prices are so scarce that companies use internal models to gauge their worth.