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It was the week of the defensive crouch. In the face of wrenching global economic and political events, many traders, corporate treasurers and pension managers decided that cash and U.S. Treasuries were the safest places to be.
The S&P 500 absorbed its worst one week decline since November 2008 as concerns grew about the inability of world political leaders to deal with the European debt crisis or the faltering U.S. economic recovery.
And even though the S&P and other U.S. stock indices closed Friday either modestly higher or lower, the flight to safety in the form of cold hard cash is one that seems unlikely to end anytime soon.
Volatile trading is likely to continue until investors see some credible plan for dealing with the sovereign debt crisis plaguing Greece, Ireland, Portugal, Spain and now Italy.
Money managers also say the toxic battle in Washington over raising the nation's debt ceiling, which led to the threat of a default, has left them doubting the ability of U.S. politicians to work together to jump-start the economy.
"I feel like I've been through the ringer," says Joelle Mevi, the chief investment officer of the Public Employees Retirement Association of New Mexico, commenting on this week's Wall Street slide.
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Mevi says she's become "less optimistic" about the U.S. economy and is moving to sell some of the $11.6 billion pension fund's stock holdings to double the fund's cash reserve to $200 million. She notes that normally her New Mexico pension fund keeps nothing in cash.
Clearly, she isn't alone in thinking about lightening up on stocks. Individual investors pulled some $7.5 billion out of U.S. stock mutual funds during the week ending Aug. 3, which was the highest weekly outflow from stocks since mid-August 2010, according to Lipper data.
A number of traders say European financial institutions also were selling U.S. stocks to build up cash reserves in light of the mounting sovereign debt problems overseas.
And large U.S. corporations, already hoarding nearly $1.2 trillion in cash, are still beefing-up their balance sheets. In a conference call with investors Friday, MetLife Chief Investment Officer Steve Goulart said the large insurer recently "added several billion dollars of excess cash" to its reserves.
"We think it is a prudent thing to do in an environment of uncertainty that exists today," said Goulart.
Companies are moving money into non-interest-paying bank accounts that carry an unlimited guarantee from the Federal Deposit Insurance Corp. The accounts, set-up by Congress last year to provide added assurance to businesses in the event of a bank failure, carry unlimited FDIC insurance.
AVOID ANXIETY
One of those companies using the new FDIC non-interest bearing accounts is the maker of glass for televisions, Corning Inc ., which moved $1 billion into one account during the middle of the debt ceiling crisis as a safe haven.
Corning Treasurer Mark Rogus says even though the debt ceiling dispute is over, the company intends to keep its $1 billion there so it doesn't "have to worry about market movements."
The rush to cash has been so great that Bank of New York Mellon Corp , one of the world's largest custodial banks, has been overwhelmed by deposits and has begun charging some of its institutional customers a fee.
