Market timing the cash on the sidelines? The subject of the amount of cash sitting on the sidelines has been a headline and topic of discussion for some time. Inspired by the November 16, 2009 article in Barron’s by Michael Santoli, I thought I would add my two cents to the subject.
Fundamental analysis did not do a good job of market timing the financial crisis. The decline in the value of stocks and bonds during the 2009 financial crisis saw individual as well as institutional investors head for the exits and move to cash. I mean cash. Some of the cash went under the mattress and if you had too much to fit under the mattress you gave it to the U.S. Treasury to hold at .01% a month. If you were a risk taker, you maybe gave it to the treasury for 6 months at .10%. Let me spell that out for you. If you gave the U.S. Treasury your $100,000 to hold for you for 6 months, they gave you $100.00 in return. Since everything is better now, you can actually get $150.00 for 6 months by lending the $100,000.00 to the treasury. I hope you don’t live in New York City. You and your date could not even go out to dinner for the $150.00.
As a money manager with many wealthy retires as clients, they have 2 major concerns. One, they can’t afford to lose any money. Second, they want a return because they don’t have enough to keep up their current lifestyle on the meager treasury returns.
There is a great deal of money looking for a home. The old adage of “money will go where money is treated best” still applies. Today, more than ever, the place to find a home is global. Where it finds a home may or may not be in the U.S.
People ask me where they can get a safe bond return of 6-8%. My answer is nowhere, if you really mean safe. They mention being told by some financial advisors that corporate bonds yielding 8% or better are available. I explain that those companies are some of the same type of companies we have seen disappear. Lehman, GM, CIT are some high yield bond names that come to mind. People don’t know what the holdings are in their high yield bond funds. These “high yield bond funds” used to be called “Junk Bond Funds”. If we had fair disclosure, they still would be called Junk Bond Funds. I ask, do you want to lend your money to Delta Airlines? How about XM Satellite Radio, Ford, Quest, or Blockbuster? How about some Mortgage Backed Bonds? Remember, you must be aware of risk vs. reward.
If our dollar keeps dropping, do you want dollars for your return?
If the economy recovers, corporate bonds should perform and you will have the potential to get your money back (maybe). If not, you may get some much diluted stock certificates to paper your bathroom walls. If the economy sinks again, you will get a nice tax deduction. Does anyone need another tax deduction?
Now let’s get to an action plan. How to use market timing? A systematic trading strategy built around technical analysis that measures buying and selling of the stock and bond market is the only way I know to balance risk vs. return. Whichever assets in which you choose to place your money, you should be aware of what you have and the potential downside risk.
To contact the writer, firstname.lastname@example.orgDisclosure: No Positions