Time To Move To Cash?

 Analysis & Commentary, Back to the basics, Cash Is King!  No Responses »
Nov 272011
 

Is it time to exit the stock market and move to cash?

What looks like the most logical move for stock investors may not end up being the best move. We have a situation in Europe that is teetering on the brink of full-blown crisis that would likely result in a global financial contagion. Such an outcome would be decisively negative for stocks. Thus, moving fully from stocks to cash might almost appear like a no brainer.

But making such a decisive move amplifies a particular element of risk in your portfolio. It is policy risk. And it is measured by the actions or lack thereof by global fiscal and monetary policy makers in addressing the various crises that arise along the way. Just as the lack of any policy action is a downside risk, the execution of aggressive policy action is a profound upside risk for stocks. Therefore, while waiting for policy action that never comes can be perilous, it can be equally crushing to exit the stock market just as unexpectedly aggressive policy action sends the stock market soaring.

The primary challenge in managing policy risk is that it is difficult to measure. This is due to the fact that it is highly dependent on the whims of human behavior and decision-making. On what day, if ever, does German Chancellor Angela Merkel suddenly decide that Eurobonds may actually be a good idea? At what hour, if at all, does the European Central Bank opt to announce that they will engage in quantitative easing through the large scale asset purchases of the bonds of at risk sovereigns across the eurozone? And at what moment, and to what scale, does U.S. Fed Chairman Ben Bernanke decide to begin pulling the trigger on QE3? While investors can spend their days reading various tea leaves, there’s no telling exactly when during times of crisis that policy makers may finally be compelled to act if at all. This leaves stock investors on a constant tight rope since the two outcomes associated with policy action and policy inaction are so widely divergent. Stay in the stock market that receives no policy support and suffer further declines, or exit the stock market that suddenly receives policy support and miss a dramatic rally. Frustrated stock investors have to look no further than the afternoon of October 4 to see how swiftly the market can shift, seemingly without any reason whatsoever other than the policy response – Operation Twist in this case – that often only becomes apparent in retrospect.

So what is an investor to do? All signs out of Europe indicate that it’s time to get out of stocks and get to the sidelines. But we could wake up on any given day and the stock market is suddenly soaring behind some extraordinary (or perceived to be extraordinary) policy response from the ECB, eurozone leaders and/or the Fed. So what is the answer? It’s not necessarily about choosing between stocks or cash. Instead, it’s about hedging your stock positions with allocations that include cash.

It should not be a question of stocks OR cash in the current environment. Instead, the answer is stocks AND cash along with a variety of other complementary positions that are designed to withstand crisis and have the potential to perform when stocks are under extreme pressure. This way, stock investors can more effectively manage against policy risk so that they can participate if stocks suddenly rise due to aggressive policy action but are also protected if stocks continue to fall.

Time To Move To Cash? by Eric Parnell

Posted by Brian Schuettler at 8:27 am  

Currency Revulsion

 Cash Is King!, Edward Harrison, Fiat Currency, U.S. Treasuries, Unintended Consequences, We Have Become Beggars To The World, What Is An Investment Asset?, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
Oct 022011
 

I have said it a few times but it bears repeating: If you march down to the government with your paper IOU with $100 printed on it to demand your money, the government will simply hand you another paper IOU with the exact same amount printed on it. As the British ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency].” All US government obligations are substantially identical promises to repay a specific amount of the currency unit of account backed by nothing but taxing authority.

So, Treasury bonds don’t ‘fund’ anything. If the Treasury were allowed to run overdrafts at the central bank, the US government could stop issuing bonds altogether and credit bank accounts with keystrokes. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything.

But what about currency revulsion, you ask? What if government deficit spends out of control?

Well, that’s the confidence trick of fiat currency. If confidence in the currency erodes, tax evasion will rise, citizens will begin surreptitiously using other media of exchange to transact and inflation and currency depreciation will spiral out of control. Notice, however, I mention currency depreciation and inflation instead of national solvency.

Currency Revulsion by Edward Harrison

Posted by Brian Schuettler at 10:33 am  

Beyond Sovereignty: Money and its Future

 Analysis & Commentary, Cash Is King!  No Responses »
Mar 142010
 

Over at Public Discourse, Acton’s Samuel Gregg has just published a piece about the future of money. The issuance of money, he writes, is often associated with issues of national sovereignty, despite the fact that governments have long abused their monopoly of the money supply. Gregg argues, however, that the role played by mismanaged monetary policy in the 2008 financial crisis may well open up the opportunity to consider some truly radical options for how we supply money to the economy…

Beyond Sovereignty: Money and its Future

Posted by Brian Schuettler at 9:33 am  

Capital Needed!

 Bond Market, Cash Is King!  No Responses »
Oct 172009
 

Ismail Dalla and Heiko Hesse note that as the financial crisis has curtailed the ability of borrowers in emerging markets to find funds abroad, they have turned to raising capital in domestic markets. Local-currency bond markets had already grown tremendously since the crises of the 1990s. Dalla and Hesse say that deepening local-currency bond markets should now be a top priority for emerging economies. See Rapidly Growing Local-Currency Bond Markets Offer a Viable Alternative Funding Source for Emerging-Market Issuers.

Posted by Brian Schuettler at 8:10 am  

Bill Gross: Sell Equities and Buy Treasuries

 Cash Is King!  No Responses »
Sep 252009
 

Bill Gross is a bond man.  In fact, he is often called the “Bond King” because Pimco, the organization where he is founder and Co-Chief Investment Officer, is the largest bond fund in the world. In Bondland, what Gross says has a lot of weight.

And Gross has been talking about a “new normal” of deleveraging, deglobalization and reregulation. In his view, this means weak consumer demand counterbalanced only by heavier government intervention, leading to slow growth for the foreseeable future (See my post ‘Gross: The new normal for “the next 10 years and maybe even the next 20 years”’).  In essence, he sees a scenario that is bullish for bonds (especially longer duration types like the 10-year and the 30-year) but not particularly bullish for shares.

But, Gross is also reducing risk.  There has been a huge run-up in corporate bonds, especially in high yield bonds. And Gross believes now is the time to take profits and reduce exposure to riskier assets, a view he first put forth in his monthly newsletter at the beginning of July (see my post, “Bill Gross: the new normal means investors should shun risk”).  And Gross is re-balancing his portfolio quite heavily to reflect this “glass half-empty” bias. His portfolio has its heaviest concentration in five years of Treasuriest.gif, considered the U.S.’s risk-free financial assets.

Below is a video of Gross talking on CNBC along with two other market experts, Bob Doll and Dan Tishman, regarding their view of the economy and financial markets. Gross goes as far as to say point blank that one should sell equities and other riskier assets like high-yield bonds.

Before you watch the video, be aware that two other formerly bearish analysts, Richard Bernstein and Jim Grant, have flipped to bullish recently.  Gross mentions Grant by name and disagrees with his take on the economy, calling it “disingenuous.” Articles by or on Bernstein and Grant’s view’s are below the video.

This is the third in a series of posts about reducing risk. See also:

Click for VIDEO

Bill Gross: Sell Equities and Buy Treasuries by Edward Harrison

Posted by Brian Schuettler at 9:30 am  

Banks Need to End $1 Trillion Kick the Can Game: David Reilly

 Analysis & Commentary, Cash Is King!  No Responses »
Sep 092009
 

Banks have known for a while that they would eventually have to face up to some of the assets they had stashed in off-balance-sheet vehicles. Now that day is looming, and regulators are concerned that lenders might need even more time to deal with such items.

Enough already. It’s time for banks, and their regulators, to stop playing kick the can. Either banks have — or can get — the capital they need to support assets on their books, or government watchdogs should take action.

Instead, regulators last week raised the prospect of giving banks a one-year, phase-in period to fully recognize for capital purposes what may be about $1 trillion in assets coming back onto balance sheets next year. This breathing room may ostensibly help some banks avoid having to quickly beef up regulatory capital, the buffer that helps them absorb losses.

Such a delay is unwarranted. Banks have had almost two years to prepare for accounting-rule changes adopted this spring that will place greater restrictions on the use of off-balance- sheet vehicles.

And it was just such hemming and hawing that helped get the banking system into its current mess. After the implosion of Enron Corp., accounting-rule makers tried to shut down off- balance-sheet games.

Bank Fight Back

Banks fought back, and the Financial Accounting Standards Board watered down the restrictions. That helped fuel both the rise of off-balance-sheet lending vehicles during the credit- bubble years as well as the so-called shadow-banking system.

These vehicles allowed banks to shuffle assets off their books — everything from mortgages to credit-card debts to auto loans — even though they often still bore some risks from them. By seemingly shedding these assets, banks were able to hold less capital. That helped boost returns and profit. It also allowed risks to build up out of the sight of investors, regulators and in some cases the banks themselves.

As Federal Deposit Insurance Corp. Chairman Sheila Bairsaid in an op-ed article in the New York Times this week, “the principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the non-bank shadow financial system.”

Those gaps were exposed when the financial crisis hit, and many banks were saddled with assets, and losses, from those previously out-of-sight, off-balance-sheet vehicles. The best- known case involved Citigroup Inc., which suddenly had to absorb about $25 billion in collateralized debt obligations.

Strained Balance Sheets

Even smaller banks such as Zions Bancorporation had to help off-balance-sheet vehicles, straining already-stretched balance sheets.

This spring, the FASB tightened the rules. In light of that, bank regulators — the FDIC, Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision — have to decide how these returning assets will be treated for capital purposes.

Regulators allow banks to hold different amounts of capital against different kinds of assets, which is why regulatory capital can differ from a bank’s stated shareholder equity, or net worth. Those deliberations gave rise to the possibility of the year-long phase-in period.

A year may not seem like a long time; it is certainly less than the three-year grace period sought by some banks.

Don’t Dilly-Dally

Yet regulators, including the FDIC’s Bair, acknowledge that the new accounting rules are needed. More than that, in a television interview last week, Bair said if banks had faced stricter treatment for off-balance-sheet vehicles “a few years ago, I think there would have been more capital in the system.”

If these rules would have helped to prevent the current crisis, that is all the more reason not to dilly-dally.

Bair and other regulators haven’t said whether they would support a phasing-in of capital requirements. Bair has said, though, the 2010 start date for the new rules “is a little troublesome.”

Big banks in particular should have to face up to reality from the get-go since the government’s stress tests of 19 large institutions acted as if about $700 billion in off-balance-sheet assets had already returned.

The big four banks — Citigroup, JPMorgan Chase & Co.,Bank of America Corp. and Wells Fargo & Co. — are expected to see about $550 billion in assets return to their books under the accounting-rule changes, Barclays Capital analyst Jason Goldberg estimated in a recent report.

Besides having had time to prepare for the changes, there is another reason to avoid delay. Any postponement opens the possibility that banks will use the phase-in period to argue for further forbearance.

That is a time-honored tradition in Washington — if you can’t kill something outright, just delay it into oblivion.

Bank lobbyists shouldn’t be given that chance. Banks need to take their off-balance-sheet medicine now, without delay.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

Banks Need to Take Off-Balance-Sheet Medicine – David Reilly, Bloomberg

Posted by Brian Schuettler at 10:02 am  

Bernanke’s Apoplithorismosphobia

 Cash Is King!  No Responses »
Aug 222009
 

Mises Daily by Mark Thornton | Posted on 8/19/2009 12:00:00 AM

Fed Chairman Ben Bernanke, like most mainstream economists, has an irrational fear of deflation — whether it is understood as falling prices or a contracting money supply. I have coined the term “apoplithorismosphobia”Download PDF for this psychological malady. In contrast, average Americans love deflation whether it’s at Wal-Mart, in the Cash for Clunkers program, or from the tax credit for first time home buyers. Austrian economists love most forms of deflation too,Download PDF and we think it is the ultimate cure for economic crises.

The Cash for Clunkers program has been a great success with the American people; they are eagerly taking advantage of the opportunity to liberate taxpayer money by trading in their old clunker cars for new, fuel-efficient cars. Given that the program was only $1 billion in scope, it’s remarkable how much positive publicity it has received. Now that the original money is running out Congress is talking about expanding the program by $2 billion. Who wouldn’t want $4,500 in exchange for a $500 clunker?

The Clunkers program is, in effect, price deflation for a big-ticket item in the family budget. It has encouraged people to look for deals and buy new cars. It has been a tonic for the hard-hit automobile industry and car dealers across the country. Of course, there are inefficiencies, as in any government program. Cash for Clunkers falls prey to Bastiat’s broken-window fallacy; a few hundred thousand perfectly serviceable vehicles will be destroyed for no good reason. It also skews expenditures towards cars and away from more valuable purchases.

The tax credit for first-time homeowners is another popular government program that acts like deflation on a large item in the family budget. A two-income family with up to $150,000 in income who has not owned a home for the last three years can earn a tax credit of up to $8,000 on the purchase of an $80,000 house. This is a liberation of taxpayer money, using it towards something that has value rather than merely giving it away to the corrupt friends of government.

“The key thing is that the price of producer goods has to fall faster and farther than consumer goods for the correction process to proceed.”

The tax credit for the price of a home is de facto deflation for home buyers. It helps people who avoided buying overpriced homes with irrational mortgages during the housing bubble and who now want to take advantage of lower prices. By artificially increasing demand, it also helps troubled homeowners to sell their homes.

Of course there are inefficiencies here as well. The government program is encouraging home buying now, when prices could still go much lower. The program is also encouraging people to take on debt, despite that taking on too much debt is at the heart of this economic crisis. The housing bubble was the result of the Federal Reserve tricking people into housing malinvestments, and now the government is trying to use the tax code to trick them into more malinvestments.

The Cash for Clunkers program and the tax credit for first-time home buyers have been popular programs, with a marginally positive impact on the housing and automobile industries. Nonetheless, they represent a proverbial drop in the multi-trillion dollar bucket known as stimulus and bailout. They do not really solve the economic crisis.

However, they do provide a good illustration of how deflation addresses the crisis. As malinvestments from the bubble are liquidated, the economy begins the correction process. The value of the malinvestments plummets. The values of loans backing these investments falls, and the money supply contracts as banks reduce lending. The price of capital and labor falls, and entrepreneurs discover new profit opportunities to redeploy the capital and labor that had been misdirected by the Federal Reserve’s boom or bubble. As the price of goods falls, potential consumers become actual buyers.

The key thing is that the price of producer goods has to fall faster and farther than consumer goods for the correction process to proceed. If money and credit are deflating, the process will be faster. If the Federal Reserve and other forms of government “stimulus” curtail the deflation of producer goods (e.g., by auto and financial bailouts), then the process will be slower and more painful.

Since deflation is the cure for the economic crisis, why is Ben Bernanke so afraid of it? Is his apoplithorismosphobia really just a psychological ailment? Is the collective of mainstream economics just misinformed or stupid? I do not know for sure, but when the situation is explained to an intelligent person, they usually suspect it involves some kind of political payoff for the bankers and the politicians.

Posted by Brian Schuettler at 7:52 am  

Why private equity is in a deep freeze

 Cash Is King!, Private Equity  No Responses »
Jul 302009
 

NEW YORK (Fortune) — If the credit markets have been an iceberg over the past year, the private equity business has been frozen as solid as a prehistoric glacier. Buyout giants like KKR, Blackstone, and Bain Capital — who just a couple of years ago were vying to one-up each other on a monthly basis with new mega-deals — have been in a virtual hibernation for months.

In the first half of 2009, just $24 billion in deals were completed globally. That compares to $131 billion last year and an astounding $528 billion in deal volume in 2007. This year’s first-half total is the lowest since 1996, when the buyout industry was much smaller. There were only three loans extended to fund leveraged buyouts through June, the fewest number since 1985 according to Dealogic.

In recent weeks, though, the stock market has begun to rally and the cost of borrowing has begun to fall. So it’s natural to wonder: Is the buyout market about to heat up again?

Don’t be on it, say industry insiders. Private equity is still in the early stages of a long thaw.

Digesting last cycle’s deals

The problem is not that firms don’t have money to spend. In fact, according to private equity research firm PitchBook, the industry is sitting on an estimated $400 billion worth of so-called dry powder, or money raised but not yet invested.

No, the reason that dealmaking isn’t going to come roaring back is that private-equity firms are simply still too busy trying to digest the companies they swallowed during the boom years.

Why Private Equity Is in a Deep Freeze – Telis Demos, Fortune

Posted by Brian Schuettler at 9:08 am  

Follow the money

 A State of Distress, Cash Flow, Cash Is King!  1 Response »
Jul 302009
 

Follow the money: The E.U. has agreed to begin talks with the United States on a pact to share counterterror info on European citizens’ bank transactions, but past CIA covert activities render some wary, The Irish Times tells — while Deutsche Presse Agentur has the very prospect “uniting disparate parts of the German political spectrum in opposition.” The Swiss government has extended a list of individuals and groups linked to al Qaeda or the Taliban who are banned from travelling through Switzerland or having Swiss accounts, Dow Jones Newswires relates. Foreign terrorists’ and insurgents’ “use of third party countries for training, fundraising, and transit is not merely an operational phenomenon, but an economic one as well,” the author of a paper titled “Foreign Fighters and Their Economic Impact” summarizes in The Counterterrorism Blog.. Somali pirates are probably using the ransom money they collect from hijacking western ships to finance Islamic terrorists, The Daily Telegraph has a parliamentary committee reporting.

Posted by Brian Schuettler at 9:01 am  

Who Needs Stocks When You Have a Mattress

 Back to the basics, Cash Is King!, Is The Market Rally Real?  No Responses »
Jul 072009
 

Nearly 13 years after making ‘irrational exuberance’ one of the most familiar phrases of all time, stock market investors are anything but exuberant.  On 12/5/96, when Greenspan suggested that stock market investors may be out of touch with reality, the S&P 500 was at 744.38.  As of the end of the second quarter, the S&P 500 has gained 53.4% on a total return basis.  At face value, this seems like a respectable return on one’s investment.  However, compared to alternatives the gain loses its luster quickly.

Consider the three month US T-Bill, which is one of the safest, most conservative, and lowest yielding investments out there.  Back when Alan Greenspan was talking about ‘irrational exuberance,’ putting your money in three-month T-Bills was akin to stuffing it in the mattress.  Currently, three month T-Bills are yielding 0.1575%, which means you will receive 15.75 cents of interest for every $100 you invest.  Even with their low relative yields, however, T-Bills have had a total return of 56.4% since Greenspan’s memorable quote, outperforming stocks by 300 basis points.  Equity market investors can only hope now that the years ahead look similar to what happened the last time stocks were underperforming T-Bills back in late 2002.

Who Needs Stocks When You Have a Mattress? – Bespoke Investment Group

Posted by Brian Schuettler at 9:20 am  

The Machinery Of Cash

 Cash Flow, Cash Is King!, Positive Cash Flow  No Responses »
Jun 262009
 

To download a Microsoft Excel file containing the full results of the CFO Midcap 1500 Machinery Industry Scorecard, click here.

Hit by a 22 percent drop in first-quarter revenue, the machinery industry provides an example of how corporations are struggling to hold the line on cash in a bad year. But a look at 41 companies out of the CFO Midcap 1500′s machinery segment with first quarters ending March 31 of this year reveals that in some cases, these manufacturers succeeded.

The Machinery of Cash CFO Online

Posted by Brian Schuettler at 6:19 am  
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