2011Aug15 Why Cash?

Our Global Opportunity and IR Select (Schwab ETF) portfolios are in a defensive position holding all cash in money market accounts. Last week’s roller coaster in the market can be a bit nerve wracking. This update is to help you understand our process.

The first decision is made within our Dynamic Asset Evaluation process. That includes comparing the previous ten week average to cash using the three month treasury rate. Currently, our asset class assignment looks like this:

Our objective is to concentrate portfolios in the top two assets unless they fail the cash bogey which is the case with assets 1, 2 and 5.

Reinvesting requires some confirmation that the negative trends have reversed.

In the next chart, “Supply in Control” means there are more sellers than buyers which, in any auction, results in lower prices.

On Saturday’s radio program, we reported that analyst earnings forecasts have shifted to a net negative for the S&P-500. All forty sectors we watch are in negative trends. Selling pressure has created washed out prices in many sectors which will offer opportunity when sellers no longer dominate the market.

Expectations for a positive end of year generally remain. However, when trends reverse up, we do not expect this to be a long-term buy and hold environment. Our unemployment situation is terrible with improvement primarily due to a decrease in available jobs and the discouraged quitting the job search. Fewer employed is less spending, less profit and less tax revenue. Families, businesses and government at all levels will contract.

We will always face uncertainties in the market. The European financial system has not resolved their deficit problems. The Fed has committed to virtually zero interest rates until mid-2013 hoping people will opt for dividends over savings accounts. We have to wait and see.