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The Case For Cash

27 May 2008 3 Comments

As I mentioned last week, I unloaded portions of the two positions that have been responsible for my outperforming portfolio so far in 2008. Today, I am going to discuss some macroeconomic conditions that have me worried about the performance of stocks in the near future.

Inflation

Even though inflation has been on the rise for some time, it is finally getting the necessary attention. It is truly remarkable how higher energy costs affect pricing for just about everything. I have a friend who owns a seafood wholesale company. He told me their fuel costs are a half million bucks more than last year. Furthermore, they are paying more for their seafood since fisherman are paying more to fuel their boats. The result? Much higher prices for seafood at restaurants everywhere. This is just one example of inflation. It is everywhere and it is getting worse.

Higher Interest Rates

It seems pretty clear that the Fed’s rate cuts are over. Furthermore, with inflation becoming a more publicized concern as crude oil remains above $130, rate hikes are becoming more likely. While I think that rate hikes will be good for our nation since a strong dollar is a great thing, the short term reaction in the stock market is likely to be ugly.

The Democrats Take Control

If the Democrats don’t win the presidency, then the party is in serious trouble because this year’s election should be in the bag for them. Furthermore, the Democrats may take further control of congress which would pave the way for a number of legislative actions that could be ugly for the markets. Higher taxes and more regulation will probably be enacted by the Democrats. Furthermore, the rhetoric surrounding high executive pay and corporate profits is gaining more traction. I look for legislation targeting corporate profits, namely oil companies, soon after the elections.

Bring On The Bear Market

I, for one, welcome a stock market downturn. I am prepared to take advantage of lower prices of companies with strong fundamentals.

For example, I recently unloaded part of my Chesapeake Energy (CHK) position and part of my Apple (AAPL) position. Both have had a beautiful run this year and I decided to take some profits. I would love for CHK to get pummeled and get back towards $40 and likewise with AAPL, I would love the stock around $150. This may happen or may not happen; but, my profits are safe either way.

Dollar Cost Averaging vs Cash

The investment strategy I have outlined in this article is very different than the dollar cost averaging approach. Most 401(k) holders automatically implement dollar cost averaging by continuous contributions. Furthermore, most “experts” will recommend this approach rather than trying to time the market.

Timing the market is impossible; however, if I think there are more factors working against the market than working for the market, I am going to raise cash. Time will tell how this strategy works itself out. Hopefully in a few months or even a year, I will have cash ready to take advantage of some new excellent buying opportunities.

Do you agree with the prediction presented in this article?  If so, what are you doing to prepare?  Join the discussion by adding your comments.

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