Cash no Longer King

[Ally]

Two years into the worst postwar economic recession, and the cogs of machinery in the industrialized world are starting to turn once again. Yet investors continue to bear the mental burden of the market crash, and positioned heavily in cash, wait for more proof that the wheels will not grind suddenly to a halt. As a result they miss a near-term earnings recovery that is supportive of share prices.

Any comparison of the current economic data to the previous year is an unmitigated disaster, yet it hides the small changes -- obscuring the fact that recession is ending in many countries.

Over the past year, we have endured a brutal economic recession: industrial production has plummeted at double-digit rates in Germany (-17.9%), Japan (-29.5%) and the United States (-13.6%). Corporate profits collapsed, millions of workers have been sacked, and investor fear remains palpable.

"History would suggest that credit earthquakes are followed by aftershocks, so our advice is to invest accordingly," warns David Rosenberg of Gluskin Sheff in a recent note to investors. Investors already took cover by hoarding cash, and many remain holed up unsure of the economic climate. The Capgemini/Merrill Lynch World Wealth Report survey of high-net-worth individuals representing US$33-trillion in assets points to cash balances at roughly 21% of assets.

Read the full article here.

 

[gwasser]

This is encouraging news, but I would not recommend throwing away all caution and let go of all your cash. The article`s finally cautionary statement should be enough warning:

"Investors might not want to break out the champagne for an economy that is as fragile as the crystal used to toast its recovery because once this inventory cycle plays out, the wheels of production are likely to slow. However, an earnings recovery could soon occur, and investors may wish to position their portfolios in equities in anticipation of this event."

The average cash level of high net worth individuals is quoted at around 21%. Mine is around 13% and I typically increase cash holdings when markets get more expensive (i.e. when the market grows more bullish). Right now, I am near minimum levels of my comfort zone and I am very cautious in investing more. Right now for every bullish forecast you can find a bearish or outright depressive one.

As such, don`t shoot all your powder. Keep on nibbling and only buy when the situation is completely irresistible - i.e. it throws of lots of cash flow and there is inflation protection.