Bipolar investing: Understanding the rush to cash

July 18, 2011

The following is a guest post written by Marianne Paskowski, who was vice president of Reed Business Information’s Television Group. Today she manages her extended family’s portfolios from Cape Cod.The opinions expressed are her own.

You’ve read the spate of articles about “cash is king” when the market went bipolar in June. Well, investors were facing the end of quantitative easing two (QE2), and now, still stare down the histrionics of unabated political grandstanding on raising the debt ceiling.

So like any bipolar investor I moved a hell of a lot around, grabbing profits and buying protection. But I kept a decent cash allocation. Well, maybe not enough.

So let’s look at the possibility that the United States could be in default if debt ceilings don’t rise. OK, that’s a big if. And let’s not dismiss those other meltdown moments like flash crashes, European debt and all of the other black swans that hover out there, such as nuclear disasters in Japan and things we can’t fathom in this global economy.

So I do get the cash is king argument. But I don’t buy it whole hog.

And I’ll tell you why and when I changed my ways. In Wall Street lingo, I’m 35 percent in cash. What that means to retail investors like me is that I’m 15 percent real cash, like bucks ready to spend or put to work tomorrow. The other 20 percent is mostly in preferred corporate fixed-income issues that I can pull the parachute ripcords instantly. I really hate being there. It’s boring and makes chump change, but it’s pretty safe.

And frankly, right now, there aren’t many fixed corporate issues that reward. Honestly, it’s easier to buy Harry Potter tickets.

In other words, I’m not elated. But I’m not bummed. My problem is I’m used to making a lot of money, thanks to the market’s bounce back from the 2008 crash. The rest of my pie, 65 percent, is still in equities, only high-yield dividend providers. I sell covered calls against them, or in my lingo, rent them, to bring in more income. It’s still a very nice run.

Still, I have the queasy feeling I’m going to pull some trigger and zoom in and reap profits, probably tomorrow. I don’t want to do that because I think inflation will hit us fast between the eyes. It might not show up in the Consumer Price Index, but go to the supermarket and gas station and you will see its ugly face

May I stress, at this age and semi-retired, I am in the game mostly for income, but sometimes the thrill of the chase. So far, that game plan has worked quite well. But maybe it needs more tweaking.

What I absolutely will not buy is Treasuries. With the debate still unsettled about the debt ceiling, I still think Treasuries will be hammered if the issue isn’t settled before Aug. 2. That could happen with the idiotic freshmen Congress, especially considering its makeup. Need I say more?

Trust me, I’m not going to hang around and wait for a Treasury coupon to redeem, delivering maybe three percent for three years. That is not my MO.

So I’m doing what every hedge fund does, bet against the market while I support it. That is bipolar, but it works. I’m in gold and silver — Market Vectors Junior Gold Miners ETF and Pan American Silver Corp., for example. I’m also into inverse exchange-traded funds that reward you when the markets dip.

Those are roller coasters that I don’t recommend for the faint of heart. I like two in particular, one that shorts the Russell 2000 (ProShares Short Russell2000) and another that short the S&P 500 (ProShares Short S&P500)

Conventional wisdom tells investors it only matters if you’re in equities for the five top-performing days of the Dow Jones Industrial Average for the year, and you will be just dandy. Well, try to predict and time that market. You simply cannot. (Actually, year-to-date, there were 15 days with gains above 100 points.)

But read on. Five of those days happened in June as hedge and mutual funds were trying to shore up their holdings to paint a happy face on the end of QE2. That’s window dressing.

So look at the worst days of the DJIA this year, when it was down 100 points or more. There were also 15 days, with the worst also occurring in June when everyone was pouring into equities.

Those investors probably thought they were not fighting what they thought was the tape … But I ran with the tape, too.

I now better understand the rush to cash. Not than I’m going there. Yet.

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