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Cash on the Side

Submitted by Bruce Krasting on 10/12/2011 19:41 -0400

I have an account with one of the well know WS names. The guy I work with calls this morning. He says:

“Across the entire‘Wealth Management’ side of our firm we have clients who are sitting on cash earning zero return. For that reason we think stocks have to move higher.”

The guy is right. I’m scared to step up and so are a lot of others. So I say back to him, “I’ll think about it.” I did, my thoughts:

The recommendation is to position for a year-end rally. That’s what’s supposed to happen. It happens every year. But all I see is uncertainty.

What’s the Best Case for the EU as far as the markets are concerned? The answer is that a deal in excess of $3 trillion is coming. This is what the market is currently looking for:

-A deal where there is a soft landing restructuring of Greek debt.

-A “solution”, where dozens of big banks will be infused with fresh government capital (a la the US TARP).

-The outcome will be the Socialization of the banking sector and the problematic public sector debts of the PIIGS. This massive transfer of debt/risk will be facilitated with a leveraged SPV.

-Numerous weaker financials will be absorbed by the State(s) (a la Dexia). The terms of those TBTF

wind-downs will be market friendly. Equity holders will not be wiped out, Preferred and subordinated debt will benefit from a new State guaranty.

-Coupled with the above, there will be an IMF package to assist in the bailout to the tune of $400 billion.

That’s the Best Case? To me that is a disaster. If all this were to happen it would result in a near immediate downgrade of both France and Germany. The “guarantees” of the SPV guarantors would be devalued in a month.

If this is the way the world is going to go, it is a road fraught with risk. The EU would look like the USA with Fannie and Freddie. Trillions of dollars of debt and guarantees would be "off balance sheet". The losses would be born by Germany and France.

I think there is a very real risk that a “positive” outcome in the EU will lead, in short order, to a broad based credit crunch in Europe. The solution to that problem will be for the ECB to print money and the Federal Reserve will have to (again) come to the rescue with a multi-trillion increase in dollar swap lines to the EU Central Banks.

The "Big Bailout" is a very slippery slope in my opinion.

That is an outcome that I would rather ‘sell on the news’ than ‘buy on the rumor’.

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The Worst Case (as far as the market is concerned) is that the deep thinkers in the EU actually start listening to the voters in France and Germany. The result is that the “Grand Plan” to save the Euro experiment is a dud.

An outcome under this scenario is a deal that is woefully inadequate to the task. A popgun approach. Any “successful” plan must put the German taxpayers at risk. A plan that falls short of today’s very high expectations would be seen through by the markets in just a few hours.

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On the USA side of things, there seems to be a disconnect between the real economy and equities. Over the next six weeks we have a few hurdles to cross:

-Another Continuing Resolution is necessary to keep the government running. The date for this is November 18th.

-There MUST be a resolution of the Bi-Partisan deficit commission on $1.4 Trillion of deficit reduction. (November 30th)

-As of today, the outlook for any 2012 stimulus is up in the air. Failure to pass any legislation will result in a $120 billion middle class tax increase that would kick in January 1. (The reversal of the “one-year only” 2% FICA tax reduction.) We may end up with the “Jobs Bill” being very much a slice of bread when a few loaves are needed. Should that be the case, 2012 GDP estimates would fall to the 0-2% range.

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It’s just a joke to think we are out of the woods with energy prices. Look at this chart of the real cost of crude for much of the country. This chart is telling me that $105 oil is the bottom of the range. It’s also telling me we are headed back up, not down, as Mr. Bernanke keeps telling us. (I discount NYMEX crude pricing as a measure of anything).

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There's a credit crunch that’s sneaking its way through the US debt markets. The latest evidence is in Jumbo Prime loans. See Zero Hedge for details (link). It’s creeping into critical areas of finance. Consider these words and charts from UBS:

The high yield primary market was virtually shut this week, with no deals pricing in the fourth $0 volume week since the start of August.

Since August, weekly volume has averaged a meager $699 million, versus $6.7 billion per week during the same period in 2010

Secondary markets have continued to trade wider. This week, the Broad Market, B-rated, and CCC-rated high yield indices all touched 2011 wides (and their widest levels since 2009). The BB-rated Index, while having fared better than its lower rated peers, also touched a 2011 wide during the week, and its widest level since mid-2010

It's increasingly clear that a credit contraction is in the works. In part, that’s due to folks like me that look at high yield debt returns and see capital loss resulting from default and restructuring. High grade debt pays nothing. Why bother.

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There is no good news coming from China over the next few months. Period. Depending on how the currency issue with the USA is resolved, it could get ugly.

We shall see what the markets will bring. There is too much cash on the sidelines and cash has been made trash by Bernanke. My broker friend may be right that the broad tape has to move higher. But I don’t trust it. I’ll keep the money in the wallet for a bit longer.

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Fri, 10/14/2011 - 07:49 | 1772833 MsCreant

I am solid and immovable in my use of the word obdurate.

Wed, 10/12/2011 - 20:08 | 1767845 onlooker

Thanks again for your outlook and information.

Wed, 10/12/2011 - 20:06 | 1767841 nmewn

"Insulting, to be sure, but I know that it isn't going anywhere..."

Actually, the insulting thing is, it is going somewhere. As the dollar goes down you are losing purchasing power.

But I know how it is...I've got cash I can't touch without them taking a 30% bite out.

Thu, 10/13/2011 - 03:37 | 1768647 ReadySteadyGo

I wish to God I knew a way to liquidate my 403(b) without having to quit my current job. Anyone have anything tricky?

Thu, 10/13/2011 - 11:43 | 1769561 CPL

And that is exactly the reason 401k's, RRSP's and other lock in instrumentation behind retirement schemes were doomed to fail.

It only works out well if your situation is in perfect sync with the requirements of retirement. (ie Economy is doing well, you are healthy, house is paid, etc.)

Change any of those varibles and a retirement shelter quickly goes from useful to a giant albatross tied around your neck. One of the stupidiest banker conjurations I've ever seen in my life was the push to get people on board these things in Canada then they turned them into home investment equity around 5 years ago.

Lets put it this way, for all the "loopholes" built into them, they haven't produced any effect but to warehouse a country's money supply and stem inflation. They were never intended to be a retirement plan anymore than a person can guarentee their life insurance policy is paid on time of death (which in most cases they are never paid, true story look it up).

You want to see what a sucker looks like, grab a mirror and stare into it. Remind yourself that you have been screwed, bamboozled, stolen from, lied to repeatly by the people that sold you the idea of stashing your fiat cash in a tax shelter. What makes you think that you get to even get more than half of it back? That wasn't the plan.

The plan was to take fiscal conservatives and turn them into useful idiots. The final knife twist is when you make any measured or legal attempt to get back what you put in without a team of lawyers behind you. Might as well put a pillow in the path of a steam roller for all the good it's going to do you.

So here's the best way to think about that money. Consider it spent and gone by the people that suckered you into subscribing to their nonsense services.

Thu, 10/13/2011 - 09:45 | 1769148 MsCreant

I heard a story of a boss who let his worker go, the worker liquidated, he rehired him.

I have a chunk trapped in an annuity I can't get out of unless I were to quit, too. I know the pain. Luckily it is only money that has been paid in for me, I never trusted it to pay into it. My job is mired in a huge bureaucracy I could never pull the stunt described above. But it has been done. I forget who it was, but a poster on ZH is a boss who did this for his workers.

Thu, 10/13/2011 - 00:56 | 1768484 DoChenRollingBearing

@ nmewn

The Bearing bit the bullet in 2008: liquidated his IRA, paid the taxes and the penalties and sleeps a bit better ever since. The money is MINE now. Much of that went into buying gold.

Wed, 10/12/2011 - 23:39 | 1768338 Edmon Plume

Wait too long and it will be 32, then 35, then 40, then... and don't forget state taxes :(

Is it a 401k, or is it a c-corp?

There are ways.

Wed, 10/12/2011 - 20:05 | 1767840 chump666

Oil selling again and the coming China/US trade war. We see UST yeilds jump again...you wanna get out of stocks, we are currently having our end yr rally. It ends

Wed, 10/12/2011 - 19:59 | 1767812 Jay Gould Esq.

A US Treasury Money Market fund. Seven-day yield: 0.01%.

Insulting, to be sure, but I know that it isn't going anywhere - that being, down - unless I commit it to the market...which I am in no hurry to do. I second BK's remarks.

Thu, 10/13/2011 - 00:43 | 1768455 CrazyCooter

My "contribution" retirement is in exactly the same position. I wish I could park it in physical, but its just not an option. I have been US Treasury MMF for quite a while now. My thought is; when this whole shit show crashes and burns, then I can look at any of my other (limited) options. I just don't believe in growth anymore, so its like picking between a set of down elevators and hoping you don't go down.

Not sure if that makes sense or not, but I don't even think about return anymore. I would be quite happy treading water at 0% (adjusted). I am really worried about just getting ass raped in the process and ending up with nothing.

I want a piece of something, not all of nothing.

Regards,

Cooter

Thu, 10/13/2011 - 09:01 | 1768979 Jay Gould Esq.

"...but I don't even think about return anymore. I would be quite happy treading water at 0% (adjusted). I am really worried about just getting ass raped in the process and ending up with nothing."

Cooter, we're on the same page -- as I suspect are quite a lot more. As an aside, I also tend to believe that a Treasury MMF ( the one which I hold is essentially two-thirds three-month bills, and the rest notes of no more than two years duration ), is unlikely to ever "break the buck," as a fund did a couple of years ago. Some of these cash reserve funds hold CDs in numerous foreign banks. No, thank you. I'll cast my lot with the indebted Uncle Sam. He, at least, has the cleanest shirt in the dirty clothes hamper.

Thu, 10/13/2011 - 00:53 | 1768480 DoChenRollingBearing

There is always a way to "park it in physical"... Gold that is. There is always a place you can hide it.

Still, holding physical FRNs, even in a wallet ($100s) is OK too, diversification...

Wed, 10/12/2011 - 19:57 | 1767811 iDealMeat