Buy-and-hold a bad tactic in these market conditions

February 2, 2009

Let's put our blindfolds on, hold out our hands, and weigh the pros and cons of the current global equity situation.

A lot of people I hear from still haven't made any changes to the soon-to-be-extinct methods of investing—the modern portfolio theory, with its diversified buy-and-hold strategies. If you are going to stay with this, it may help to see how the scales are leaning by using a truly unbiased approach to the analysis.

The strongest positives in favor of the markets right now are the large cash positions of firms all over the world. Many small companies have no debt and are valued at less than the cash on their books. There are dozens of big-name firms that are sitting on sizable cash cushions, and these cushions are getting bolstered through massive spending cutbacks in the guise of layoffs and other downsizing. Credible evidence suggests that making every move to conserve cash today will eventually attract investors, which will then lead to recovery.

Another good point for the markets is the enormous level of government-stimulus spending that is being unleashed all over the world. Every country with any kind of economy to speak of is running the presses full tilt to get things moving again. The stock market experienced a decent rally last year right about the time the stimulus checks hit people's mailboxes. It happened before and it can happen again.

Well, that's all there is for the good news. The negative side is fairly long, so I will try to focus on the most important ones.

First, those same printing presses that have the potential to stoke a short-term rally are the ones that completely kill the long-term sustainable growth path for any debt-heavy nation. This is the single most important economic issue the world is facing right now. If world leaders don't quickly demonstrate the courage to stop printing money, the long term is shot. And since that courage isn't likely to surface anytime soon, investors should rethink traditional strategies now.

The next almost insurmountable problem is the amount of debt that exists in the world. I am not just talking about U.S. government debt, although the $65 trillion in current debt and future entitlement liabilities has effectively bankrupted our government. Every major government is in the same position. And that's not all.

Those same firms I mentioned above with all that cash? A lot of them are heavily in debt, and the ones that aren't are burning through that cash rapidly just trying to stay alive. Crushing debt levels exist everywhere, though. State and local governments are drowning. Businesses can't keep up. Individuals, even apparently wealthy ones, are suffering worse than at any point since the Great Depression. These debt levels can only be paid back with difficult decisions, and I doubt the global citizenry will agree to live under those conditions.

Rising unemployment levels are an obvious problem for the market, but this is a lagging indicator. Markets bottom out several months and, in some cases, years, before employment begins to improve. But, in this case, I think it will pay to watch what types of layoffs are going on. We are still seeing massive, wholesale and all-inclusive announcements. This will be trouble for the markets for a long time.

The last major problem is the emotional state of the average investor. I've thought for some time that boomer investors would really start to get wary. Most of the world's wealth is owned by this generation and they are slowly becoming unglued.

Buy-and-hold strategies simply do not work anymore for anyone older than 54. This slowly rising anger has the potential to turn into a true panic. If, and when, that happens, the markets could fall another 50 percent from current levels.

The scales have been weighed and they are falling hard in the bear camp. While the short and even intermediate term could see significant rallies at any time, the longer-term picture is still extremely weak. Caution is still the stance, and cash is still the place to be.

Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer's. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.

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