With market still falling, cash remains good choice

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How low can you go?

A stock that dropped 77 percent in 2008 would have to be near some kind of bottom, right? I guess not if the stock spent the
first seven weeks of 2009 falling another 70 percent!

The stock market leaves clues all over the place regarding what it wants to do in the future. It is never easy, though, because
the market is always changing the location, look and character of these clues.

One key that has been holding up for me over the last 18 months are the financial stocks, and I believe this clue still has
some potency left in it.

The financial stocks have fallen 21 percent below the so-called Nov. 20, 2008, stock market low. They first broke that low
a month ago, on Jan. 20, then the Dow Jones industrial average followed suit three weeks later, smashing below the level that
almost every expert told us back in November was the final bottom of this bear market.

A few days ago, the financials were crushed again, breaking to a new all-time low since measurements of the financials began.
And I believe this portends further lows by the Dow, and by consequence eventually all the other major stock market averages.

The stock described in the opening paragraph is Citigroup. The carnage suffered by Citi has the potential to happen to any
stock you own right now. Just because it may not have any financial dealings doesn’t mean your stock is immune to that kind
of selling in this environment.

For proof, just look at two industrial stalwarts and proven survivors, International Paper and Alcoa.

IP is down 85 percent from its all-time high, and every major step down shows areas where investors have made that fateful
bear-market mistake, "How much lower can it go?"

Right now, IP is trading at a three price-to-earnings ratio and it is paying a 16-percent dividend. But, if it has fallen
85 percent up until now, I guess it can still fall a lot more.

Alcoa shows a similar picture. The stock is down almost 90 percent and it is selling for less than half its book value. But
who is to say it can’t sell for a fifth of its book value? The Citigroup chart says it can happen.

There are still investment professionals and experts everywhere you turn laying logical-sounding ideas about how and where
to invest in this bear market.

These ideas sound like this: "General Electric has paid a dividend since 1899; it is a safe place to put some money today."

But who cares about a 10-percent dividend when the stock is down 75 percent?

Or how about this advice: "Warren Buffet keeps buying stocks; we should, too."

Buffet’s Berkshire Hathaway has lost half its value since this bear market began, and there are historical facts claiming
his stock will never see that level again.

And this is my all-time favorite piece of wisdom: "The market always comes back."

Yes, but it may come back from a much lower level, leaving you about the same as you are today for a decade or longer (look
at market action from 1966 until 1982.)

All these mistakes come from not being patient enough and buying too soon. Since late September 2007, I have screamed about
sitting in cash and, for the last few months, buying a little gold.

Cash has been, by far, the No. 1-performing asset since then, followed by gold. And despite stock market losses that have
only been exceeded one other time in our history, cash and gold remain the best places to be.

From here on out, the stock market has the potential of putting in a major bottom. Cash will allow you to strike hard when
we reach those lows.

___

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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