As a football fan there is nothing that I hate worse than losing.  My second most hated aspect of football is the dreaded “prevent defense”.  If you ask the coach I’m sure you would hear that the “prevent” is implemented to prevent losing.  Ok.  So, understanding that, it’s easier for me to understand the question that must come to an investor’s mind when the portfolio manager goes to a large cash position in an investment account.  The “cash position” is an effort to prevent loss.  BTW, cash is a position and a good one when the markets are whipsawing.  As I write this commentary the DOW is negative for the year.  The S&P is hanging on to a positive number by its fingernails.  The NASDAQ is up over 6%.  And the Russell 2000 is negative by over 3%.  The Russell is a basket of small caps stocks and is considered a leading indicator of the market’s direction.

Federal Reserve: The market is betting that the Fed will not raise rates this year.  March is now circled on the calendar as the earliest date that the Fed might move to lift rates.  The bond market is believing that rates will stay low.  The benchmark 10 year government bond is for the moment yielding 2.05% and the 30 year 2.8%.  The US may very well be moving into an environment where rates stay low for an extended period similar to the situation in Japan where rates have been low for 20 years.

The Economy:  We are truly in a global economy.  What happens in China does matter to the rest of the world.  The Chinese commodity shopping spree has come to a screeching halt.  Countries like Canada, Brazil, Australia, South Africa, Russia and so on which have commodity driven economies are no longer selling to their biggest customer.  Those countries are now finding it harder to buy what we have to sell.    China’s leadership is working hard to shore up a tilting economy.  Among other moves the yuan was recently devalued.  What the US buys from China just got cheaper.  What we sell to China just became more expensive for the Chinese consumer.  The result is US companies that count on exports for their profit are swimming upstream.  If the Fed raises rates, then the strengthening dollar will add to the cost of US exported goods.   Meanwhile, the US energy sector is hurting as energy prices continue to stay low.  Once the golden child for high end employment opportunity the energy sector is now laying off workers.  Industry that provides equipment and parts to the energy sector is left suffering as the demand for their services weakens.

We expect to see the market crab along with a bias toward a negative return.  If we were fully invested in the equity market that would not be a positive outlook.  However, we see the current market trend as the prelude to an opportunity.  Would you rather go shopping for a new home when prices are at all-time record highs or when real estate prices have dropped?  We will continue our watchful waiting in belief that equity prices will be more attractive at some point in the near future.  At that point cash will be king.