There is no safety other than in cash

People looking for a safe outlet for capital in the marketplace are not going to see anything except in the form of cash and cash equivalents. Typically commodities were used for the safety outlet, but notably today we see that the S&P 500 is down about 2.8% and gold is down about 4.5%.

Notably, today is the first day where the safe haven of gold is getting compromised in a market downturn. Previously gold used to hold its own against down equity market action.

One day does not make a market, but this trend is something to watch.

Technically you also see safety in 30 and 10-year government treasury bonds (Canadian or US, take your pick), but getting a 1.8% yield for the next 10 years is quite obviously a temporary solution for capital. While this might work best for a fund manager, for an individual cash is much more practical.

Notably, the Canadian dollar got pounded over the past couple days – currency traders have seen a 4% decline in the Canadian dollar:

US dollar strength to a lesser degree has also been witnessed in other major world currencies, including the Euro and Yen.

I continue to remain very skeptical of the markets and am still in a preservation of capital mode – today is the first day in awhile that I’m looking at the dry powder keg and thinking of how I will be deploying it. But that time is not now. The only minor exception I made was in the preferred shares and debentures of Yellow Media (per my previous post) simply because the liquidation of those securities by its existing investors is a mostly independent event of the present market meltdown we are currently witnessing.

It is very difficult to be an index-beating active investor without the ability to side-step market crashes. By side-stepping crashes you can keep your capital freed up for those very brief and opportunistic time that the market is desperately asking for your capital. The market signals this to you with low prices, intense volatility, high bid-ask spreads and desperation. The last real time this happened was in late February/early March of 2009. There was a one week window of opportunity that you had where you could catch the bottom. It is very easy to identify in retrospect, but very difficult to get correct in real-time. Excessive outsized returns over a relatively short period of time (i.e. 200%+ returns on investment) can only be realized with ridiculously low entry points, which in turn requires financial nerves of steel to be the only buy hitting the “buy” button when the rest of the world is liquidating.

If your capital gets caught up in a market crash, it is a simple matter of mathematics to prove why you will not be able to gain much – in the 2008-2009 financial crisis, your average index investor was down 60% from peak to trough, which means in order to just break even you had to see a 150% return from the trough. If you can limit your damage to 10-20% of your portfolio and invest your capital at a more opportune time, it obviously will do wonders to your overall performance, just as how I nearly doubled my capital base in 2009.

A recent 21st century innovation is also that if you carefully analyze the tape, you will also see probable computer program traders that are set on a “fast liquidate” setting by relentless bid hitting. While it doesn’t have to take four years of electrical engineering education to perform a formal analysis of the trading signal, having some quantitative aptitude does assist in the process.

You can get a hint of what you are competing with simply by doing some mental work on how you would program such a trade algorithm, but Interactive Brokers conveniently has some simple algorithmic trade types that give you an idea if your mind blanks out.

It is time to do research on quality securities that will get needlessly hammered by a market downturn, but not nearly time to buy – yet.

Here’s a hint: I would not look at commodity companies.