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The cash question

The toughest question to answer in these hip pocket challenging times comes from superannuation members close to retirement or retirees, and it is the ‘should I go to the cash option’?

Regrettably, the answer has to be the butt-covering one — it depends.
It depends on someone’s age, their tolerance of risk, the size of their nest egg, the quality of their current fund, the costs their fund charges, how much they have lost and what will happen in global economies as well as their relevant stock markets.
Unquestionably the central, external focus for someone deliberating over going to cash or not is what economic rescue decisions will be made in USA and what will be the impact on Wall Street?
Lance Lai, investment adviser with ACE Capital Trust, which targets Japanese investors, says all stock markets are taking the lead from the New York Stock Exchange. The correlation is so high it means the fortunes of the All Ordinaries index are virtually in the hands of US politicians debating two crucial questions.
The first is what should the economic stimulus package proposed by Barack Obama’s team look like? And secondly, how can the US banking system be fixed up to get more normal kinds of lending to business and consumers happening?
The latter question is probably the most important as it is holding back private sector stimulation of the economy, but considering the depth of the American recession, a big public injection is essential too.
At home our politicians are debating the nature of our economic stimulus and while the urgency to get agreement here is not as pressing as in the US, the longer the delay in both countries, the more likely that negativity builds and the longer the downturn will persist.
In fact, the more the Yanks play politics, the more essential it is that $42 billion gets injected into our economy by the Rudd Government.
Despite the consensus of most US economists that the first half of this year will be negative for the economy, increasingly more are predicting a second-half recovery.
Joel Prakken from US-based Macroeconomic Advisers told Bloomberg last week that he expected a mild economic recovery in the second part of 2009. But the assumption is that an economic stimulus package will be passed and will be effective.
“Our modelling shows that there would be two years of deflation without the economic stimulus,” he said.
While the alarmists love to dig up the Great Depression for comparisons, others point to the recessions of the 1970s and 1980s. Those lasted around 16 months while the former dragged on for 40 months.
Lai says markets have hovered around clear levels since the November lows but the bottoming process is not raising his confidence that we’re out of the woods yet.
He is a big charts analyst and believes the broader US index — the S&P 500 — is the best indicator to watch. He believes that while the index has shown resistance to going much below the 820-840 level, there is little to suggest it can break higher and stay there.
There is more a case, Lai argues, to see the market head to 740, which we last saw around November 20 and what is needed is good news. He says the bottoming process in 2002-03 after the tech wreck crash was clear-cut compared to the hovering we see now.
If charts were infallible, all chartists would be millionaires. Shocks can turn markets and make chartists eat humble pie.
 Just as bad news can trigger collapses such as September 11, better than expected news can convince traders to join long-term investors in buying oversold, once in a lifetime good value stocks.
The buyers missing from the stock market now are the insiders — the wise guys who are happy to go long with their ears pinned back. And the reason for this is simple — unconvincing solutions for the US banking and economic problems.
The economic stimulus package should be the easy challenge to beat but creating a banking solution that deals with toxic assets on bank balance sheets, which then prompts these banks to start lending again, is the real deal breaker.
If Obama and his finance team along with Congress can create a solution that convinces the market then we are off to the races and stock markets will start heading up.
The University of Michigan consumer sentiment index hit a four-month high in January and history points to a good rebound in US shares in the six months that follows the low point of consumer confidence.
Going to cash now could be essential for some people but there could be a risk they might miss a big bounce in the stock market. The gamble rests on the decisions of politicians and that is the main thing that worries me.

Published on: Thursday, February 05, 2009

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