Cash is King

  • June 13, 2006

Most of my spare time over the last couple of weeks has been consumed with getting an exciting new website ready for launch next week, leading to a brief hiatus from blogging. While I cannot get into the details of this new website right now, it will hopefully become your first destination for financial information.

The markets have continued their downward march over the last two weeks with the Dow Jones Industrial Average joining the Nasdaq in wiping out all of its 2006 gains. This comes in the wake of a dismal loss of 0.6% in 2005. The global markets have fared even worse with India and Russia falling almost 30% since their peaks on May 10th. Have precious metals and commodities done better in the face of this global decline in stock markets? No such luck. Gold (GLD) fell another $44.50 to close at $566.90 an ounce today, down 24% from its peak in mid May. Copper companies that I have been following like EuroZinc (EZM) and the bigger (safer?) Phelps Dodge (PD) have also been feeling the pain. In a rising interest environment, bonds have also dropped in value though not quite as precipitously as stocks and commodities.

So what is driving so many disparate asset classes down? Could it be that interest rates have risen to a point where the risk premium associated with stocks no longer makes them attractive? With many online banks like ING Direct offering interest rates of 4.25% on savings accounts and Certificate of Deposits (CDs) offering even higher rates, it makes sense that investors may want to lock in some of their stock gains and move into cash.

I am currently comfortable with my asset allocation as I liquidated some stock positions in May. I may consider reinvesting some of those proceeds into stocks that are beginning to look attractive after the recent sell off. I did start a position in Logitech (LOGI) after the June InsideArbitrage was sent out to subscribers and also started a small position in Intel (INTC). Other stocks that are on my radar and that I may consider buying (or adding to current positions) include Infosys (INFY), Sify (SIFY), ICICI Bank (IBN), EuroZinc (EZM), Intel (INTC) and RCM Technologies (RCMT). As you can see, I am still bullish on Indian stocks for the long-term. However with blood running on dalal street, it may be prudent to wait for signs of stability before initiating new positions in Indian stocks. Gold is also beginning to look attractive at these levels if you were to buy into the argument of Gold bulls that it should be at $1,000 an ounce.