|This might be news for some of you? Cash sweep accounts are NOT protected in broker security accounts.
And for those who don’t know, cash sweep accounts are money market funds.
However, there are different kinds of money market funds…only those money market funds invested through BANKS are FDIC protected.
But Money Markets with brokerage accounts are NOT protected by FDIC.
Money Markets are protected by SPIC insurance, but that only matters should your broker go belly up….
If the money markets should lose value (called “breaking the buck” because most MMs are priced at $1.00 per share, exactly), it is highly unlikely your stock broker will take the blame since MMs are invested in short term debt paper such as 30 day treasuries, and 90 day commercial paper sold by banks and large companies for short term borrowing needs.
I think the average trader believes that their CASH account sits on a bunch of dollar bills in a vault somewhere? That illusion is not true…
Instead, your CASH accounts (called sweep accounts because every time a trader sells a stock, the proceeds are “swept” into a “cash” account) are invested in 30 day to 90 day paper sold by sovereign nations, banks, and large corporations.
If Greece were to default, or any other PIIG nation, then that event could cause investors to stop buying commercial paper sold by European banks because of fear of bank bankruptcies…this in turn could cause sweep accounts to become illiquid and/or worth less than $1 per share.
Also, should the US have a technical default on its treasuries on or around August 2, that would cause buyers to hesitate to buy or trade treasuries, except at greatly slashed prices causing a discernible drop in value of those assets (debts), and stinging many cash sweep accounts. Now, I know that most Americans believe that Congress will come to its senses and raise the debt ceiling limit, but I have my doubts. Time is short, and I believe the two parties are far apart in ideology, and as the TARP vote in 2008 demonstrated, there are many in Congress who do not understand how the complex world of finance really works.
The main point here is that many traders think of their cash sweep accounts as the “safest” places to park their money, even despite the low interest rates…
Well, “surprise, surprise!” Maybe that notion is about to be turned on its head?
So, where should one park their money if they are risk-averse in this market correction?
Well, the strategy I am using is to park my sizable cash sweep money (money otherwise not intended to be invested in stocks at this time) into currency ETFs. The ones I favor currently are FXF (Swiss Franc) and FXA (Australian Dollar)…
XRU (The Russian Ruble) looks a bit attractive too, but keep in mind that can be a more volatile, less stable currency because of political concerns…and yet, even the Ruble looks much more stable to me than does the US $ or Euro.
Also, consider some sweep money in gold/ silver…now, currently, gold and silver are in a de-leveraging selloff, so go lightly here for now. But the one that continues to stand out as a safe investment to me is the Central Fund of Canada (Amex symbol: CEF) which is invested directly into gold and silver bullion held under safe lock and key in a Toronto bank vault.
Now, keep in mind that when the smoke clears (which may not be for a long while?), you would have to wait 3 business days for funds to settle before you could use the proceeds from one of these ETFs for a stock investment…but the idea here is to preserve your cash for another day…what good is convenience with a cash sweep acccount if the money markets it invests in “break the buck” and lose value or become illiquid and difficult to cash out?
Now, what if my concerns are totally overblown and way off base, as I suspect some of you may believe? Well, at worse, you will probably make money any way on investing in these ETFs….or at least, you won’t lose much if I’m wrong, as the FXF and FXA move rather slowly compared to stock trades…and CEF is generally a very stable traded gold ETF.
Well, you have the plan from ACE…where else are you getting this type of strategy?
Good luck…now that you know my concerns about the very fragile economic situation…and what I think is the best flight safety plan! Don’t follow the crowd on this safety trade, people…you could get badly burned.
Please visit ACE’s message forum where active traders discuss their trades on stocks and options...it’s free! You might find your next great trade idea there!
“Katie, bar the door!”
Well, I could see it coming even as early as middle of last week…I even remarked that it was too late because as one pulls out the earliest readings of the 20 day mov avg line, it only got worse!
The 20-100 cross occurred on Friday on the S&P…not a well-known cross and rarely ever mentioned by talking heads, but ONE that I have followed closely over the past several years….I find it is an important signal in many back-tests. In 1987’s crash, anyone exiting the markets upon this cross would have gotten out within about 12% of the top, as I recall. In ’87, if they waited for the death cross, they would have been down about 25% as I recall (round numbers here…someone can do the research to find more accurate numbers).
Well, here we area again, perhaps? We are down about 11% from the top, and we have the 20-100 cross! The angle is steep this time, like in 1987…whereas the one in February was a shallow angle… and note the difference in the MACD between February’s cross and today’s cross!
I have been fighting this development every step of the way…always seeing a glimmer or light in my charts that say it is not that bad, and today’s Birinyi Poll gave me hope that the Bears will soon be short-squeezed, but that cannot happen without a strong catalyst, and right now, I’m not seeing it.
As I remarked about 3:00 ET today, I cashed out 2 more positions….XXX and XXXX (except the call options)….I am thinking of holding my LT positions in stocks like (stock symbols removed for the benefit of our PAID subscribers) and a couple others with more SH. My LT positions are with a Full Service broker–a long time friend of the family…I make trades rarely in that account. They do not allow me to use levered ETFs, so I added SH (not levered, 1x short the S&P) several weeks ago as insurance…am thinking I may just double the position tomorrow. It is easier to just add more SH than tell the broker to sell everything which incurs many more commissions (this guys commissions make discount broker fees look like a walk in the park!)….
Also, looking at pulling back on my mutual funds in 2 retirement accounts that are really LT accounts where I make perhaps a half dozen moves a year. One of those accounts is 50% mutual funds and the rest in cash equivalents or bonds (corporate as well as treasuries)…and the other account in about 75% cash now.
In my two trading accounts which are the ones I refer to most often on this board, I am already about 65% cash–I was only about 25% cash back on April 26th when I first spotted the early signs of a correction with my 5-15 VIX chart.
Now, I’m thinking of putting in a couple of shorts tomorrow to enhance my returns.
So, am I saying the Bull Market is dead? Not quite, but it has gotten quite dangerous, I’m afraid.
I think it’s possible we can find a bounce or two along the way, but the quants’ algorithms are programmed as such that they will sell into the bounces, I believe. It will take some very good news to overcome the trading programs of the quants…in other words, a human being or two who controls large amounts of cash will have to step in and battle the quants…and I don’t see any reason for that to occur right at this time.
I’m not really shorting much at the moment (partly because I took profits on shorts last week), but I think this correction may go the maximum 20% down from the top…not the original 10% I thought we might see…and if it gets worse than that, then I will rest easy knowing I have the majority of my money out of harm’s way…
It’s not the time to be a hero for us small guys…leave it up to the BIG FUNDS to fight this battle and show us which way they want to go! Me? I just want to be scrappy enough to grab a few nice trades out of all this volatility that we now must endure!
Bloomberg reports that Shanghai is officially in a BEAR MARKET tonight (down more than 20% from November re-test of previous high area)….I looked closer at a Shanghai Composite chart and also noticed a death cross occurred there several weeks ago…downside has accelerated to a critical lateral support area.
Notice that US rally followed a Shanghai rally back in early 2009…will this China Bear now precede a US Bear?…or is the US rally truly independent of the woes in these other countries, now that the $ is King once again?
A question we may have answered soon…I remain cautiously optimistic for US stocks. Ace